The tokenized market will reach a trillion-dollar scale, but there are still four major obstacles

Author: Crypto Carl

Compiled by: Hu Tao, ChainCatcher

We are at the dawn of a new era in finance. Tokenization is no longer a niche experiment but is rapidly evolving into a significant field, with institutions competing to lead this largest emerging asset class, while capital allocators seek more substantial returns.

The question today is no longer whether trillions of dollars will move on-chain, but who will lead this process. This article will explore the conditions necessary to achieve this process and the opportunities faced by operators and entrepreneurs in building platforms for custody and trading of trillions of dollars in assets.

Tokenized finance has reached a considerable scale. The circulation of stablecoins alone has exceeded $300 billion, while the total market capitalization of other tokenized financial assets (including money market funds, private credit, stocks, commodities, and other products) has also surpassed $30 billion. Many of the world's largest asset management companies, including BlackRock, Fidelity, and Franklin Templeton, have cumulatively put tens of billions of dollars of real-world assets on-chain.

Figure 1: Tokenized Financial Assets (excluding stablecoins)

While cryptocurrencies have performed well as an emerging industry, substantial progress in technology and institutional-level risk management is required to scale tokenized finance to trillions.

The Key is Risk-Adjusted Returns

The growth of tokenized finance depends on whether it can provide better risk-adjusted returns than traditional finance; otherwise, assets will remain off-chain. Tokenizing an asset must improve capital deployment through higher returns, lower risk units, or significant operational and capital efficiency advantages.

The historical flow of stablecoin funds clearly illustrates this. When on-chain "risk-free" yields (represented by Aave USDC supply APY) were significantly higher than the federal funds rate (from the end of 2023 to August 2024), assets under management (AUM) grew the fastest; conversely, when on-chain yields were below the federal funds rate from 2022 to 2023, the scale contracted.

The initial reasons for stablecoins moving on-chain included trading, remittances, and acquiring dollars, not just yield. However, when on-chain yields lose attractiveness relative to traditional options, capital flows out.

Figure 2. Month-on-month growth of USDC relative to Aave supply yield and federal funds rate.

This "capital flowing to higher risk-adjusted returns" pattern is not unique to stablecoins; it reflects the overall historical trajectory of tokenized finance development and foreshadows future directions.

The Tokenization Process

Initially, cryptocurrency trading referred to tokenizing dollars to trade crypto-native assets, but it later expanded to include real-world assets, with on-chain native issuance becoming the next significant opportunity.

Tokenization originated from users wanting to trade crypto-native assets like cryptocurrencies and NFTs. The emergence of stablecoins made them a practical medium for transferring value between exchanges, quoting in dollars, and storing value on-chain.

Starting in 2025, real-world assets (RWAs) will become a significant driver. These assets are traditional financial assets, such as money market funds, private credit, and stocks, packaged and issued on-chain by intermediaries. The function of tokens is often similar to "warehouse receipts," representing digital claims on the underlying assets. However, the primary record sources remain off-chain, requiring additional legal structures to link token holders with the actual assets. This downstream approach enhances accessibility but also introduces dual management and additional counterparty risks.

The longer-term goal is native asset issuance, where the initiation and issuance of assets occur directly on-chain. For example, native on-chain lending and blockchain-based equity issuance. If blockchain is integrated into financial operations from the start, it can enhance capital efficiency through higher yields, lower operational costs, faster capital cycles, and greater transparency. However, the first truly native issuances are likely to come from emerging companies building payment finance and credit infrastructure, rather than traditional financial institutions. Superstate has made substantial progress in equity tokenization through its direct issuance program.

We should anticipate that these three different models will coexist in the long term. The current goal should be to validate product-market fit and build deep, reliable liquidity. Only when assets under management (AUM) reach a certain scale will institutions begin to view blockchain as a primary trading venue rather than a secondary one.

Therefore, it is essential to identify which assets and use cases can achieve trillions in scale through tokenization in the near future.

Tokenization Premium

Since tokenized finance must ultimately provide superior risk-adjusted returns, the real question becomes: where and how can this be achieved? What assets should issuers and allocators prioritize?

Thinking from fundamental principles is beneficial. I propose the framework of "tokenization premium" to identify where tokenization can create the most value. Returns are not evenly distributed but are shaped like a dumbbell—clear and strong advantages appear at both extremes: extremely low volatility assets and extremely high volatility assets.

Figure 3. Tokenization Premium

Applying this framework to various asset classes reveals the most significant short- to medium-term investment opportunities:

Figure 4. Cross-Asset Class Application of Tokenization Premium

Low-volatility assets are clear short-term winners. For example, tokenized Stretch ($STRC) and money market funds (like BlackRock's BUIDL) provide stable, predictable yields that can be reused as collateral or deployed into persistent yield strategies that traditional finance struggles to achieve. These assets are well-suited for institutional capital that prioritizes yield-generating collateral and for companies wishing to keep capital on-chain. Tokenization transforms them into composable, 24/7 collateral that can be reused across protocols with minimal friction—creating structural advantages over off-chain equivalents.

