When Big Money Gets Serious, RWA's Liquidity Issues Come to the Fore

Author | @ballsyalchemist

Compiled by | Odaily (@OdailyChina)

Translator | DingDang (@XiaMiPP)

Liquidity is the prerequisite for an asset to gain confidence. When the market has sufficient depth, large capital can be smoothly absorbed, whales can freely build positions, and assets can be used as reliable collateral. This is because lenders know they can exit at any time if needed. However, if the asset itself lacks liquidity, the situation is completely reversed. Shallow liquidity struggles to attract users, and insufficient users further compress trading depth, ultimately forming a self-reinforcing "liquidity depletion cycle."

Tokenization was initially held in high hopes: it was seen as a key tool for enhancing capital liquidity, unlocking DeFi's financial utility, and bridging on-chain and off-chain assets. Ideally, trillions of dollars from traditional financial markets would be brought on-chain, allowing anyone to trade freely, use assets as collateral for loans, and perform combinations and innovations within DeFi that are difficult to achieve in the traditional financial system.

However, the reality is that beneath the surface prosperity, most tokenized assets operate in extremely fragile, illiquid markets, fundamentally incapable of supporting meaningful capital scale. The "liquidity" that serves as a prerequisite for financial composability and practical utility has not truly materialized. These issues are not apparent in small transactions, but once capital attempts to move at scale, hidden costs and risks quickly emerge.

The Current Liquidity Reality

The first hidden cost of tokenized assets manifests in slippage.

Taking tokenized gold as an example, the chart below compares the expected slippage for different trade sizes between major centralized exchanges and the traditional gold market. The difference is stark.

PAXG / XAUT Perpetuals & Spot vs CME Deliverable Gold Futures: Trade Size vs Slippage

As trade size increases, the slippage for PAXG and XAUT perpetual contracts rises rapidly and exponentially. At a notional trade value of approximately $4 million, slippage approaches 150 basis points. In contrast, CME's slippage curve is almost flat against the horizontal axis, barely noticeable.

At the spot market level, the liquidity constraints for PAXG and XAUT are even more pronounced. Even when selecting their most liquid spot trading venues, the effective depth their order books can provide on either the buy or sell side is less than $3 million. This liquidity ceiling is directly reflected in the curves being "truncated" prematurely at smaller trade sizes.

The right side separately shows CME's slippage curve. Its nearly flat shape visually reflects the depth advantage of traditional markets. Even for trade sizes far exceeding $4 million, expected slippage remains highly stable. A $20 million gold futures trade results in a price impact of less than 3 basis points. In terms of magnitude, CME's liquidity depth is far beyond any comparable product in the crypto market.

This difference has direct consequences. In deep traditional markets, even large trades have a negligible price impact; in the shallow markets of tokenized assets, the same operation immediately incurs significant costs, and the difficulty of closing positions increases rapidly with size. The daily average trading volume comparison below clearly illustrates this gap, and this issue is not unique to the gold market but applies to other assets as well.

CME Gold Futures vs PAXG / XAUT Perpetuals & Spot: Daily Average Trading Volume Comparison

The discussion above primarily focuses on CEXs. So, what if we switch to AMM DEXs? Does the situation improve? The answer is the opposite; it only gets worse.

For example, in a February 2025 XAUT trade, a user spent 2,912 USDT but only received XAUT worth approximately $1,731 at the real-time gold price, effectively paying a premium of 68% for this transaction.

In another transaction, a user exchanged PAXG worth about $1.107 million (at the then gold price) for 1.093 million USDT, with slippage around 1.3%. Although not as extreme as the previous case, this level of slippage is still unacceptably high when price impact in traditional markets is typically measured in single-digit basis points.

Furthermore, over the past approximately six months, the average slippage for XAUT and PAXG trades on Uniswap has consistently remained in the 25–35 basis points range, and even exceeded 50 basis points during certain periods.

Average Absolute Slippage for XAUT & PAXG on Uniswap V3

This article chooses gold as the primary analysis object because it is currently the largest non-dollar, non-credit tokenized asset on-chain. However, the same problems also appear in the tokenized stock market.

NVDAx / TSLAx / SPYx vs Nasdaq NVDA / TSLA / SPY: Trade Size vs Slippage

TSLAx and NVDAx are currently among the top tokenized stocks by market cap. On Jupiter, a $1 million TSLAx trade incurs slippage of about 5%; while NVDAx slippage is as high as 80%, rendering it almost untradeable. In contrast, in traditional markets, a trade of the same size in Tesla or Nvidia stock results in a price impact of only 18 basis points and 14 basis points, respectively (and this doesn't even include off-exchange liquidity like dark pools).

