Tokenization 101: Institutions Leverage Avalanche to Test Merits of On-Chain Finance

Avalanche

Real-world assets (RWA) have always been a topic deemed central to the growth of blockchain adoption, with tokenized assets projected to reach $16.1 trillion by 2030. Where does RWA growth show the most significant promise? This two part series will break down the impressive state of RWAs and tokenization, focusing on how the Avalanche ecosystem leads the way.

Why Bringing Real-World Assets On-chain Matters

Traditional asset management is slower, less efficient, and can lead to mistakes. Then there’s the issue of multi-party reconciliation and cash allocation maintenance. Coordinating transactions among multiple parties is complex and expensive, with plenty of room for errors.

The Benefits of Tokenization and the Utility of RWAs

The greatest opportunity within the RWA domain is finding applications that offer genuine real-world access and utility. This utility can often be unlocked through a combination of blockchain, smart contract logic, and tokenization.

How so?

Simplified Investment and Portfolio Rebalancing: Representing investments as tokenized funds can help standardize and automate funding, order execution, and settlement for traditional asset classes and alternatives. Automation streamlines investing and portfolio management, reducing manual work and errors. It can also simplify how investments in alternatives are managed by replacing manual subscriptions with automated, straight-through processes using smart contracts for payments and investor register updates. This efficiency enables wealth managers to more systematically include alternatives in client portfolios.

Enhanced Lending and Borrowing Efficiency: Credit Vaults, like Clearpool’s Credit Vault on Avalanche, are designed to enhance lending efficiency using RWAs such as private credit. These platforms offer uncollateralized borrowing for institutions and host RWA pools. This approach can simplify the traditionally cumbersome access process to alternatives like private credit.

Improved Asset Settlement: Partnerships like the one between ANZ and Chainlink aim to enhance tokenized asset settlement by integrating Chainlink’s interoperability protocol with Avalanche’s blockchain infrastructure and traditional messaging systems like SWIFT. This helps ensure more robust atomic delivery vs payment capabilities for transacting traditional assets and payments.

Financial Services Institutions Leveraging Avalanche

The Institutional landscape of Avalanche is vast and deep. Due to Avalanche’s high levels of customization, institutions are leveraging the network–both the Avalanche C-Chain and Avalanche Evergreens. This section delves into how Evergreens (custom L1s within the Avalanche network tailormade for regulated FIs) contribute to the growth of on-chain finance on Avalanche.

According to the extensive Bank of America report on tokenization, "Commercial, investment and central banks; institutional investors; corporates; and governments are leveraging the private sector to build new financial and non-financial systems and integrate the underlying technology into their processes. We expect private sector beneficiaries to include both traditional and digital asset companies. However, the largest and stickiest revenue opportunities are likely to exist for infrastructure providers that offer customizable distributed ledger platforms and blockchain subnets."

Evergreens: The Institutions Have Arrived

Custom Avalanche Evergreen L1s (fka Subnets) mark a significant innovation within the Avalanche ecosystem, designed to meet the specific needs of institutional applications. Their novelty is that they offer financial services firms a way to test tokenization and the merits of on-chain finance in a controlled environment–to the extent that is a key consideration for them. Let’s take a closer look at institutions leveraging the power of Evergreen L1s.

Case Study: Intain

Intain developed a structured finance platform that leverages its own Avalanche Evergreen architecture to launch an on-chain marketplace for tokenized asset-backed securities (ABS) called IntainMARKETS. IntainMARKETS facilitates efficient, cost-effective, and transparent end-to-end asset issuance, investment, administration, and trading. The platform has already administered over $6 billion in loans through its administration platform, IntainADMIN. By combining the benefits of on-chain administration and tokenization, IntainMARKETS dramatically improves the investor and issuer experience.

Key Benefits:

Efficiency Gains: Intain’s platform reduces the days required to validate a loan pool by 80%, underwrite a deal by 65%, and complete post-closing administration by 90%
Cost Savings: Intain reduces issuance costs by 50-100 basis points on average, making smaller, previously prohibitively expensive transactions viable.

Case Study: Onyx by J.P. Morgan

Onyx by J.P. Morgan, Apollo Global, and WisdomTree collaborated under the Monetary Authority of Singapore’s (MAS) Project Guardian, showcasing a proof-of-concept (PoC) that marked a pivotal step toward revolutionizing the asset and wealth management industry. This PoC demonstrated how tokenized alternative investments can be integrated alongside liquid assets in discretionary client portfolios.

