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 vying to lead one of the largest emerging asset classes, and capital allocators seeking more significant returns.

The question today is no longer whether trillions of dollars will move on-chain, but who will lead the process. This article will explore the conditions required to achieve this process, and the opportunities for operators and entrepreneurs to build platforms for hosting and trading trillions of dollars in funds.

Tokenized finance has already reached a considerable scale. The circulating supply of stablecoins alone has exceeded $300.00B, while the total market capitalization of other tokenized financial assets (including money market funds, private credit, stocks, commodities, and other products) has also exceeded $30.00B. Many of the world’s largest asset management companies, including BlackRock, Fidelity, and Franklin Templeton, have cumulatively put billions of dollars of real-world assets on-chain.

While crypto has performed well as an emerging industry, scaling tokenized finance to trillions of dollars requires substantial progress in technology and institutional-grade risk management.

The growth of tokenized finance depends on providing risk-adjusted returns superior to those of 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.

Historical stablecoin fund flows clearly illustrate this point. Asset under management (AUM) grew fastest when on-chain “risk-free” yields (represented by Aave USDC supply APR) were significantly higher than the federal funds rate (late 2023 to August 2024); while in 2022–2023, when on-chain yields were lower than the federal funds rate, the scale contracted.

Stablecoins were initially put on-chain for reasons including trading, transfers, and dollar acquisition, not just yields. But when on-chain yields lost their appeal relative to traditional options, capital flowed out. This pattern of “capital flowing to higher risk-adjusted returns” is not unique to stablecoins; it reflects the overall historical trajectory of tokenized finance and foreshadows its future direction.

Initially, crypto trading referred to tokenizing dollars to trade crypto-native assets, but it later expanded to include real-world assets, and on-chain native issuance has become the next major opportunity. Tokenization originated from users wanting to trade crypto-native assets such as cryptocurrencies and NFTs. The emergence of stablecoins made it a practical medium for transferring value between exchanges, quoting in dollars, and storing value on-chain.

From 2025 onwards, real-world assets (RWA) became an important driver. These assets are traditional financial assets, such as money market funds, private credit, and stocks, which are packaged and issued on-chain by intermediaries. The function of the tokens is usually similar to a “warehouse receipt,” i.e., a digital claim on the underlying asset. However, the primary source of records remains off-chain, and additional legal structures are needed to link token holders to the actual assets. This downstream approach increases accessibility but also introduces dual management and additional counterparty risk.

The longer-term goal is native asset issuance, where the origination and issuance of assets are completed directly on-chain. For example, native on-chain lending and blockchain-based equity issuance. If blockchain is integrated into financial operations from the outset, it can improve capital efficiency through higher yields, lower operating 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 expect these three different models to coexist for a long time. 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 necessary to identify which assets and use cases can reach trillions of dollars in scale in the near future through tokenization.

Since tokenized finance must ultimately provide superior risk-adjusted returns, the practical question becomes: where and how can this be achieved? Which assets should issuers and distributors prioritize? It is helpful to think from first principles. I propose the “tokenization premium” framework to identify the areas where tokenization can create the most value. Returns are not evenly distributed but are dumbbell-shaped—the clearest and most powerful advantages appear at two extremes: extremely low-volatility assets and extremely high-volatility assets.

Applying this framework to various asset classes reveals where the biggest short- to medium-term investment opportunities lie: low-volatility assets are the clear short-term winners. For example, tokenized Stretch ($STRC) and money market funds (such as BlackRock’s BUIDL) offer stable, predictable yields that can be recycled, used as collateral, or deployed into persistent yield strategies that are difficult to achieve in traditional finance. These assets are ideal for institutional capital that prioritizes yield-generating collateral, and for companies that want to keep capital on-chain. Tokenization transforms it into composable, 7×24 collateral that can be recycled between protocols with extremely low friction—forming a structural advantage over off-chain equivalents.

High-volatility assets benefit from a completely 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 7×24 global trading, permissionless and orderly liquidation, real-time price discovery through robust oracles, and deep composability. Risky assets can enter and exit the market instantly, without delay; it is also possible to build trading experiences, indexes, 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 paramount.

