Live From DAS: Tokenizing the World - Institutions Enter the Arena | Carlos & Marc

This episode unpacks the accelerating institutional adoption within crypto, dissecting the nuances of real-world asset (RWA) tokenization, the debate between permissioned and permissionless systems, and the strategic considerations for Crypto AI investors and researchers.

Live from DAS: Setting the Stage

Recorded live at the DAS conference shortly after a notable political talk, this discussion brings together Carlos and Mark, both deeply focused on tokenization and real-world assets (RWAs), alongside hosts Pachio and Ryan. The conversation immediately dives into the key themes dominating institutional interest in the crypto space.

Institutional Adoption and Market Sentiment

• Mark kicks off by observing the recent turnaround in Bitcoin ETF (Exchange-Traded Fund) flows – funds that track Bitcoin's price and trade on traditional stock exchanges, offering regulated exposure. After five weeks of outflows, a significant influx of over $500 million signals renewed institutional interest.
• He notes a palpable shift at the conference: tokenization is not just a buzzword anymore; attendees are asking more sophisticated technical questions compared to previous years.
• Mark highlights a sentiment shared in another talk: "we're educating again as a space," suggesting a move past the FTX fallout and back towards constructive development, a core purpose of events like DAS.

The State of Tokenization: Scale and Hurdles

• Carlos provides a data-driven perspective, emphasizing that outside of stablecoins, RWA (Real-World Asset) tokenization – representing physical or traditional financial assets on a blockchain – remains nascent, totaling less than $20 billion.
• This market is heavily concentrated (around 90%) in private credit and US Treasuries.
• He argues the primary bottleneck isn't technology, which he sees as largely foundational, but regulation.
• The current challenge lies in establishing clear rules for native on-chain asset issuance, as opposed to merely creating a "digital twin" of an asset managed via legacy systems, which Carlos points out "you're just adding cost, you're not like making anything more efficient."

Focus on Private Credit Tokenization

• The discussion probes why private credit dominates the RWA space.
• Mark explains much of it originates from Figure issuing home equity line of credit (HELOC) loans onto Providence, a semi-permissioned Cosmos-based blockchain.
• Figure, a financial technology company, essentially had to "dog food" its own system, proving the viability of tokenizing these loans, which led to market success.
• Mark, known for his market analysis, suggests the focus is on less liquid assets because tokenization offers greater potential benefits there, unlike highly liquid stocks which, while technically tokenizable, face regulatory hurdles and liquidity limitations for significant size.
• Carlos concurs, adding that tokenization provides secondary market liquidity and transparency for inherently illiquid and non-standardized private credit markets.
• He contrasts this with tokenized gold, which hasn't grown because liquid ETFs like GLD (holding $86 billion AUM vs. $1 billion tokenized gold) already serve the market effectively.

Gaining Exposure: Novel Use Cases and Private Equity

• Exploring how investors can gain exposure, Mark points to innovative examples like Box_us using NFTs (Non-Fungible Tokens) – unique digital tokens representing ownership – on Solana to represent whiskey casks, abstracting the blockchain layer for users. This creates liquidity for collectors.
• He also mentions tokenized Uranium requiring KYC (Know Your Customer) – identity verification processes – highlighting how blockchain expands the Total Addressable Market (TAM) for niche commodities.
• Carlos identifies private equity as a major opportunity, citing Swiss examples like Actionariat, though geographically limited.
• He references Robin Hood's co-founder expressing excitement about tokenizing assets like SpaceX or OpenAI, democratizing access beyond meme coins, but stresses the critical need for clear US regulation to unlock billions in assets.

