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2024 will be the year that transforms traditional asset management. Institutional investment in blockchain technology has been anticipated for years, but that is about to become a reality.
Key capabilities, particularly the development of the zero-knowledge Ethereum Virtual Machine, or zkEVM, are capable of enabling tokenization of real-world assets and setting the stage for a fundamental transformation of the global financial system.
Institutions need mainnet-level security, infinite scalability, and massive liquidity potential. With the advancements in developer tools and mathematically proven security measures, the necessary components are finally assembled to fulfill this promise.
This will, in turn, lead to mainstream blockchain adoption.
Transparency Through Chain Abstraction
The zkEVM, which is capable of performing smart contract transactions within a zero-proof environment, has firmly established itself in blockchain infrastructure. Now institutional investors can tap into a proven ecosystem of Ethereum-based blockchains, with its robust security guarantees, decentralization, and transactional transparency, at a far lower cost, rapid settlement times, and with potentially unlimited scaling capacity.
The picture of success for Web3 is to create a "chain of chains," in essence, a seamless user experience across the entire ecosystem. Part of the liquidity advantage comes through being able to integrate different applications spanning from gaming, DeFi, and permissioned institutional platforms. Each of these requires custom-tailored blockchain architectures with varying levels of permission, privacy, cost, security, and incentive designs.
With the technical decisions about chain design abstracted away, developers can build on a secure infrastructure and focus on optimizing for a single use case. They are able to elevate the capabilities of the application layer so any blockchain interactions happen transparently. The end-game means a broadened blockchain ecosystem where institutional investors gain access to the high liquidity of the entire Ethereum ecosystem plus the security benefits of zero-knowledge transactions.
Institutional-Scale Liquidity Aggregation
The zkEVM facilitates tremendous liquidity potential by enabling near-instant settlements, allowing for seamless transactions and liquidity transfers between chains. A user can take liquidity from one chain and do a decentralized exchange (DEX) transaction seamlessly on another chain.
Institutional scale requires institutional levels of liquidity. In the near future, we will see not only tokenization products brought to the ecosystem but also more sophisticated financial tools like derivatives. Major technological innovations are necessary to make this happen, largely driven by the aggregation of all the liquidity in the space within a single layer capable of efficiently managing these resources.
Looking to the Future
Blockchain tech offers around-the-clock trading and access to previously inaccessible assets and vehicles, yet institutions require customizable chains, and integrating with legacy systems poses significant challenges. The capabilities of zkEVMs introduce a level of security and integration potential that changes everything.
Recently, Hamilton Lane and Brevan Howard became users of the new real-world asset tokenization platform Libra, developed with the Polygon Chain Development Kit (CDK). Polygon CDK is permissionless software which enables developers to create new chains with varying degrees of decentralization, security, and functionality, enabling customizability for developer compliance needs such as matching of users with suitable financial instruments, whether it's a hedge fund, collateralized lending, or other investment product.
As we move forward, the ecosystem's primary enablers for institutional investors are to enhance the developer experience and provide security and safety backed by mathematical proof. This will reduce operational costs and bring about ways of integrating legacy systems in a way that supports compliance and security requirements.
Edited by Benjamin Schiller.
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Colin Butler is the Global Head of Institutional Capital at Polygon companies, driving education and awareness within the institutional investment community.
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