Avalanche’s AvaCloud was key in developing and managing Onyx's Evergreen L1.

Key Benefits:

Operational Efficiency: Onyx’s Crescendo (on-chain wealth management application) reduced the monthly rebalancing process for portfolio managers from over 3,000 operational steps to just a few clicks, enabling real-time transparency and an immutable audit trail, reducing manual errors.
Economic Independence: Evergreen L1 design monitored that transaction costs, gas fees, and network load were independent of the broader Avalanche ecosystem’s activity. This maintained predictable transaction fees and throughput for Onyx participants.
Web3 Obfuscation: The Onyx team utilized Biconomy's ERC-4337 infrastructure to enable gas-free user interactions.

Case Study: ANZ & Chainlink

The Australia and New Zealand Banking Group (ANZ), serving over 8.5 million customers across nearly 30 markets, partnered with Chainlink to enhance the settlement of tokenized assets using Avalanche. By integrating Chainlink’s Cross-Chain Interoperability Protocol (CCIP) with Avalanche’s blockchain infrastructure, ANZ demonstrated how clients could seamlessly settle tokenized assets across networks in different currencies through Delivery vs. Payment (DvP). ANZ leveraged its own Avalanche Evergreen L1 for its EVM compatibility, permissioning, and customized gas token, among other features.

Key Benefits:

EVM Compatibility: Allowed seamless integration and interaction with Ethereum-based assets.
Permissioning and Custom Gas Token: Enabled secure, efficient, and customizable transaction processes.
Improved Settlement Efficiency: Streamlined cross-chain DvP settlements, reducing complexity and ensuring atomic transactions.
Enhanced User Experience: Abstracted backend complexities, providing a smooth front-end user experience.

Case Study: Citi x Avalanche Spruce

Citibank leveraged Avalanche Spruce–a testnet Evergreen–to explore re-architecting capital markets and enhancing financial services with blockchain, tokenization, and smart contracts. Partnering with industry pioneers Wellington Management, WisdomTree, and ABN AMRO, Citi explored private fund tokenization to address challenges around liquidity, operational inefficiencies, limited access, and lack of transparency in the private equity markets.

Citi conducted a series of tests on Avalanche Spruce, simulating real-world use cases like fund creation, secondary market trading, and collateralized lending using tokenized private equity funds. Avalanche was chosen as the platform for the proof of concept due to its:

Ease of Customizability: In this case, the financial institutions needed a permissioned testing ground.
Scalability: Institutions often deal with an enormous magnitude of transactions on a daily basis. To even simulate trades, a chain needs to have the capacity to scale with volume.
Speed: Avalanche’s highly customizable L1s offer sub-second transaction finality.

The biggest takeaways from these case studies highlight the transformative potential of Avalanche's Evergreen L1s. Their ability to provide seamless interoperable and customizable permissioned blockchain environments is crucial for regulated institutions like banks. Evergreen L1s enable enterprises to launch, control, and tailor their blockchain networks to meet specific needs, ensuring security and efficiency. The consistent and predictable transaction cost environment offered by Avalanche is essential for enterprise operations, reducing transaction cost uncertainty and enhancing budgeting accuracy. Additionally, the rapid stabilization of gas prices after spikes serves to prove Avalanche’s capacity to handle high transaction volumes and mitigate congestion effectively. Combined, these features make Avalanche a robust, scalable, and reliable platform for institutional adoption in tokenizing real-world assets.

Conclusion

With Evergreen L1s, institutions are testing the merits of on-chain finance. As explored in the first part of this series, Avalanche is at the forefront of this transformation by offering institutions a secure, customizable, and efficient platform to explore and launch in-production businesses on-chain.

Part 2 of this series explores diverse RWA applications flourishing on the Avalanche C-Chain and beyond.

About Avalanche

Avalanche is a smart contracts platform that scales infinitely and regularly finalizes transactions in less than one second. Its novel consensus protocol, Subnet infrastructure, and HyperSDK toolkit enable Web3 developers to easily launch powerful, custom blockchain solutions. Build anything you want, any way you want, on the eco-friendly blockchain designed for Web3 devs.