How Superstate Is Building The Bridge Between $700 Trillion In TradFi and DeFi

This goes to why I started Superstate in the first place. As somebody that was a DeFi founder building in the space and looking at the space, the ceiling, the upper bound for how big DeFi can get, is not a very high ceiling if the only assets that you can use in it are Ether and other tokens of DeFi projects. It's not a very high ceiling of what you can do with it. Meanwhile, outside of the blockchain, we have $700 trillion of potential TVL. $700 trillion is a lot bigger than what honestly, frankly, is mostly Ether still at this point, of Ether and stables in DeFi. I basically looked off-chain and I said, "Well, if we really want to grow this stuff, that's where we're going to grow it from."

Hey, guys. Thanks for having me on the show.

Yeah. Well, first of all, excited to go through all this stuff. Before we even go into tokenization, I do want to say I prefer that term to RWAs, RWA standing for real-world assets. It kind of diminishes all of the assets that are crypto-native, but it's a helpful starting point. So you have assets on blockchains that are crypto. Ether is a crypto-native asset. It only exists on the blockchain. It doesn't point to or derive its value from something off the blockchain, and it's entirely encapsulated within a blockchain. All the governance tokens and ownership tokens of DeFi protocols and projects launching in crypto are generally crypto-native assets. They live on the blockchain and the blockchain only; they don't get their value from something not on the blockchain. Then you have all of the assets that are traded on stock exchanges, that live in people's investment accounts, that people have a roof over their heads. You have all of the assets that aren't tokens on a blockchain. Tokenization is just the process of recording the ownership of off-chain things on a blockchain instead of however it's currently recorded. It could be spreadsheets, legal contracts, brokerage statements, whatever. Tokenization is just taking that record of ownership and moving it onto a blockchain where it can do new things.

Yeah, absolutely. And I'm not even sure I originally said that quote, but let's just go with it. Evolution is updating the file format by which we record wealth. Tokens are the best possible way to record who owns something. Why? Because you can transfer them 24/7 permissionlessly. Because tokens and the blockchains they're running on are basically completely tamper-proof and censorship-resistant. Aside from compromising someone's private key, it's almost impossible to break the cryptography that underlies the system and steal assets. They're totally transparent. You don't have any doubt about the fact that someone owns an asset. There's no inability for them to prove that they own an asset. And they're programmable. That's what DeFi is. It's adding logic to making the tokens move in really interesting and productive ways. So tokens are just the best possible way to record who owns what. There's a lot of other ancillary reasons why this is amazing. The fact that we can have one ledger just reduces confusion and redundancy and the cost of having everyone on Wall Street keep their own record of who owns stuff, but tokens are just honestly the best form factor we've ever as a society created to record who owns something. Now, that's in some ways a revolution, but it's also just an evolution. Right now, things are recorded in databases. They're recorded in spreadsheets. They're recorded in physical paper that sits in filing cabinets. That's how we record stuff. And when I think about this journey, it's really just replacing all the old ways of keeping track of who owns things with the best possible file format, which is a token on a blockchain. And that's an evolution. That's like saying, "Hey, we're just going to make what already exists better, faster, cheaper, more transparent, more resilient, always on, and enabling it to have new use cases in DeFi, but it's not like throwing out the old system. It's upgrading it."

Yeah, I think of us as a bridge, too. This is a multi-part question, but I'll start with the first part, which is you talking about will tokenized assets flip crypto-native assets as being the primary use case for DeFi protocols? The answer is yes. It's inevitable; it's just a matter of when. And this goes to why I started Superstate in the first place. As somebody that was a DeFi founder building in the space and looking at the space, the ceiling, the upper bound for how big DeFi can get, is not a very high ceiling if the only assets that you can use in it are Ether and other tokens of DeFi projects. It's not a very high ceiling of what you can do with it. Meanwhile, outside of the blockchain, we have $700 trillion of potential TVL. $700 trillion is a lot bigger than what honestly, frankly, is mostly Ether still at this point, of Ether and stables in DeFi. And so for me as a founder, I basically looked off-chain and I said, "Well, if we really want to grow this stuff, that's where we're going to grow it from." A DeFi protocol doesn't really care what the ERC-20 token is that's going inside of it and moving around. The beauty and the magic of this stuff is that you can build something in a generalized way and it works for any asset, that it's composable. And so, as somebody in the space, I was like, well, how do we just raise the ceiling, not just a little bit, but 100x? How can we make it where the upper bound for what we can do with a DeFi protocol really scales? And the answer is tokenization. And so, what is Superstate? Superstate is a bridge, or an operating system, or an approach to take the assets that don't yet live on blockchains and put them on blockchains as tokens that are able to interact with DeFi protocols and do DeFi things. And the way we go about this is we are a technology company that's regulated as a transfer agent and investment adviser. We partner with security issuers. That could be a public company who has stock that's traded on a stock exchange. That can be an asset manager who's creating a hedge fund or a mutual fund. We partner with a security issuer and we take that security, we tokenize it, and we make that token live on a blockchain. Today we support Ethereum, Solana, and we're launching a number of other chains like Base. But it doesn't really matter; we're somewhat agnostic. We built a system to take an asset, turn it into a token, put the token on a blockchain, and when it is on a blockchain, we're able to record ownership, track ownership, and allow people to program securities in a way they never have been able to before.

