Unlocking Liquidity: Tokenized Asset Exchange on Automated Market Makers

n the blockchain space, the concept of tokenized assets has emerged as a revolutionary force, a killer app, creating a bridge between traditional and digital assets. Particularly, the integration of Automated Market Makers (AMMs) has paved the way for increased liquidity, democratized access, and innovative financial applications.

Let's delve into the exchange of tokenized assets on the blockchain, exploring liquidity mechanisms and deployment strategies that make the tokenization ecosystem thrive.

Tokenized Assets: A Paradigm Shift

Tokenized assets represent a seismic shift in the financial paradigm, offering digitized versions of real-world assets (RWAs) or digital, but illiquid tokens. Examples range from tokenized bonds, private equity, and real estate to the novel concept of tokenized staked Ethereum, named Liquid Staking Tokens (LSTs). Any asset - real and digital - that is illiquid can be tokenized. The advantages are compelling:

1. Liquidity: Tokenized assets via Automated Market Makers (AMMs) have enhanced liquidity and accessibility, meaning they are freely traded 24/7
2. Democratized Access: Any-sized investments are possible, democratizing access to diverse assets.

Automated Market Makers

Automated Market Makers (AMMs) are smart contracts - computer programs that run on the blockchain -and are counterparts for traders wanting to buy or sell some tokens. They give traders the freedom to buy or sell tokens 24/7.

AMMs operate on mathematical formulas to establish token exchange prices. The exchange rate of tokens is determined by the token reserves, called liquidity pools.

Anyone can contribute their tokens to these pools, and in return, earn trading fees. These contributors are known as Liquidity Providers (LPs).

If you want to learn more about AMMs, I recommend you one of my previous posts on this topic:

Now let’s answer three fundamental questions regarding liquidity of tokenized assets:

• Why are tokenized assets more liquid on-chain than in traditional finance?
• How to distribute the yield of tokenized assets to token holders?
• How to list yield-bearing tokenized assets on Automated Market Makers?

Why are tokenized assets more liquid on-chain than in traditional finance?

The act of tokenization allows for fast and efficient trading on blockchain, but it is the listing at AMMs that brings liquidity to the tokenized assets. Tokenized assets, once, listed for trading at AMMs can be further used for other applications on the blockchain, such as:

• Freely Traded at AMMs: Platforms like Curve v2 and Uniswap v3 facilitate 24/7 trading, providing liquidity even to traditionally illiquid assets.
• Collateral at Lending Protocols: Aave, Compound, and others allow tokenized assets to be used as collateral for borrowing, accumulating yield.
• Leverage and Stablecoin Minting: Platforms like ETHSaver and Liquidity v2 enable leveraging and stablecoin minting using tokenized assets.
• Liquidity Provisions: Tokenized assets play a crucial role in liquidity provision strategies at AMMs.

How to distribute the yield of tokenized assets to token holders?

Many tokenized assets pay some form of yield, for example, tokenized bonds pay coupon payments. There are various ways to distribute these coupon payments on-chain to the token holders:

• No On-Chain Payments: Yield distribution is done off-chain, e.g. in the traditional banking system.
• Rebase Tokens: Daily airdrops with rewards, simple but not compatible with all DeFi protocols.
• Reward Tokens: Accumulating yield in token value, a successful model seen in tokens like wstETH, rETH, and sDAI.

How to list yield-bearing tokenized assets on Automated Market Makers?

Because of compliance requirements, listing tokenized assets may not be possible at permissionless DeFi on public chains. However, there are deployment strategies that ensure full regulatory compliance:

• Private Chain with AMM: Utilize private/permissioned blockchains with an EVM-compatible AMM.
• Private AMM on Public Chain: Establish a private AMM on public chains like Ethereum or its Layer 2 solutions.
• Permissionless DeFi: Embrace the decentralized ethos, managing a basket of tokenized assets through DAOs and listing them on popular AMMs.

Conclusion

Tokenized asset exchange, fueled by AMMs, brings forth a plethora of opportunities, with liquidity being a major advantage. With constant value appreciation, instant trading, and innovative applications like Aktionariat for tokenized SMEs and FriendTech for tokenized friends, this ecosystem of tokenized assets listed on AMMs reshapes the future of finance. As we navigate this landscape, the fusion of tokenized assets and AMMs brings liquidity to traditionally illiquid and inaccessible assets.

Embark on this journey of financial evolution—where liquidity knows no bounds, access is universal, and innovation thrives. ????

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