The Blockchain Dilemma: Permissioned vs. Permissionless Systems

• The conversation shifts to the infrastructure layer, noting a trend of projects launching their own, often Permissioned Blockchains – networks with restricted access, typically controlled validator sets.
• Examples include Ondo Finance's Onyx chain and Ethena Labs' recently announced Converge network with Securitize.
• Carlos finds Ethena's move interesting, as they aim to bridge institutions to DeFi products like their USDe stablecoin, using a permissioned environment for compliant access, rather than purely focusing on RWA issuance.
• Mark observes this broader trend (citing Hyperliquid, dYdX) driven by protocols wanting to capture more value and exert greater control – a key requirement for financial institutions issuing assets.

Control vs. Interoperability: The L2 Hybrid Approach

• Mark, offering a pragmatic view grounded in market realities, cautions that the proliferation of private, permissioned chains risks recreating the fragmented, siloed data problem of traditional finance (comparing it to isolated MongoDBs or legacy systems).
• He recalls the limited success of earlier private blockchain initiatives.
• However, he proposes a hybrid solution: institutions launching their own L2s (Layer 2 scaling solutions) – blockchains built atop a base layer like Ethereum to increase speed and reduce costs.
• Citing Base (Coinbase's L2 with a centralized sequencer) as an example the market seems comfortable with, he suggests institutions could gain control (via KYC, centralized sequencing) while potentially tapping into broader Ethereum ecosystem liquidity if interoperability improves.
• He notes pilot projects like Deutsche Bank exploring an L2 with zkSync (a type of ZK-rollup L2) and Ernst & Young's Nightfall L2 on Polygon (another Ethereum scaling solution).

Alternative Models: Subnets and Provider Partnerships

• Carlos acknowledges similar approaches in other ecosystems, like Avalanche Subnets (customizable, independent blockchains validated by a subset of Avalanche validators), mentioning the Evergreen subnet aimed at institutions but noting limited traction so far.
• He questions whether traditional banks possess the expertise or desire to run their own blockchain infrastructure.
• Carlos suggests a more likely model, exemplified by BlackRock's BUIDL fund, involves institutions partnering with specialized tokenization providers like Securitize (a digital asset securities firm) to wrap traditional products and issue them on existing public blockchains, leveraging established infrastructure without needing to build it themselves.

The Evolving Ethos: Cypherpunk Ideals vs. Institutional Reality

• Pachio raises the observation that crypto is becoming less cypherpunk and more institutional, a trend he expected.
• He points to examples like Fogo, described by Carlos in a recent report as using only 21 permissioned validators in major cities, and the increasing focus on blockchain primarily as a superior settlement layer (T+0 Settlement, meaning transactions settle almost instantly, versus days in traditional finance).
• The question arises: is this evolution positive or negative?

Mark's Perspective: Inevitability and "On-Chain Finance"

• Mark, while initially drawn to Bitcoin's cypherpunk roots, views this shift as inevitable with mainstream adoption.
• He argues the permissionless nature of blockchains inherently allows for permissioned systems to be built upon them.
• "You have permission to be permissioned if you'd like," he states, framing it as users choosing how to utilize the technology, whether for meme coins on Solana or less decentralized institutional applications.
• He reframes "DeFi" (Decentralized Finance) as potentially misleading given governance realities, preferring the term "On-Chain Finance," which encompasses both permissionless and permissioned activities.

Carlos's View: The Need for Permissionless Optionality and Privacy

• Carlos largely agrees that permissioned networks will likely dominate usage in the future.
• However, drawing parallels to fundamental rights like free speech, he stresses the critical importance of maintaining the option of permissionless systems, even if unused by the majority.
• He also highlights "private money" as a neglected but crucial area, noting the transparency of current public blockchains allows extensive tracking by firms like Chainalysis or Arkham, arguing for renewed focus on privacy-preserving technologies.

Deconstructing "Trustlessness": Inherent Trust in Crypto Systems

• Mark challenges the notion of absolute trustlessness in crypto. He points out users inherently trust hardware manufacturers (laptops, hardware wallets like Ledger), audit firms, wallet providers, and RPC networks – all centralized points of potential failure or reliance.
• Even Bitcoin's code, he argues, is trusted implicitly by most users rather than personally audited.
• Mark concludes that "trustless is a meme," suggesting crypto operates on a spectrum of trust, shifting reliance rather than eliminating it entirely.