Those in the middle ground—with moderate volatility and yields—struggle in the current era of physical assets. They rarely generate enough yield to support frequent recycling without facing liquidation risk, and they cannot fully leverage the benefits of 24/7 trading due to low oracle update frequencies or the need for manual operations. These challenges are particularly acute for private investment vehicles such as private equity and venture capital that 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 minor factors, such as whether the asset is publicly or privately traded, counterparty risk, and the asset’s liquidity profile. But from first principles, it provides a structural reference point for maximizing the benefits of tokenization.

Even for those assets that should be tokenized, there are at least four obstacles preventing capital from flowing on-chain on a large scale. The first is that investors need better security. Modern portfolio theory defines risk as volatility. Tokenized assets also have two other 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 smart contracts to ensure that such events would not happen again throughout the ecosystem. Today, hacks continue and are becoming increasingly sophisticated. This round is mainly an OpSec (operations security) issue, with Drift Protocol and KelpDAO alone losing more than $500.00M this year. Even large, mature centralized companies like Bybit suffered a $1.50B hack in 2025. Clearly, this is a never-ending cat-and-mouse game.

However, today the cat has unprecedentedly powerful tools—next-generation AI models. Anthropic’s Mythos model is so advanced that it can find security vulnerabilities in basic platforms such as Linux and Apple. Hackers such as North Korea’s Lazarus Group can use these to accelerate attacks, even if developers use them as Blue Team allies. Current on-chain security methods are not sufficient to cope. Institutions will not invest trillions of dollars in a system where a single attack can instantly siphon off hundreds of millions of dollars. A Security Renaissance is now needed—a conscious, disciplined rethinking of how on-chain finance is designed, governed, and trusted.

This requires both common-sense improvements and new underlying mechanisms, and for some asset classes, a partial abandonment of the idea of complete decentralization. Protocols and companies that dare to innovate will win the trust of large capital, while those that do not will struggle to attract capital. On-chain finance would benefit greatly from establishing more robust institutional-grade standards in security architecture. The first and most obvious measures are to develop standards for upgrade permissions, withdrawal limits and time locks, signature thresholds, and overall transparency of security architecture.

The second is institutional-grade buy-side tools. Suppose an institutional investor wants to invest $100.00M in tokenized assets. They are likely to ask: are there currently platforms that allow me to discover investment opportunities with full prospectuses, invest and custody across chains, hedge against market volatility and liquidation risk, monitor portfolio performance, and efficiently recycle positions? Frankly, there are no institutional-grade platforms yet. We have built a rich portfolio of tokenized assets—from Treasuries to stocks—but we have not yet built the robust infrastructure needed to deploy and manage institutional capital at scale.

The third is the ability to trade large amounts. Privacy is the final frontier. Liquidity used to be a bottleneck. PropAMM has largely solved this problem by enabling low-latency dynamic quoting, which increases capital efficiency and liquidity while reducing the incidence of adverse MEV compared to static AMMs. But liquidity is not the only thing institutions need. Trading intentions are still public, trading algorithms can still be reverse-engineered, and block settlement still requires funding. Institutions cannot escape pilot mode if every position, hedge, and execution is visible in real time.

The fourth is regulatory reform and on-chain KYC. While broad regulatory reform remains one of the biggest structural obstacles to the scaling of tokenized finance, early-stage companies also struggle to have a direct impact in this area. Even so, founders can have a meaningful impact on a related issue in the short term: on-chain identity and KYC (Know Your Customer). Reducing transaction 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 streamline information sharing processes or establish reciprocal KYC mechanisms within specific monetary thresholds, we will greatly expand the space for innovation.

The first $350.00B mainly came from stablecoins. The next order of magnitude is more difficult. It requires winning over capital that has good reason to stay in traditional finance: capital that cares more about counterparty risk than throughput, more about strategy confidentiality than composability, and more about institutional-grade tools than ideology.

Capital will not flow on-chain just because tokenization is a new thing. Capital will only flow in when tokenization can deliver structurally superior risk-adjusted returns. The tokenization premium points to the opportunities, while the four major gaps reveal the problems that need to be addressed. Tokenizing trillions of dollars of assets is no longer a question of “whether it will happen,” but who will build the applications for issuing, trading, and custodying these assets globally. We believe the opportunity is real and is coming soon.

[ChainCatcher]