The crypto space has had a number of opportunities to reach mass adoption but has been held back by a series of high-profile failures. FTX was a pro-regulation exchange that promised a bright future for all until it collapsed after mismanaging investor funds. Similarly, crypto lender Celsius was brimming with potential until it went insolvent, leaving $1.3 billion in missing funds. Bad business practices have continuously eroded progress.
We are now on the precipice of another opportunity for mainstream adoption of blockchain technology to take place: Tokenization of real-world assets (RWA) has the potential to create a new financial market, one that intertwines the choice and flexibility of DeFi with the safety and regulatory nature of TradFi.
Tokenized RWAs have the potential to realize the promise of DeFi and bring crypto to the masses. However, this is a double-edged sword. Participants within the crypto space have been burnt too many times and the industry is on its last lifeline to get things right. Tokenized RWAs could bring mass adoption for crypto or be the final nail in the coffin for the industry.
The risks of a mismanaged tokenization process
Tokenization in this context takes real-world assets and produces a token representation that moves around on the blockchain. That token can then be used in a plethora of activities, enabling people to do more with their collateral. Whilst the concept is fairly simple, the process to make it trusted, insolvency-proof and legally binding requires a lot of effort.
Firstly, there is the issue of attestation. For asset-backed tokens, the typical model is a financial institution buys the underlying collateral from public markets, for example, US Treasury bond ETFs, Tesla, or Apple stock, and then mints a token representing those assets. It is crucial that an independent third party, acting as token trustee, can attest to the collateral held in custody in order for the token to be minted. There is a large market opportunity here for trusted firms, like the big four, to assume an auditing and attestation role for the purposes of tokenization.
Secondly, well-documented crypto and DeFi collapses in 2022 have resulted in greater industry demand for transparency over the collateral held in custody that mirrors tokens being traded on chain.
In the wake of the FTX collapse, Binance championed proof-of-reserves (PoR) where a snapshot of assets held in reserve by a financial institution corresponds to the assets that the company holds on behalf of its customers. Seemingly logical, the approach does not account for whether the same collateral then gets used elsewhere after the snapshot is taken.
Tokenization providers are providing snapshots of assets held in reserve that correspond to the tokens issued on chain but on a more frequent basis. For example, Swarm publishes monthly disclosure reports and has announced its intentions to move towards a real-time verification process which is currently only prevented by restrictions in web2 infrastructure.
Finally, token holders need insolvency protection. There are some organisations that offer ‘contract for difference’ tokens, which do not entitle the buyer to any claim for the underlying asset should that entity become insolvent. This approach relies on the health of the company’s balance sheet, which does not need to be disclosed to token holders. It's a calculated risk investors must make.
Where is momentum for RWAs coming from?
Retail investors in emerging markets - People in areas like India, Africa, or South America cannot open accounts with platforms like Robinhood or eToro so easily, to access global markets. They also live in places where their local currency is plagued by hyperinflation. In Argentina for example, inflation will reach an average of 147 percent this year, according to ICIS.
Hyperinflation is driving crypto adoption amongst people in these regions who need safe haven assets to deploy into, whilst remaining on chain. Tokenized stocks and bonds are more stable assets for those looking to escape the volatility of crypto and their local fiat currencies.
Retail investors in established markets - You can do more with tokenized assets than simply wait for the price to go up or down. There are many yield-generating activities that DeFi enables. For example, decentralized finance works on being able to swap assets from liquidity pools. In DeFi, anyone who contributes liquidity to a pool receives a prorated share of trading fees for assets swapped using that pool. By acting as liquidity providers, retail investors can generate real yield on their collateral.
In time, retail investors will also be able to lend out their collateral for an agreed interest rate, something that is currently only reserved for institutions within the traditional financial infrastructure.
DeFi-natives - About a third of business development leads for regulated Defi platform, Swarm, are from DeFi-native protocols who are looking to improve the health of the on-chain lending ecosystem by offering diversified collateral options. One example of this is between Arf, a global liquidity and settlement platform, and Huma Finance, which builds infrastructure for on-chain lending, who have announced a partnership to tokenize receivables that can be used for lending, in order to create liquidity for cross-border payments.
Centralised crypto exchanges - Most, if not all, major crypto exchanges have a tokenization strategy. Many are looking at ways to offer a diversified set of asset classes to keep the customers they have spent time and money acquiring, in their ecosystems. Brian Armstrong, CEO of Coinbase, made comments to The Wall Street Journal, after the SEC filed a lawsuit against the crypto exchange, discussing a vision for one platform where all tokens representing different asset classes could be traded alongside each other. Developments in European regulation have already made this possible on platforms like Swarm.
Stablecoin issuers - Since the last bull run, there has been a flight to quality for reserve assets that support the peg of a stablecoin to the denominated fiat currency. For example, US-pegged stablecoins, Like DAI from MakerDAO, are diversifying away from volatile crypto assets and commercial paper and towards highly liquid tokenized traditional financial products like US Treasury bonds. The growth of tokenized short-term US Treasury Bills has exploded to over $600 million in 2023 alone.
Traditional financial institutions - Inflation sits at roughly 10 percent in the UK meaning institutional investors need to find a way to take 10 percent out of the economy. One option is to make trading more efficient, which blockchain technology offers through disintermediation, automating those functions through smart contracts. As Marex executives, Ilan Solot and Mark Arasaratnam, wrote, DeFi swaps credit risk for smart contract risk, and the level of automation that code provides, means it will be easier for professional traders to build structures and exotic options.
