Original author: Tristero Research

Original translation: TechFlow

Background

The slowest assets in finance—loans, buildings, commodities—are being bundled into the fastest markets in history. Tokenization promises liquidity, but in reality, it creates only an illusion: a liquid shell enclosing an illiquid core. This mismatch has been dubbed the "real-world asset (RWA) liquidity paradox."

In just five years, RWA tokenization has leapt from an $85 million experiment to a $25 billion market, achieving "245-fold growth between 2020 and 2025, driven primarily by institutional demand for yield, transparency, and balance sheet efficiency."

BlackRock has launched tokenized Treasuries, Figure Technologies has put billions of dollars of private credit on-chain, and real estate deals from New Jersey to Dubai are being fragmented and traded on decentralized exchanges.

Analysts predict that trillions of dollars in assets could follow this trend in the future. To many, this appears to be the long-awaited bridge between traditional finance (TradFi) and decentralized finance (DeFi) - an opportunity to combine the security of real-world returns with the speed and transparency of blockchain.

Beneath this enthusiasm, however, lies a structural flaw. Tokenization doesn't change the fundamental properties of office buildings, private loans, or gold bars. These assets are inherently slow and illiquid—they are subject to the legal and operational constraints of contracts, registries, and courts. Tokenization simply wraps these assets in a hyper-liquid shell, enabling them to be traded, leveraged, and liquidated instantly. The result is a financial system that transforms slow-moving credit and valuation risks into high-frequency volatility risks, whose contagion is measured not in months but in minutes.

If this sounds familiar, that's because it is. In 2008, Wall Street learned a painful lesson about what happens when illiquid assets are transformed into "liquid" derivatives. Subprime mortgages collapsed slowly; collateralized debt obligations (CDOs) and credit default swaps (CDSs) unraveled rapidly. The mismatch between real-world defaults and financial engineering detonated the global system. The danger today is that we're rebuilding that architecture—only now it runs on the rails of a blockchain, and crises spread at the speed of code.

Imagine a token tied to a commercial property in Bergen County, New Jersey. On paper, the building appears solid: tenants pay rent, loans are repaid on time, and the title is clear. But the legal process to transfer that title—title inspections, signatures, filing documents with the county clerk—takes weeks. This is how real estate works: slow, methodical, and governed by paper and courts.

Now take that same property and put it on the blockchain. The title is stored in a special purpose vehicle (SPV), which issues digital tokens representing fractional ownership. Suddenly, this once-dormant asset can be traded 24/7. In a single afternoon, these tokens might change hands hundreds of times on a decentralized exchange, serve as collateral for stablecoins in lending protocols, or be packaged into structured products promising "secure real-world returns."

Here's the problem: Nothing about the building itself has changed. If a major tenant defaults, property values decline, or the SPV's legal rights are challenged, the real-world impact could take months or even years to manifest. But on-chain, confidence can evaporate in an instant. A rumor on Twitter, a delayed oracle update, or a sudden sell-off can be enough to trigger a chain reaction of automatic liquidations. The building doesn't move, but its tokenized representation can collapse in minutes—dragging down collateral pools, lending protocols, and stablecoins with it.

This is the essence of the RWA liquidity paradox: tying illiquid assets to hyper-liquid markets doesn’t make them safer, it makes them more risky.

The Slow Crash of 2008 vs. the Real-Time Crash of 2025

In the mid-2000s, Wall Street converted subprime mortgages—illiquid, high-risk loans—into complex securities.

Mortgages were pooled into mortgage-backed securities (MBS), which were then sliced and diced into collateralized debt obligations (CDOs). To hedge risk, banks layered credit default swaps (CDSs) on top of each other. In theory, this "financial alchemy" transformed fragile subprime loans into "safe" AAA-rated assets. But in practice, it built a towering tower of leverage and opacity on a shaky foundation.

The crisis erupted when slow-moving mortgage defaults collided with the rapidly developing CDO and CDS markets. Homes took months to foreclose, but the derivatives associated with them could be repriced in seconds. This mismatch wasn't the sole cause of the collapse, but it amplified local defaults into a global shock.

The tokenization of RWAs risks repeating this mismatch—but at a much faster pace. Instead of layering subprime mortgages, we're fragmenting private credit, real estate, and government bonds into on-chain tokens. Instead of using CDS, we'll see "RWA-plus" derivatives: options, synthetic assets, and structured products based on RWA tokens . Where ratings agencies once labeled junk assets AAA, we now outsource valuations to oracles and custodians—the new black box of trust.

This similarity is more than just superficial; the logic is exactly the same: illiquid, slow-moving assets are packaged in seemingly liquid structures, then allowed to circulate in markets that fluctuate orders of magnitude faster than the underlying assets. The 2008 systemic collapse took months. In DeFi, crises unfold in minutes.

