Centralized exchanges provide liquidity. The largest example is stETH, which is pledged by Lido.
Many decentralized applications and centralized digital asset service providers offer staking services, where users deposit tokens into smart contracts or centralized modules to earn rewards, increase rewards, and obtain governance rights. Although this is also referred to as staking, it is quite different from staking with blockchain consensus protocols. It is more commonly used to reduce token supply, increase token demand, and reward users.
Overview: Tokenization is the process of introducing off-chain assets (usually referred to as real-world assets or RWA) onto the chain to achieve on-chain tracking, transactions, programming, and management. Many different types of assets can be tokenized, such as commodities, collectibles, financial instruments, intellectual property, and real estate. Due to its benefits and improvements, enterprises, crypto OG, and regulatory agencies are all highly interested in this. According to The Block, the global tokenization market is expected to reach $16 trillion by 2030.
Benefits: The benefits of tokenization include:
Asset management and administration: Simplifying operations, reducing administrative burdens, automated and transparent record-keeping
Market efficiency and liquidity: Improving standardization, shortening settlement times, reducing reliance on intermediaries, and increasing asset efficiency through composability
Financial inclusion: Lowering minimum investment limits, accessing more sources of capital
Economic growth: Increasing access to capital and financing through broader and more diversified participation
Process: Real-world assets go through a tokenization process that includes:
Identification: Selecting the real-world assets to be tokenized
Verification: Confirming the ownership and value of assets through legal documents or evaluations. Trusted third parties, such as lawyers or auditors, can verify authenticity, ownership, and valuation
Tokenization: Creating a digital token or set of tokens to represent the assets on the blockchain. Each token typically represents a fractional ownership or specific claim of the asset and can define the token’s attributes and functions using smart contracts
Issuance: Verified asset information and created token records are stored on the blockchain. Token issuance is completed through ICO, STO, or direct listing
Custody/management: Asset management and custody ensure the secure storage of physical assets and the management represented on-chain, typically involving traditional asset custodians and blockchain-based custody solutions.
Examples: Stablecoins are the most famous examples of tokenization. Stablecoins typically tokenize the US dollar but also include other assets such as gold (e.g., KAU, PAXG, XAUT). The US Treasury bond tokenization market is rapidly growing, with leaders including Franklin Templeton ($3 billion), Ondo’s OUSG ($130 million), and Matrixdock’s STBT ($85 million). In addition to government bonds, other debt instruments are also being tokenized, such as private credit (by Defyca), structured debt (Intain), and debt securities (Obligate).
Furthermore, some protocols are tokenizing or acting as less liquid tokenized products in the market, such as Centrifuge, Goldfinch, Maple, RealT, BSOS, and Re, while other protocols are tokenizing stocks and indices, such as Backed and Swarm. Finally, tokenization extends to carbon credits (Ecowatt, Flowcarbon), physical collectibles (Collector, Tangible), and even data indexes (The Graph), KYC (Shyft Network), and labor markets (Human Protocol), although the latter is not typically within the current tokenization/RWA narrative.
Challenges: Despite these benefits, tokenization/RWA must first overcome various challenges to fully realize its potential. Firstly, a robust and clear legal and regulatory framework must be established. Secondly, standardization is needed in asset representation, ownership determination, and user identity. Thirdly, interoperability needs to be improved to consolidate users and liquidity between chains and applications. Finally, data, custody, and auditing processes need improvement.
Tokenomics is the economics of protocol tokens, covering various supply and demand characteristics.
Tokens play a crucial role in decentralized entities, coordinating and incentivizing behaviors, rewarding value contributions, and facilitating exchanges. Therefore, strong token economics can support protocol goals, establish/enhance sustainable economic models, and accelerate long-term protocol growth and value creation.
Tokenomics design starts with the protocol’s goals and then examines how tokens help achieve these goals. Tokenomics is not about increasing prices by reducing supply but more about matching supply and demand. There are many tokenomics frameworks, but research on supply and demand may be the most popular.
Supply: Token supply is usually encoded in smart contracts and is more formalized than demand. Some important issues regarding token supply include:
Supply definition: Token supply has various definitions, including circulating supply, which is the current circulating and immediately available token quantity for sale; total supply, which is the established token quantity minus the destroyed token quantity (including tokens locked in smart contracts); and maximum supply, which is the hard-coded limit of total tokens, representing the total token quantity that will exist in the future, indicating the remaining currency inflation.
Supply indicators: The current and future supply of a token is influenced by many different components. These include issuance plans (many protocols have built-in mechanisms to increase circulating supply to incentivize and reward activity), distribution (tokens may be established and distributed through fair launches or pre-mining), lockups (pre-mined tokens may be subject to lockup plans to prevent large supplies from entering the market at once), and distribution (the current holders and quantities of tokens, with the presence of a few large holders posing a risk).