High-volatility assets benefit from an entirely different set of advantages. Crypto-native assets ($BTC, $ETH, $SOL), on-chain derivatives (perpetual contracts, structured products like Ethena), and tokenized stocks and commodities enjoy 24/7 global trading, permissionless and orderly settlement, real-time price discovery through robust oracles, and deep composability. Risk assets can enter and exit positions instantly, with no delays; they can also create trading experiences, indices, and structured products that traditional NAV quarterly updates or settlement cycles cannot achieve. These assets thrive in environments where speed, transparency, and atomic composability are most critical.

Assets that are in the middle ground—moderate volatility and yield—struggle in the current era of physical assets. They rarely generate enough yield to support frequent rotation without facing liquidation risks, and due to low oracle update frequencies or the need for manual intervention, they cannot fully leverage the advantages of round-the-clock trading. These challenges are particularly pronounced for private investment tools like private equity and venture capital, which settle quarterly. The expansion of new products, such as @upshift_fi's Upshift Clear, which enables instant settlement of semi-liquid assets, can begin to narrow the attractiveness gap.

The tokenization premium is not all-encompassing and does not cover some secondary factors, such as whether assets are publicly traded or privately traded, counterparty risks, and the liquidity status of assets. However, from a fundamental perspective, it provides a structural reference point to maximize the advantages of tokenization.

Even for those assets that should be tokenized, at least four barriers prevent capital from flowing on-chain at scale.

1/ Investors Need Better Security Guarantees

Modern portfolio theory defines risk as volatility. Tokenized assets also face two additional risks: protocol risk and liquidity risk.

In the early days of DeFi, hacks were commonplace—or at least not surprising. Most attacks were related to smart contracts, and after each attack, developers diligently upgraded the smart contracts to ensure such events would not happen again across the ecosystem. After that, around 2024, many believed that large-scale hacks involving tens of millions of dollars would no longer occur. Their thinking was partially correct.

Today, hacks continue and are becoming increasingly sophisticated. This round is primarily about OpSec (operational security) issues, with Drift Protocol and KelpDAO alone losing over $500 million this year. Even large, mature centralized companies like Bybit faced a $1.5 billion hack in 2025. Clearly, this is an endless cat-and-mouse game. The characteristics of crypto and blockchain as superior financial assets (instant settlement and permissionless) are also the root of security challenges.

However, today this cat has unprecedentedly powerful tools—next-generation AI models. Anthropic's Mythos model is advanced enough to discover security vulnerabilities on foundational platforms like Linux and Apple. Hackers like North Korea's Lazarus Group can leverage these to accelerate attacks, even if developers use them as blue team allies.

Current on-chain security methods are insufficient. Institutions will not invest trillions into a system that can lose hundreds of millions in a single attack. A security renaissance is needed—a conscious and disciplined rethinking of how on-chain finance is designed, governed, and trusted.

This requires both common-sense improvements and new underlying mechanisms, and for certain asset classes, it may require a partial abandonment of the fully decentralized ideal. Protocols and companies willing to innovate will earn the trust of large capital, while those that do not innovate will struggle to attract capital.

If on-chain finance can establish more robust institutional-level standards in security architecture, it will benefit immensely. The most immediate and obvious measures include establishing standards for upgrade permissions, withdrawal limits and time locks, signature thresholds, and overall transparency of security architecture. Like many, I was shocked to see Drift adopt a 2/5 signature configuration without a time lock, while KelpDAO's bridging smart contract used only one DVN (i.e., signer).

I am pleased to see new standards for transparency reports and certifications emerging, which will set clear benchmarks for institutional participation. Protocols that prioritize transparency and robust design will attract more capital inflows; institutions have strong risk management departments that require robust protections. While it is impossible to discover all vulnerabilities comprehensively, teams that implement common-sense circuit breakers and more refined upgrade processes will be more attractive to issuers, institutions, and retail investors.

Secondly, teams should consider issuing their own stablecoins. This has dual advantages: it can generate revenue for the protocol and provide the ability for instant freezing and seizure. The initial moments after an attack are critical, and the ability to act quickly and unilaterally is essential. Why rely on existing stablecoin issuers to freeze tokens immediately when an attack occurs? Because it is impractical; stablecoin issuers can hardly monitor every protocol, and this puts them in a dilemma: should they respect the rights of the protocol or the rights of the holders and comply with relevant laws? The vulnerability attack on the Drift protocol was a clear hack, but what if the nature of the attack is less clear? Issuing their own stablecoin allows the protocol to have complete control and judgment, significantly reducing losses.

However, we also need to develop this paradigm. In reality, protocols can never be 100% secure, and institutions need to hedge risks.

