Tokenization of illiquid assets risks on-chain subprime crisis: Tristero Research

Tristero Research touches on critical flaws of real-world assets and how tokenization doesn't necessarily solve them but rather, increases the associated risks.

The slowest assets in finance—loans, buildings, commodities—are being strapped onto the fastest markets in history. Tokenization promises liquidity, but what it really creates is an illusion: a liquid shell wrapped around an illiquid core. That mismatch is the RWA Liquidity Paradox.

Tokenization doesn’t change the fundamental nature of an office building, a private loan, or a gold bar. These are slow, illiquid assets—legally and operationally bound by contracts, registries, and courts. What tokenization does is wrap them in hyper-liquid shells that can be traded, leveraged, and liquidated instantly. The result is a financial system where slow-moving credit and valuation risks are converted into high-frequency volatility risks, with contagion that spreads not over months but minutes.

If this sounds familiar, it should. In 2008, Wall Street discovered the hard way what happens when illiquid assets are transformed into “liquid” derivatives. Subprime mortgages collapsed slowly; Collateralized Debt Obligations (CDOs) and Credit Default Swaps (CDS) collapsed quickly. The mismatch between real-world defaults and financial engineering detonated the global system. The danger today is that we are recreating this architecture—only now it runs on blockchain rails, where crisis moves at code-speed. – Tristero Research

This would be the first time I'd come across a piece arguing against a crypto innovation that actually makes sense.

Even if you're not American, you would have potentially come to watch the movie “The Big Short” and from here, would have gathered some ideas on what happens when “slow and high risks” assets are made into something faster and more easily traded.

Today, tokenization makes anything an instantly tradable market, even though much of its value are derived from off-chain systems that are much slower.

Of course, over the years, we've built several solutions to try to reduce the risks associated with on-chain assets being disconnected from external systems. Such solutions include blockchain Oracles, which enables off-chain systems to become interoperable with decentralized blockchains.

That said, Oracles in themselves don't solve all the problems. They are many factors of influence that are outside systems to which blockchain Oracles currently bridge to the on-chain markets.

A couple of things to note here:

-real world assets are slow and illiquid.

-tokenization doesn't magically change the state of these assets.

-on-chain liquidity is in fact an illusion of liquidity for these assets in many cases.

-real world assets can critically harm on-chain economies.

Think about it. Imagine that an estate is tokenized and is traded 24/7 on on-chain markets.

Then it happens that a natural disaster significantly damages the estate. The effects of this can cause the value of the tokenized estate to crash, potentially liquidating several DeFi positions, even before the estate can be priced in the real world for what's left of the damage.

Processes are slow when it comes to these types of markets and evidently, the given example isn't exactly what can be automated.

If an estate is tokenized, the tokenized market essentially becomes the pricing venue for the estate. Given that this is a fast market with instantaneous settlements, events are perceived and priced differently.

An event that could have potentially led to an asset losing 35% of its value could lead to as much as 80-90% value loss due to its tokenized markets.

When we turn estates valuation and ownership into tokens instantly tradable, we create fresh incentives for estate-backed loans and when we're dealing with buildings bought with loans not paid off, then we essentially have mortgage-backed tokens, which can, as warned in the study, trigger fresh housing boom that could turn into a worse financial crisis.

Certainly, this isn't something most crypto enthusiasts and tokenization advocates want to hear, but is rather a valid concern. Tokenization moves assets into fast and liquid markets but it doesn't always make the assets themselves fast or liquid and this poses significant risks to on-chain investors touching these tokens.

Thank you for reading!