In general, if most of a token’s maximum supply has been exhausted, or there is stable, predictable monetary inflation encouraging its use, fair launches or pre-mining, gradual, long-term vesting schedules, a higher community token allocation rate, and a fair distribution with no large holders, then over time, such a token generally absorbs demand well.
Demand: Token demand is driven by fundamental and speculative characteristics, motivated by the benefits provided by tokens.
Demand creation mechanisms: Token demand can come from various sources, such as internal use within protocols (e.g., value exchange, governance, access discounts), sharing protocol income or potential income with token holders, monetary attributes, and speculative demand.
Demand-driving factors are not all equal. Governance rights are usually of lower value due to lower voter participation. Speculative demand has a dual nature, as it can help increase token prices but may also harm token prices. Sharing income with token holders is a strong potential benefit and demand-driving factor, but it is challenging to achieve in the current regulatory environment. In conclusion, protocols should focus on providing and growing genuine use cases/practicality for their tokens to drive demand, and then match this demand with supply.
Zero-knowledge proofs (ZKPs) are a method that allows one party (the prover) to prove a statement is true to another party (the verifier) without revealing any other information.
For example, suppose your friend is wearing a blindfold and holding a green ball and a red ball. You want to prove to your friend that the two balls are different in color without revealing any information about the two balls. You ask your friend to either switch or not switch the balls behind their back and then show them to you again. At this point, you can tell whether or not your friend switched the balls.
With each round and a correct answer, your friend might start to believe you, but won’t fully trust you because you have a 50% chance of guessing correctly. However, with each round and a correct answer, you are simply moving the probability of guessing towards zero, and eventually, your friend will believe that the two balls are of different colors, without you revealing any information about them.
Zero-knowledge proofs are primarily used in blockchain for privacy and scalability purposes. Examples of the former include hiding transaction information and minimizing information sharing, while examples of the latter include zero-knowledge rollup, which processes transactions outside the Ethereum main chain, then batch processes, compresses, and publishes the state data to a layer while providing zero-knowledge proofs (called validity proofs) to prove that the computation was executed correctly. Future use cases include cloud-scale verifiable outsourcing computation, anonymous data analysis, and enhanced trust, privacy, and remuneration for decentralized identity.
Zero-knowledge proofs use arithmetic circuits to prove the validity of statements, are probabilistic (cannot be certain, only with high confidence), can be interactive (as in the example above) or non-interactive (the method used in blockchain), and typically exist in the form of zk-SNARK in the cryptographic field. Zero-knowledge proofs have recently shifted from theory to practice and are rapidly improving in critical areas such as proof time, proof size, verification time, and trusted setups.
The drawbacks of zero-knowledge proofs are that they are in the early stages of development, are probabilistic rather than deterministic, require multiple interactions or significant computations, and typically have some minimal trust assumptions in trusted setups, which is the process of generating standard parameters for proof systems (although some ZKP implementations do not require trusted setups).
Zero-knowledge proofs are similar to other technologies such as multi-party computation (which allows multiple parties to share data for computing tasks without revealing each other’s data) and fully homomorphic encryption (which enables computations on encrypted data without first decrypting it).
Popular protocols adopting zero-knowledge proofs include Aleo, Anoma, Mina, Tornado Cash, Iron Fish, Manta Network, Aztec, Argent, Starknet, zkSync, and Penumbra, among others.
More and more games are utilizing blockchain technology to incorporate cryptocurrency-based payments, rewards, and ownership into their gameplay. This includes facilitating in-game transactions, creating in-game digital assets such as NFTs, and verifying and recording all blockchain transactions that occur in the game.
Blockchain-based games have many benefits, including:
Decentralization/trustlessness: Games are more secure, transparent, trustless, and traceable.
Ownership: Users truly own their assets in the form of self-custodied NFTs, transforming in-game purchases from expenses to assets.
Enhanced functionality: Users can resell their assets to others. Composability may allow users to transfer assets between different games or enable developers to build on existing games.
Greater influence: Blockchain-based games can adopt user-generated content or community governance based on DAOs, allowing users to create in-world/game assets, develop storylines, or improve the game’s economic model.
Incentives: Token incentives can reward users for contributing to the game, such as completing quests, creating popular content, or bringing in new users.
New revenue streams: Developers can now oversee dynamic virtual economies, extracting a portion of revenue from all business transactions.
Blockchain-based games first emerged in late 2017 with the launch of CryptoKitties. CryptoKitties allowed users to collect and breed digital cats based on determined cat attributes and a smart contract-based breeding algorithm and became so popular that it clogged the Ethereum network.
The next popular blockchain-based game was Axie Infinity, launched in 2021. It is a digital pet universe game that allows players to breed, raise, battle, and trade fantasy creatures called Axies.