Scenario 1: Credit default chain reaction

A private lending protocol has tokenized $5 billion worth of SME loans. The yields are reportedly stable at 8% to 12%. Investors use the tokens as secure collateral and borrow and lend on platforms like Aave and Compound.

Then, the real economy began to deteriorate. Defaults rose. The real value of the loan book declined, but the oracle providing the on-chain price was only updated once a month. On-chain, the token still looked robust.

Rumors began to spread: some large borrower had defaulted on their payments. Traders sold before the oracle could detect the problem. The token's market price plummeted below its "official" value, breaking its peg to the dollar.

This was enough to trigger automated mechanisms. DeFi lending protocols, detecting the price drop, automatically liquidated loans backed by the token. Liquidation bots repaid the debt, seized the collateral, and dumped it on exchanges—further depressing the price. More liquidations followed. In a matter of minutes, a slow-moving credit issue turned into a full-blown on-chain crash.

Scenario 2: Real estate flash crash

A custodian managing $2 billion worth of tokenized commercial real estate faces potential legal jeopardy due to a hacker attack. Meanwhile, a hurricane strikes the city where the buildings are located.

The off-chain value of the asset fell into uncertainty; the price of the on-chain token collapsed immediately.

On decentralized exchanges, panicked holders rushed to exit. Automated market makers were drained of liquidity. Token prices plummeted.

These tokens were used as collateral throughout the DeFi ecosystem. Liquidation mechanisms were triggered, but the collateral seized was rendered worthless and illiquid. Lending protocols were left with irrecoverable bad debts. Lending protocols ultimately became mired in irrecoverable bad debts. What was once promoted as "institutional-grade real estate on-chain" suddenly became a massive hole in the balance sheets of DeFi protocols and any traditional financial funds associated with them.

Both scenarios demonstrate the same dynamic: the liquidity shell collapses far faster than the underlying assets can react. The building remains standing, the loan remains, but the on-chain asset representation evaporates in minutes, dragging the entire system down with it.

The next stage: RWA-Squared

Finance never stops at the first layer. Once an asset class emerges, Wall Street (and now DeFi) builds derivatives on top of it. Subprime mortgages gave rise to mortgage-backed securities (MBS), then collateralized debt obligations (CDOs), and later credit default swaps (CDS). Each layer promised better risk management; each layer exacerbated vulnerabilities.

The tokenization of RWAs will be no different. The first wave of products was relatively simple: fractionalized credit, government bonds, and real estate. The second wave is inevitable: RWA-squared . Tokens are packaged into index products, layered into "safe" and "risky" tranches. Synthetic assets allow traders to bet on or against a basket of tokenized loans or properties. A token backed by New Jersey real estate and Singapore SME loans can be repackaged into a single "yield product" and leveraged in DeFi.

Ironically, on-chain derivatives appear safer than the CDS of 2008 because they are fully collateralized and transparent. But risks don't disappear—they mutate. Smart contract vulnerabilities replace counterparty defaults; oracle errors replace ratings fraud; protocol governance failures replace AIG's problems. The result is the same: layers of leverage, hidden correlations, and a system vulnerable to single points of failure.

The promise of diversification—mixing Treasuries, credit, and real estate into a single tokenized basket—ignores the reality that all of these assets now share a single correlation vector—DeFi’s underlying technological rails. If a major oracle, stablecoin, or lending protocol fails, all RWA derivatives built on top of it will collapse, regardless of the diversity of their underlying assets.

RWA-enhanced products will be promoted as a bridge to maturity, proving that DeFi can recreate the complexities of traditional financial markets. But they could also be a catalyst, ensuring that when the first wave of shocks hits, the system doesn’t cushion the blow—it collapses.

in conclusion

The RWA craze has been touted as a bridge between traditional and decentralized finance. Tokenization does bring efficiency, composability, and new avenues for generating returns. But it doesn’t change the nature of the assets themselves: even if digital assets like loans, buildings, and commodities trade at blockchain speeds, they remain illiquid and slow to transact.

This is the liquidity paradox. By bundling illiquid assets into highly liquid markets, we increase fragility and reflexivity. The very tools that make markets faster and more transparent also make them more vulnerable to sudden shocks.

In 2008, the spread of defaults on subprime mortgages took months to trigger a global crisis. With tokenized real-world assets, a similar mismatch can unfold in minutes. The lesson isn't to abandon tokenization, but to fully consider its risks in design: more conservative oracles, stricter collateral standards, and stronger circuit breakers.

We are not doomed to repeat the last crisis. But if we ignore this paradox, we may end up hastening it.