Tokenization, Liquidity and Interoperability in Digital Financing
Liquidation is the process of taking things of inherent value (assets) and converting it to cash or cash equivalents. So for the banking industry to be lacking on-demand liquidity (ODL), means they lack the ability to exchange peoples assets, or bank accounts into cash or cash equivalents.
Crypto thrives on its ability to create ODL in real time for the clients they provide services for. This liquidity process happens through the tokenization of assets or sensitive information and recording that value onto a blockchain and converting that sensitive data into a non-sensitive token that can be held and traded for its represented notion of value. ODL allows for the easy transfer between cash funds and tokenized assets.
“Asset tokenization has the potential to bring trillions of dollars of real-world value onto blockchain networks. Tokenized assets benefit from permissionless liquidity, open access, onchain transparency, and reduced transactional friction compared to traditional assets.” (Chainlink 2024).
This process can be replicated in industries like the stock market, Treasury Bills, Bonds, and real estate titles in order to efficiently store pools of liquidity and document the transactions associated with that token/asset. Utilizing blockchain technology will shift markets towards instant settlement systems.
Blackrock CEO, Larry Fink, on CNBC “Squawk Box” January 23, 2025
“I want the SEC to rapidly approve the tokenization of bonds and stocks.. That will simply things, make everything easier.”
With tokenizing assets and creating on-demand liquidity to help facilitate transactions, we can infer that larger liquidity pools will assist smaller ones. Here lies the importance of interoperability. Eliminating the frustration of having high fees using a PNC ATM as a member of SunTrust. The same way Bank of America may not have seamless transaction with the Bank of England. Crypto and Distributed Ledger Technology (DLT) are layer based systems and can be utilized to eliminate miss-communication in transactions.
Standard Chartered Bank’s visual representation of Blockchain DLT. This process optimizes financial documentation and security. Structuring in layer based systems help alleviate traffic.
Identifying layer based systems can help when researching Crypto. Layer 1 is the base, the foundation in which the blockchain is built, protocols are created, and transactions are executed. This is where uniformity is created. Layer 1 blockchain systems are more geared towards enterprise, institutional, and government partners.
Layer 2 is built on top of Layer 1, bringing scalability and processing transactions off-chain to help ease traffic through Layer 1 (Cointelegraph 2023). Layer 2 systems will be more niche, getting into specific markets and asset classes. Here is where majority of Cryptocurrencies, memecoins and NFT’s are. Different tokenized blockchains validate and document different payments. Using Bank of America for example, they could have a layer 2 system to process their credit card payments, and another blockchain to process auto loan or mortgage payments. Built on the same Bank of America layer 1 ledger, but process and record different types of payments.
Layer 1 Blockchain sets the functions for the entire system. Layer 2 blockchains are built on top of layer 1 to facilitate payments before being validated and posted by the layer 1 Blockchain. This improves efficiency in transactions per second.
Layer 3, built on top of layer 2, is the consumer facing decentralized application to interact with layer 2. A layer 1 blockchain system could support all transactions for the NYSE. Layer 2 will help tokenize and facilitate payments for ETF’s, Mutual Funds, and stocks. The layer 3 system will be the Robinhood or Fidelity in which consumers buy and sell the individual tokenized stocks on.