The time is now
Tokenization still feels like a crypto-native story but there are signs that this will cross-pollinate into other areas of the financial ecosystem. A recent market survey on tokenization by EY found hugely optimistic metrics for adoption: 57 percent of institutional investors said to be interested in investing in tokenized assets, with 40 percent interested in starting this year or next.
As long as tokenization providers get this right, blockchain will reach mass adoption.
Lead image: upklyak
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Summer this year was the warmest on record. In a 1.5 ◦C world, it is predicted that over 1 billion of the world’s population will be exposed to severe heat waves at least once every 5 years. Annual excess deaths due to heat are already averaging at 500,000 in 2021.
As temperatures continue to rise, keeping people cool will not be a matter of comfort, but a requirement for survival. The demand for cooling systems is increasing, with research by the IEA finding that sustained average daily temperatures of 30°C increased weekly sales of air conditioners by 16 percent, and it is predicted that shipments of air conditioning units will triple by 2050 to 5.6 billion units.
However, today’s cooling systems are energy-hungry and inefficient. Currently, we’re trapped in a vicious spiral, whereby the systems we use to cool down directly contribute to the climate problem at hand. More sustainable methods of cooling must be enforced to ensure these soon-to-be vital systems don’t risk increasing the temperatures they’re created to reduce.
The cooling problem
Currently, the ozone-depleting refrigerants used in cooling systems, the energy inefficiency of these systems, and the overbearing energy demand they place on the grid all mean they’re complicit in worsening the climate problem.
Refrigerants enable the whole refrigeration process within a cooling system to work, yet HFCS or Hydrofluorocarbons, the most common refrigerants used in AC units, are potent greenhouse gases with up to 4,000 times the warming impact of CO2.
Furthermore, the average consumer will typically opt for AC units that are energy inefficient, despite the existence of best-in-class AC units. Selection is often based on price rather than efficiency, with people typically buying AC units with average efficiencies of less than half of what is available. This will only get worse as research by Sustainable Energy for All reveals that 2.4 billion lower-middle income will soon be able to purchase affordable cooling appliances.
As a result of the energy inefficiency and increase in demand for AC units, cooling systems already represent around 10 percent of global electricity demand. This is forecast to more than triple by 2050.
With such a high electricity demand, cooling usually correlates with peak energy demand and is therefore mainly powered by fossil fuels, feeding back to the climate problem that raises the temperatures that cooling systems seek to combat.
In addition, the air conditioning manufacturing industry is highly consolidated, with the majority of market share controlled by a small number of large companies. This results in high entry barriers, and so partnerships with these major companies will be needed to fully combat the cooling problem and facilitate change, ensuring that actions taken have a wide-reaching impact.
How can we solve the cooling problem?
Firstly, the ozone-depleting refrigerants driving the cooling process itself must be switched out for those with lower GWPs. Progress has been made, with the Kigali Amendment of 2016, committing 97 countries to cut the production and consumption of HFCs by more than 80 percent in the next 30 years.
Furthermore, the AIM Act, introduced in 2022, outlines the strategic approach of the Environmental Protection Agency (EPA) to eliminate the use of high-GWP HFCs in new air conditioning and commercial refrigeration systems.
Widening the reach of such legislation and guidance to target all countries operating cooling systems will help to reduce the use of harmful chemicals. At the same time, the drive to switch to natural refrigerants, including CO2, ammonia, water, air, and hydrocarbons, must be elevated.
Alongside refrigerant transition, energy efficiency in cooling systems must be improved. If both steps are taken, we could avoid between 210-460 GtCO2e over the next 40 years, with energy efficiency improvements accounting for 75 percent of avoided emissions.
The IEA’s Efficient Cooling Scenario shows that policy interventions could improve AC efficiency and cut energy demand by 45 percent. The challenge lies in implementing energy efficiency requirements, and ensuring these are upheld.
Incentivising efficiency
To ensure success, policies and incentives must target the right people. The commercial market is the best means of targeting improved energy efficiency in cooling systems, given that commercial cooling users are more attuned to price and policy signals.
So, they are more incentivised to find efficient and less impactful cooling solutions, therefore creating better conditions for innovation. These technologies can then be introduced to the residential market.
Incentivising organisations and individuals to find better cooling solutions, such as Blue Frontier, is also essential to improving the problem. For example, the Indian government and RMI recently sponsored the Global Cooling Prize to identify solutions that were at least 5 times less impactful than the status quo. Making this energy-efficient technology more affordable will also improve its accessibility.
Even with more energy-efficient systems, it’s important that we balance the energy load they rely on. Distributing the energy requirements of cooling systems across both renewable and non-renewable sources can improve their overall sustainability.
Alongside this distribution, there’s a need for a stack of solutions - for example, technologies that improve energy efficiency in AC units must be combined with alternative refrigerants or refrigerant-free technologies in order to fully decarbonise.
In the long run, accelerating the transition to cleaner energy will further improve their sustainability, making more renewable energy available to power cooling systems instead of fossil fuels.
Ultimately, the fact our cooling systems today are actually making the world hotter cannot stand. Solutions exist to improve their energy efficiency, but people must take action — be that innovating or investing in new, more efficient technologies and the renewable energy sources used to power them, or regulating the refrigerants and energy used by the systems themselves.
Lead image via Adobe Firefly
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