The Future of Venture Capital is Tokenized
It has been said that everything that can be tokenized, will be tokenized. The tokenization of real-world assets is just beginning and is likely to impact the daily lives of millions around the globe. Investing is no different and is proving to be an early adopter of this burgeoning technology.
Innovation is a relentless force that continuously shapes every aspect of our world. It pervades every sector and drives dynamic development as it enables new possibilities. Often the advancements will change established practices of an activity or a service. There are numerous examples of this happening, from Google to the iPhone, to Uber to Amazon. The creative application of emerging technologies often alters how we live our daily lives.
The advent of blockchain and its rise to prominence enables innovation in multiple sectors. One sector that is rapidly adopting blockchain is debt capital markets. Some leading traditional financial companies are tokenizing Treasury bonds and money market funds to gain the efficiencies and other benefits tokenization provides. In fact, a report by Standard Chartered and Synpulse projects that in 2024, some 69% of buyside firms will invest in tokenized assets.
A glimpse into the tokenization process
Tokenization is the process of creating on a blockchain a digital representation of an asset that follows pre-determined, automated actions encoded in smart contracts. The representation serves as a digital certificate of ownership.
Most of the process relates to creating the token and establishes the infrastructure of token operations. The process begins with the use case and segregating the associated asset. Next, the type of token, the appropriate token standard, and which blockchain will be utilized must all be selected.
Importantly, the information that is required to validate the token throughout its life must be identified and a process developed for how it will be gathered. After the infrastructure is created and the oracles identified, the token is minted and distributed via a token generation event, or TGE. A TGE can occur via multiple channel options, but the most common is a digital-asset exchange.
The current process provides manifold benefits and while the process appears to be complex, it is rapidly becoming increasingly easier. As it does, the benefits provide increasingly greater value.
Tokenized investments provide a wide range of benefits
While tokenization provides multiple benefits, one overarching key reason that traditional finance pursues tokenization is because it has a solid business case that provides efficiencies and creates superior user experiences.
Efficiency: Efficiencies are realized through streamlined processes that reduce costs and increase transaction settlement speeds.
Transparency: Because the transactions are on-chain transparency increases as visibility into asset ownership and transactions. immutability ensures data integrity through blockchain technology. Decentralization diminishes dependence on intermediaries.
Liquidity: Tokenized assets are more easily tradable, providing greater liquidity.
Fractionalize: Assets can be divided into smaller segments, making them more accessible, and smart contracts enable automated and conditional transactions.
Leaders across financial services recognize the benefits of tokenization and it is occurring across the broad range of investment projects, from money markets to private equity. Firms such as KKR and Hamilton Lane are tokenizing their private equity funds. Doing so makes these types of private investments open to new investors, as in some cases investment minimums fall from the millions to the low thousands.
Tokenization Causes a Paradigm Shift in Venture Capital
The myriad benefits that tokenization provides are ushering in a new paradigm of venture investing.
Venture investors will experience new levels of transparency, efficiency, and automation. Venture investing is no longer a black box of visibility where funds are locked up for a decade. A tokenized fund can provide near real-time insight into the status of the investment and the value of the portfolio holdings.
Additionally, now for the first time, an entirely new set of investors will have access to early-stage investments. Much in the same way that the internet democratized information, tokenization democratizes investment possibilities. It enables a new level of accessibility, as fractionalization often enables a lower minimum investment. Across the industry, minimum investment amounts are being reduced to make investments more accessible to average investors.
All investors will benefit from the greater liquidity and the capability to dynamically manage exposure and diversification across asset classes, geographies, industries, and more.
Embrace the Future of Venture Capital
More than likely, you use an iPhone or something similar. More than likely, your iPhone is now integral to your daily life. Now just as the iPhone has revolutionized communication and daily life, tokenization is set to transform venture capital. Soon most VC investments will be tokenized. The improved experience will be so apparent that it will be hard to imagine investing any other way.