Traditional finance (TradFi) has managed counterparty and credit risks through credit default swaps and insurance. Similar opportunities exist on-chain: protocols can allow depositors to purchase insurance or credit default swaps to guard against losses. A promising approach is to leverage prediction markets, where participants can choose to go long (buy protection) or short (collect premiums by betting on protocol security). These markets can provide not only hedging tools but also transparently show in real-time which platforms are considered the most trustworthy.

We urgently need a security renaissance that involves protocols exerting greater control, providing higher transparency, and leveraging market forces so that large depositors can "buy their own safety."

2/ Institutional-Level Buy-Side Tools

Suppose an institutional investor wants to invest $100 million in tokenized assets. They are likely to ask: are there currently platforms that allow me to discover investment opportunities with complete prospectuses, make cross-chain investments and custody, avoid market volatility and liquidation risks, monitor portfolio performance, and efficiently cycle positions?

Frankly, there are currently no institutional-grade platforms. We have built a rich portfolio of tokenized assets—from government bonds to stocks—but we have yet to build the comprehensive infrastructure needed for large-scale deployment and management of institutional capital.

Now is the time to start building the tools needed by institutional buyers. I find several significant gaps.

The first is an institutional-grade UI that provides the overall capabilities mentioned above. On-chain investing is far more complex than traditional finance, and investors need solutions that provide necessary risk profiles and assist with cross-chain custody and execution. A recent investor purchased $50 million worth of $AAVE through the Aave official website, only to receive real tokens worth $36,000—this is the experience institutional capital faces today. Platforms must protect investors from front-running and other MEV attacks.

Another key feature is short-term liquidation insurance or protection. Most oracles are robust but not perfect. Institutions cannot be liquidated due to short-term oracle issues or unrelated contagion causing perceived asset price drops. I envision multiple crypto-native market makers willing to step in during temporary market mispricing. Individual protocols currently offer such services, but institutions need more generalized solutions.

Finally, platforms could offer one-click looping functionality. Platforms like Pendle and Kamino support looping for specific asset lists, but managers may want to loop unlisted assets. Thus, there is a clear opportunity: to release a set of looping contracts that allow wallets and institutional-grade platform UIs to directly access any asset.

3/ Large Transaction Capabilities

Privacy is the final frontier.

Liquidity used to be a bottleneck. PropAMM has largely addressed this issue by achieving low-latency dynamic pricing, thereby improving capital efficiency and liquidity while reducing the incidence of bad MEV compared to static AMMs.

But liquidity is not the only need for institutions. Trading intentions remain public, trading algorithms can still be reverse-engineered, and block settlements still require capital. If every position, hedge, and execution is visible in real-time, institutions cannot escape pilot mode—and they will not. This is why blockchains optimized for confidentiality in trading finance (TradFi), like Canton, have reached valuations in the billions. It is also why some large whales steer clear. Hyperliquid, despite limited market depth, sees orders pushing the market in unfavorable directions.

The solution is to shield execution of public liquidity. Silhouette (Hyperliquid's shielded trading product) achieves this through a TEE-driven matching engine. Orders are batched, privately matched, and net settled without revealing intentions; unfilled portions are routed directly to HyperCore's public order book. Spot trading has gone live, saving an average of 4 basis points per trade through net settlement. Perpetual contracts will launch this year. Of course, there will be more solutions for different trading types across various chains.

Over-the-counter trading platforms and centralized exchanges will continue to facilitate large transactions. But only when the execution of trades themselves can be protected will the full advantages of on-chain finance—instant settlement, reduced counterparty risk, and deeper unified liquidity—truly be realized.

4/ Regulatory Reform and On-Chain KYC

While broad regulatory reform remains one of the biggest structural barriers to the scaling of tokenized finance, early companies in this field also find it challenging to exert direct influence. Nevertheless, founders can still have a meaningful impact on a related issue in the short term: on-chain identity and KYC (Know Your Customer).

Regulated tokenized products (like those issued by Securitize) require users to complete KYC at a portal before trading. But what if users want to trade products not issued by Securitize? They have to KYC again.

Reducing trading friction will help grow on-chain users and assets. We may not be able to completely avoid KYC requirements for certain assets, but if we can simplify information-sharing processes or establish reciprocal KYC mechanisms within specific monetary thresholds, it will greatly expand the space for innovation.

Conclusion

The first $350 billion mainly comes from stablecoins.

The next order of magnitude is more challenging. It requires winning over capital that has ample reasons to stay in traditional finance: this capital is more concerned with counterparty risk than throughput, more focused on strategy confidentiality than composability, and more interested in institutional-grade tools than ideology.

Capital will not flow on-chain simply because tokenization is a new thing. Only when tokenization can deliver structurally superior risk-adjusted returns will capital flow in. The tokenization premium points to the opportunities, while the four gaps reveal the urgent issues that need to be addressed.

Tokenizing trillions of dollars in assets is no longer a question of "if it will happen," but rather "who will build the applications for issuing, trading, and custodying these assets globally."

We believe the opportunity is real and imminent.