Austin Barack

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The CoinFund Blog

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6 min read

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5 hours ago

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Asset tokenization will be the bridge between crypto and traditional finance

We are thrilled to announce that CoinFund has co-led Superstate’s $14MM first close of their Series A round, after participating in their seed round earlier this year. Superstate plays a critical role in the journey of traditional finance moving onchain, a long-promised vision whose moment appears to be approaching.

For years, we have all heard the mantra “The Institutions are coming”, yet there has been limited overlap between traditional finance and blockchains to date. It’s not for a lack of synergies. Blockchains create an immense amount of transactional efficiency, reduce settlement times, lower costs, and drive composability while significantly reducing counterparty risk. So far, ‘institutions’ have meant crypto-native funds, a very limited number of traditional allocators, forward-thinking corporates, and more tech-forward traditional financial institutions (with many pilots more experimental than anything). We believe there are two main reasons why we haven’t seen large banks, allocators, and corporates move on chain en masse for trade settlement, payments, custody, and asset management. One reason is hesitancy due to a lack of broad regulatory clarity. Sensible regulation with real clarity will be resolved over time as the benefits of blockchains become more widely understood. The second reason is that the assets these large banks and allocators want to trade do not live onchain, they live offchain. Bringing those real world assets onchain is how we bridge the gap between crypto and traditional finance. That’s what Superstate is doing, in a compliant and regulated manner, while also bringing to the table what makes crypto special: DeFi interoperability, asset transferability, and self custody.

Superstate is being built by a world class team, led by Robert Leshner. Robert was previously the founder of pioneering borrow lend protocol Compound Labs / Compound Protocol, one of the first major DeFi applications. At Superstate, he is joined by a team of top executors with the necessary on the ground experience working at the intersection of DeFi technology and finance.

People have been talking about bringing real world assets onchain for over 6 years. So what makes Superstate different? To date, besides stablecoins, the assets that have been brought onchain have been illiquid, often further out on the risk curve, and broadly esoteric. Despite that liquidity is one of key benefits of asset tokenization, a critical mass of participants must trade illiquid fixed income and real estate assets onchain to unlock the liquidity value proposition. However, those participants are not yet trading onchain, while cryptonatives prefer to trade cryptocurrencies and tokens, not illiquid debt or real estate real world assets. Hence, already illiquid assets become more illiquid, and tokenization has not yet achieved its liquidity promise. The market needs an asset that appeals to both types of cryptonative and traditional participants. Enter T-Bills.

There are currently $124.0B of asset-backed stablecoins on the blockchain, with the vast majority of that non yield-generating stablecoins backed by fiat. The total market cap of stablecoins peaked at $168.0B in February 2022 and has been precipitously declining as the U.S. Federal Reserve raised rates at its fastest pace in decades, with investors able to earn a higher rate of return in US treasuries (over 5% in short term T-bills) than by depositing stablecoins into historically lucrative DeFi protocols. (Until the recent market rally, borrow/lend supply rates were ~2%.) When T-bill rates were near zero, the opportunity cost of holding non yield-generating stablecoins was tolerable. As the Fed increased rates, however, this opportunity cost equation changed dramatically.

Unsurprisingly, the stablecoin market cap peaked the month before the Fed first began hiking rates in March 2022. Since then there have been attempts at creating a scalable fiat-backed stablecoin that can pass treasury yields to its holders, but none have yet had the right combination of team, network, regulatory expertise, and DeFi connectivity to build the right product. Additionally, there have been early attempts at yield-generating crypto-backed stablecoins leveraging primarily ETH staking yields, but these largely lack the regulatory clarity required by large institutional users today. It is clear that onchain cryptonatives want a stablecoin type product that is yield-bearing. Institutional investors love yield and the low risk nature of treasuries. Also, DeFi unlocks the opportunity to magnify yield by taking this collateral and putting it to work to earn incremental yield. Superstate aims to leverage existing U.S. securities regulations to achieve widespread global distribution in a fully compliant manner, and implement state of the art tokenization frameworks, robust DeFi composability, and wide ecosystem reach to bring the highest quality yield bearing treasury product to market.

Our investment thesis is straightforward.

• The blockchain will eventually be the coordination mechanism for all of traditional finance, and trillions worth of USD will be tokenized in the form of stablecoins or stable collateral to facilitate a useful medium of exchange and store of value.
• USD-pegged stablecoins will eventually be supported and encouraged by the U.S. political and regulatory establishment as a critical demand driver for U.S. Treasuries, to maintain continued widespread dollar dominance, and to ensure the U.S. participates as a key technology player in the global adoption of blockchains.
• DeFi (both permissioned and permissionless) will be a major driver for asset adoption and integrations.
• Tokenized money market funds will be widely accepted as eligible collateral across traditional and cryptonative financial market infrastructure (FMI).
• Market participants will require yield bearing collateral over non-yield bearing stablecoins.

While the total addressable market for tokenized U.S. treasuries is enormous, the opportunity for asset tokenization extends to ETFs, index products, corporate and sovereign debt, and real estate as well. We couldn’t be more bullish on Superstate’s vision and look forward to supporting them every step of the way as they bridge the worlds of crypto and traditional finance.

Disclaimer: The views expressed here are those of the individual CoinFund Management LLC (“CoinFund”) personnel quoted and are not the views of CoinFund or its affiliates. Certain information contained herein has been obtained from third-party sources, which may include portfolio companies of funds managed by CoinFund. While taken from sources believed to be reliable, CoinFund has not independently verified such information and makes no representations about the enduring accuracy of the information or its appropriateness for a given situation.

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