Yeah. At the end of the day, the primary benefits if you're someone who's creating a security is that there's a large and growing differentiated investor base that can own that security if it's tokenized that just won't interact with it non-tokenized. There's today hundreds of billions of dollars on chain from very sophisticated people, from institutions, from everything in between that strongly prefers tokens over the traditional, more analog versions of assets. If you're a crypto hedge fund or you're a person who has a Ledger wallet or you're just living on chain all day, you're probably the right investor for a tokenized asset. You're probably going to prefer the tokenized thing over the, "I own this because a spreadsheet says I own this." And so the first thing is that it just opens up a different audience of owners that otherwise don't exist. If Superstate launched a T-bill fund that wasn't tokenized and we're just launching T-bill fund number 714, it would be really hard to attract investors to it. Why would anyone want our T-bill fund versus all of the other ones out there that are all identical? They're pure commodities: same cost, same returns, same everything. There's no reason to do it. But when it's tokenized, you have people who are like, "Well, I spend all day on chain. I actually like that I can go in between Ether or Bitcoin and this T-bill product really seamlessly. That's superior to the one that I have to access through a website that has nothing to do with it." And so different investor base, that's probably the biggest advantage. The second is that when it's tokenized, a tokenized security is really good collateral. It could be moved around really easily. It can go in DeFi protocols. The biggest growth areas we've seen so far, it's not like can you trade this stuff in a DEX, it's can you borrow against it? And this is one of the things that I explored heavily as one of the people that originally built borrow-lend protocols, is what can you use this for? Tokenized securities are awesome collateral, just awesome, less volatile than most crypto assets by far, therefore better assets to be used in DeFi protocols. And this is still a relatively new concept, but the securities that Superstate has tokenized in particular have experienced a huge amount of growth specifically from DeFi protocols, from Horizon, from Kamino and Morpho in particular so far. And so this relates to there's more investor demand, there's a different group of purchasers, there's more use cases that create demand in the tokenization that just don't really exist off-chain in a historical analog. Yes, for securities, you can borrow against them in a brokerage account generally, but the rates aren't great, the collateral factors aren't great. It's honestly pretty clunky, which is hilarious that they've had 50 years to work on this and it still kind of sucks. The token versions on chain, DeFi is just actually superior in its offering to traditional analogs. And so by tokenizing something, you're going to get new investors who are going to be doing new things with it, and it's just a big growth opportunity. And for anyone who has a security, if you're a public company who has stock that's traded, you want more demand and you want people doing new things with it. If you're creating a hedge fund or a mutual fund or a fund product, you want more investors and you want them doing new things with it. It's just a growth channel. The historical stuff, it's kind of maxed out for how big it gets, but by tokenizing it, it's just the next wave of growth.

Launching in just a couple days.

Yeah, absolutely. At Superstate, we're really focused on tokenizing two different types of securities right now, although the platform that we've built under the hood is suited to tokenize pretty much any security in general. The two different security types that we're tokenizing are funds through a platform called Fund OS, and equities through a platform called Opening. One we work with asset managers, one we work with public companies. The asset managers that you mentioned—Invesco, Bitwise, Coinbase Asset Management—these are managers that create fund products. They could be private funds like a hedge fund, or they can be publicly registered investment companies like an ETF or a mutual fund. But you have funds and you have equity, so all the names you mentioned are fund managers. We're working with each of them closely to tokenize funds. We've seen a lot of traction and a lot of demand for tokenized funds before, and we've seen a lot of demand for single-name equities right now. And that's because, very frankly, a tokenized fund can actually give you—especially when you factor DeFi into it, and the speed of settlement, and the 24/7 nature—something that you just can't get in its traditional analogous opportunity. A tokenized fund is genuinely differentiated and superior to the old version, versus a tokenized equity, it's like, well, if you can get a brokerage account, it's going to be pretty much the same thing. And so we're starting to see a lot of growth on the tokenized fund side to start with simply because it's just such a net-new thing. A great example of this is USTB, our T-bill product which Invesco has taken over and formally becomes the manager of in just a couple days. USTB is a fund that operates 24/7 and calculates and distributes interest by the second, as opposed to how any other money market fund works, which is at the best case in business days. The unit of measurement in traditional finance, generally the fastest you get is one business day. But because it's a tokenized fund, it operates in seconds. It operates in Ethereum blocks and Solana blocks. That's the speed at which it calculates interest and distributes it and records ownership. The tokenized version is just strictly more high-tech than anything you could build off-chain, truly fundamentally. And it inherits a lot of the design principles that I learned as a DeFi founder to make things always on and calculating and distributing interest by the second. It's a lot of the same principles as a DeFi protocol under the hood. And so the funds that you can create are just better than you've ever been able to create them before. There's nothing you can get through Charles Schwab that calculates and pays interest by the second, let alone allows you to transfer it to another person and they'll start earning interest the second they receive it. Nothing like that can exist the old way. And so that's where we're seeing a lot of traction; we're seeing a lot of growth. All of these extremely marquee asset managers are starting with the question: What can we build now because of a blockchain that we've never been able to build before? How does it work differently? And how do we offer something to our investors that they've never experienced before? And the answer is tokenized funds. And that's why they're excited about this. There's going to be more asset managers that we're going to continue to announce over the next couple months. But everyone is passionate about how can we upgrade the way these things work under the hood because of a blockchain.