Convergence is Happening - Low-Latency is Coming to Tokenization and DePIN to Wall Street
- Pete Harris, Principal, Lighthouse Partners, Inc.
- 3 days ago
- 5 min read
Updated: 1 day ago
It was back in January that I last discussed the convergence of the TradFi and DeFi spaces through tokenization and suggested that 2025 would be a year when momentum began to accelerate. As we head towards year end, it’s safe to say that such momentum has been flat out for the past few months and has resulted in significant technology innovation. That includes tapping into approaches that have supported high frequency trading (HFT) for many years as well as cutting-edge decentralized models for infrastructure buildout.
Driven by the promise of greater liquidity, lower transaction costs and more efficient markets, many established financial players are now betting on blockchain-based tokenization as the next transaction and settlement architecture for asset-based markets, and they are investing heavily to turn their bets into wins. Some notable early proof points are:
BlackRock CEO Larry Fink expects all assets to eventually be tokenized.
Nasdaq plans to launch trading of tokenized securities.
Citi is offering tokenized deposits for 24/7 payments.
JP Morgan is tokenizing private equity funds.
DTCC launches tokenized real-time collateral management.
Meanwhile, traditional payments services face disruption from stablecoins – tokens that maintain a stable value relative to a major fiat currency, such as the US dollar. Following on from the passing of the Guiding and Establishing National Innovation for US Stablecoins (GENIUS) Act during the summer, many current payments companies, as well as banks and major corporations, have taken steps to enter the stablecoin fray.
Familiar payment services like PayPal, Mastercard and Visa are all working with partners to incorporate stablecoin transfers into their offerings. Banks – including a consortium consisting of Goldman Sachs, Deutsche Bank, Bank of America, BNP Paribas, and Citi – have formed a consortium to explore issuing a stablecoin. Even some retailers, like Amazon and Walmart, are thought to be developing stablecoins of their own.
In a nutshell, a substantial portion of the critical infrastructure that supports global finance is set to move “on chain” in a redux that (IMHO) is more fundamental, impactful – and risky – than shifts such as the adoption of the public internet or embracing cloud computing.
Critics rightly point to the challenges of the wholesale adoption of a technology base that few had heard of before the Bitcoin whitepaper was published in 2008. The distributed nature of blockchains introduces latency and synchronization issues, autonomous smart contracts continue to be too bug-prone and can be exploited by hackers, technical standards are still developing, and regulatory clarity remains a patchwork when viewed from a global perspective.
Undoubtedly the biggest challenge cited when a move to blockchain rails is proposed is performance. In short: Can decentralized and distributed blockchain platforms buck the laws of physics to deliver high enough data throughput, transaction rates and scalability to support what are generally regarded as extreme trading volumes?In reality, it will likely take a while to find out the answer to that concern. But for sure, the technology vendors and projects that are working at the coal face of blockchain performance are focused on leaps to cope with the demands of the financial markets.
That includes improvements to the Ethereum blockchain, which is the most popular general-purpose Layer 1 platform. While its native transaction rate is only around 30-40 transactions per second (TPS), the implementation of compatible Layer 2 chains, which run atop the Ethereum Layer 1 and benefit from its security model, has resulted in performance of thousands or tens of thousands of TPS.
Layer 2 platforms increase performance by taking much of the transaction processing off the Ethereum L1 mainnet, batching transactions and reducing L1 consensus operations. Early L2 chains include Base (from Coinbase, targeting 2,000 TPS), Arbitrum (40,000 TPS), and Polygon (65,000 TPS).
A new and notable L2 platform set for an imminent launch is MegaETH. Backed initially by Ethereum co-founder Vitalik Buterin and enjoying a recent token sale that was many times oversubscribed, MegaETH is targeting a throughput of 100,000 TPS. Featuring parallel transaction execution, it is designed to deliver sub-10mS transaction finality.
While Ethereum supporters are pinning their performance future on Layer 2 approaches, the rival Layer 1 Solana blockchain has emerged with a theoretical limit of 65,000 TPS, made possible via a unique consensus mechanism. Solana has found applications in several markets, including gaming, non-fungible tokens (NFTs), and Decentralized Physical Infrastructure Networks (DePINs). In recent months it has positioned itself as a platform to deliver what it calls the Internet Capital Markets – essentially a blockchain platform for tomorrow’s Wall Street.
Alongside this innovation in blockchain platform throughput, another approach to increasing performance has recently gone live in beta from a startup called DoubleZero, and it owes its design to technology that already underpins financial markets HFT operations – fiber network connectivity.
The team at DoubleZero recognized that blockchain platforms have been hampered by their reliance on the public internet as a backbone. So, it took a cue from the HFT space and has constructed a dedicated, private, global low latency and low jitter fiber network that supports deterministic routing and multicast propagation, and without any centralized failure point.
Already, the network provides connectivity at more than 750 gigabits per second made up of 70+ direct fiber links across 25 locations. Currently, more than 350 Solana network validator nodes are using the network – though the network is designed to be blockchain (and application) agnostic.
What differentiates DoubleZero from established HFT connectivity services is that it did not have to lay the fiber that comprises its network and it does not own any of the network segments itself. Instead, the fiber has been provided by 11 independent contributors, including Jump Capital, RockawayX, Distributed Global, Latitude, Teraswitch, Galaxy, Cherry Servers, Staking Facilities, South 3rd Ventures, Jito, and Cumberland/DRW.
In return for providing networking infrastructure, the providers earn rewards according to a DePIN model in the form of DoubleZero’s native 2Z token. The 2Z token can be used to access the network’s resources and derives its value directly from the performance enhancements that contributors provide to the network, resulting in rewards being tied to utility, not volume. Notably, DoubleZero scored a recent regulatory win when the US Securities and Exchange Commission awarded it a No Action Letter, meaning that 2Z tokens are not considered to be securities. This ruling is likely to influence the commission’s broader view of DePIN tokens as it creates formal legislation for cryptocurrencies.
In the future, DoubleZero plans to expand its network to support additional blockchains and other high-performance distributed systems, including CDNs (Content Delivery Networks), online gaming, and for training AI models.
For now, it’s likely to be in high demand to help support the rollout of the financial markets’ next – converged – era.
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