These costs are easily overlooked in small trades but become unavoidable as trade size increases. Insufficient liquidity directly translates into actual losses.

Why Are Tokenized Markets More Dangerous?

The problems caused by insufficient liquidity extend beyond just transaction costs; they directly undermine the market structure itself.

When market liquidity is thin, price discovery mechanisms become fragile, order book noise is significantly amplified, and oracle data feeds can be affected by this noise. In highly interconnected systems, even extremely small trades can trigger massive chain reactions.

In mid-October 2025, PAXG experienced two notable "anomalous" events on the Binance spot market within a week. On October 10th, the price dropped by 10.6%; on October 16th, it surged by 9.7%. Both fluctuations quickly reverted, almost certainly not caused by fundamental changes but rather a direct manifestation of order book fragility.

Because the tokenized asset ecosystem is highly interconnected, this instability is not confined to a single exchange. Binance spot holds the highest weight in Hyperliquid's oracle construction. Consequently, during these two anomalous price movements, $6.84 million in long positions and $2.37 million in short positions were liquidated on Hyperliquid, with the liquidation size even exceeding that on Binance itself.

This outcome is concerning. It demonstrates that a single illiquid market is sufficient to amplify and propagate volatility across multiple trading venues. In extreme cases, this structure could even increase the risk of oracle manipulation. Even traders who never participated in the original spot market may passively suffer losses due to liquidations, price distortions, and widening spreads.

Ultimately, all these problems stem from the same fact: the primary market lacks real, scalable liquidity.

PAXG Liquidation Chart on Coinglass

Insufficient Liquidity is a Structural Problem

The liquidity scarcity of tokenized assets is a structural issue.

Liquidity does not automatically appear just because an asset is tokenized. It relies on the continuous supply from market makers, who themselves operate under strict capital constraints. They allocate capital to markets where inventory can be efficiently turned over, risks can be continuously hedged, and positions can be exited with minimal time and cost friction.

Most tokenized assets precisely fail to meet these critical requirements.

First, for market makers to provide liquidity, they must first complete asset minting. In reality, minting itself comes with explicit costs. Issuers typically charge minting and redemption fees ranging from 10–50 basis points. Simultaneously, the minting process often involves operational coordination, KYC verification, and settlement through custodians or brokers, rather than direct on-chain execution. Market makers need to advance funds and wait for hours or even days to actually obtain the tokenized assets.

Second, even after inventory is generated, it cannot be redeemed instantly. The redemption cycle for most tokenized assets is measured in "hours or days," not seconds. Common redemption rules are T+1 to T+5, accompanied by daily or weekly quota limits. For larger positions, a complete exit often takes several days or even longer.

From a market maker's perspective, such inventory is largely equivalent to "illiquid assets," unable to be quickly recovered and redeployed.

To maintain market depth, market makers must hold inventory over a longer period, continuously bear price volatility risk and hedge it, while waiting for redemptions to complete. During this time, the same capital could have been deployed to other crypto markets—where inventory is hardly needed, hedging is continuous, and positions can be closed at any time. Precisely because of this, the opportunity cost is particularly high in the crypto market.

Faced with such trade-offs, rational liquidity providers naturally choose to allocate capital to other markets.

The existing market structure is also insufficient to solve this problem. AMMs shift inventory risk to liquidity providers but do not eliminate redemption constraints; while order book-based trading venues fragment market maker liquidity across multiple exchanges, further weakening overall depth.

The end result is persistently insufficient liquidity, forming a vicious cycle. Insufficient liquidity dampens participation willingness, and insufficient participation further erodes liquidity. The entire tokenized asset ecosystem is thus trapped in this cycle.

A New Market Structure

Insufficient liquidity is a structural barrier constraining the scaled development of tokenized assets.

Shallow market depth cannot support positions of practical significance, and fragile market structures amplify and transmit localized volatility to different protocols and trading venues. Assets that cannot be exited smoothly under predictable conditions also struggle to serve as credible collateral. Under the current mainstream tokenization model, liquidity remains chronically constrained, and capital efficiency is consistently low.

For tokenized assets to become truly usable at scale, the market structure itself must change.

What if an asset's price discovery and liquidity supply could be directly mapped from off-chain markets, rather than being rediscovered and cold-started on-chain? What if users could access tokenized assets at any trade size without forcing market makers to hold illiquid inventory long-term? What if the redemption mechanism were fast enough, with clear paths and no restrictions?

Asset tokenization has not failed due to the technical path of "bringing assets on-chain."

Where it has truly failed is that—the market structure supporting the operation of these assets has never truly been established.