Crypto Firms Eye Collateral Markets as Tokenization Pushes Finance Onchain

The thesis is that digital assets will increasingly be used to back loans, insurance products and other financial activities, creating new sources of yield linked to risk transfer rather than token incentives.

Jillian Friedman, chief operating officer of restaking protocol Symbiotic, told Sandmark that the shift reflects a broader evolution in crypto markets as investors look for ways to put onchain capital to work beyond staking and network security.

"We're really focused on moving away from some of those more mercenary strategies towards yield, where the underlying is an actual value proposition in a real business," she said.

Collateral is an asset pledged to support a financial obligation, such as a loan or insurance-style coverage. In traditional markets, that can include cash, bonds or other securities. In crypto, the concept increasingly refers to digital assets deposited onchain and used to back lending, absorb losses or provide liquidity while allowing holders to seek returns without selling the underlying asset.

According to a recent report from crypto lending firm Ledn, while 88% of crypto holders would consider borrowing against their digital assets, only 14% actually do borrow. "That is a 6-to-1 consideration-to-adoption ratio between general openness to borrowing and current usage of crypto-backed loans," notes the analysis.  

A new yield model

A shift towards collateral markets would mark a departure from the strategies that have defined much of decentralized finance in recent years, in which yields were often driven by token emissions, liquidity incentives and speculative trading activity.

Max Khan, chief executive of wealth management firm Digital Wealth Partners, told Sandmark that demand for yield-generating strategies is growing among wealth-management clients, particularly long-term crypto holders seeking ways to earn returns without selling their positions. "We're seeing the conversation shift from how do I buy it? To how do I put it to work," he said.

Tokenization tailwind

The emergence of tokenized assets and the expansion of stablecoin usage are providing additional appeal for collateral-based models.

"We're moving away from every new project having its own token and there being a whole travelling circus of yield generation around each new token," Friedman said.  

Tokenized assets represented more than $26.3bn of onchain value as of 2 Jun, according to DeFiLlama data. The sector has more than doubled in size over the past year as institutions increasingly tokenize US Treasuries, private credit, commodities and other traditional assets.

The trend is also becoming intertwined with debates over how regulated finance will interact with decentralized systems.

Friedman said one of the key questions facing the industry is whether the arrival of traditional financial institutions will create a more open and composable ecosystem or a more restricted environment built around regulated assets and a limited number of participants. "The big question is to what extent will traditional finance and institutions engage in those [digital assets] strategies," she said.

If the thesis proves correct, the next phase of crypto's development could be defined less by the creation of new networks and more by how effectively existing digital assets can be deployed as collateral supporting a wider range of financial activities on and off blockchains.

"There's a lot of work going on right now with vault architecture and SMA architecture that I think is the next evolution of wealth management and digital assets," Khan said.