Learning from the Past: UX and the "Web2" Advantage

• Pachio notes that traditional "Web2" applications excel at user experience (UX), something crypto often struggles with due to backend complexities.
• He expresses excitement about established players potentially bringing superior front-end design to crypto applications, citing the difference between Robin Hood and most DeFi apps.
• Mark builds on this, referencing a talk suggesting public equities of companies using blockchain tech might offer better returns than native tokens.
• He voices a concern: "there's a risk that web2 comes and you know eats our proverbial lunch," leveraging crypto's open-source tech with better user interfaces, citing Neo banks in Brazil using blockchain for payments seamlessly.

Key Takeaways:

• Carlos summarizes his main takeaway: the critical need for clear regulation, especially for tokenization, to ensure legal parity between the digital token and the underlying real-world asset ("digital twin and the physical twin").
• He also emphasizes solving practical challenges for global adoption, particularly in emerging economies, focusing on improving on-ramps and off-ramps – the gateways between fiat currency and crypto.

Spotlight on Stablecoins: Exposure and Innovation (Ethena)

• Pachio shares his key takeaway: the need to find investment exposure to the Stablecoin (cryptocurrencies pegged to stable assets like the US dollar) ecosystem's growth.
• He mentions Ethena (USDe) as a prominent player, alongside the potential IPOs of giants like Circle (USDC) or Tether-related entities like Plasma.
• Carlos elaborates on Ethena's strategy, identifying the use of stablecoins as margin on centralized exchanges as a key market.
• He praises Ethena's efforts to get USDe accepted as collateral, increasing its utility.
• As traditional interest rates potentially fall, Ethena's yield (currently 10-15%) becomes more attractive, potentially driving inflows if institutional access is smooth.

Deep Dive: Ethena's Model and Risk Mitigation

• Addressing concerns about Ethena's risk, Carlos explains how they mitigated the vulnerability to negative Funding Rates (payments exchanged between long and short positions in perpetual futures markets).
• They introduced USDTV, backed by BlackRock's BUIDL Treasury fund.
• During periods of negative funding, Ethena can close its delta-neutral perpetual positions and allocate capital to USDTV, stabilizing the system.
• Carlos frames USDe as a prime example of tokenization democratizing a complex financial strategy previously accessible only to a few.

The Path Forward: Sufficient Decentralization and Strategic Compromises

• The discussion touches upon competitors like UXD, which attempted a similar delta-neutral stablecoin model permissionlessly but failed to scale, contrasting with Ethena's more centralized, higher-reward approach.
• This leads to the concept of Sufficient Decentralization, highlighted in another DAS talk and exemplified by platforms like Hyperliquid.
• The consensus suggests a pragmatic path forward, potentially requiring compromises on ideological purity – a "Trojan Horse" approach to bring crypto benefits mainstream, while retaining the permissionless "fire exit."
• Mark adds the example of Meta's Threads exploring decentralized protocols (ActivityPub) potentially for jurisdictional censorship and liability management, showing even Web2 giants see value in distributed tech for strategic purposes.

Stablecoin Exposure via Money Markets

• As a final point on stablecoin exposure, Carlos suggests Money Markets (DeFi protocols like Aave or Compound enabling lending and borrowing) as primary beneficiaries.
• When stablecoin supply increases, these protocols often see significant inflows as users seek yield, making them another potential investment vector to watch.

The conversation underscores crypto's transition towards institutional integration, driven by RWA tokenization and the demand for efficient on-chain finance. Key strategic considerations involve navigating regulatory hurdles and choosing between permissioned control and permissionless composability. Investors and researchers must monitor evolving infrastructure choices (L2s, subnets) and regulatory clarity to identify opportunities within this maturing landscape.