Tokenization’s Liquidity Paradox Could Spark Financial Flash Crash

The rapid expansion of tokenized real-world assets (RWAs) has sparked a growing debate over systemic risks, as market valuations surge while fundamental vulnerabilities remain unresolved. According to Tristero Research, the RWA tokenization market has grown from $85 million in 2020 to $26.5 billion as of 2025, representing a 245-fold increase [1]. This expansion is driven by institutional demand for yield, transparency, and efficiency, with tokenized U.S. Treasuries and private credit accounting for nearly 90% of the sector’s value [1]. Ethereum holds a 55% market share in the space, and industry projections suggest the market could reach $16 trillion by 2030 [1]. However, researchers warn that this growth is accompanied by a “liquidity paradox” — a structural mismatch between the slow-moving nature of physical assets and the rapid, automated processes of blockchain-based markets.

Tokenization wraps traditionally illiquid assets, such as real estate, private loans, and commodities, into liquid digital tokens. This creates the illusion of liquidity while amplifying risk, as the underlying assets remain subject to lengthy legal and operational processes. Tristero Research highlights a historical parallel to the 2008 financial crisis, where subprime mortgages were transformed into complex, fast-moving derivatives, eventually leading to systemic collapse [2]. The firm argues that tokenization does not alter the fundamental characteristics of real-world assets, which remain slow to change and settle. In contrast, the digital shells enable instant trading, leveraged positions, and rapid liquidations, creating a system where real-world defaults can trigger on-chain collapses within minutes [2]. A token representing a commercial property in New Jersey, for example, can be traded 24/7 on decentralized exchanges while the legal transfer of the actual property may take weeks [2].

The risk of a cascading on-chain crisis is heightened by the potential for automated liquidations and feedback loops. In one scenario described by Tristero, a private credit protocol tokenizing $5 billion in SME loans faces rising defaults. If the oracle feeding on-chain valuations fails to update in real time, market confidence may erode before the system adjusts, triggering algorithmic liquidations and further devaluing the tokens [2]. In another case, a custodial failure or legal dispute affecting tokenized commercial real estate could lead to a flash crash, with collateralized tokens collapsing in value and dragging down interconnected DeFi protocols [2]. These scenarios demonstrate how real-world risks — which typically unfold over months — are compressed into seconds in the tokenized ecosystem, potentially accelerating the onset of a financial crisis.

European regulators are beginning to address these challenges, with the European Commission planning to propose reforms under the Savings and Investment Union (SIU) and upgrade the DLT Pilot Regime to accommodate tokenization efforts [3]. The European Securities and Markets Authority (ESMA) has also recognized tokenization as a transformative force but cautioned that without clear legal frameworks and investor protections, the sector could become a “ticking time bomb” [3]. While some platforms, such as Trust Wallet and Ledger Live, have integrated tokenized equities and ETFs, regulatory restrictions in key markets like the U.S., U.K., and EU limit accessibility and scalability [4]. For example, tokenized U.S. stocks and ETFs offer 24/7 liquidity and fractional ownership, but lack shareholder rights such as voting and dividend distribution [4].

The future of RWA tokenization depends on addressing these structural risks while capitalizing on its efficiency and transparency. Tristero Research recommends the implementation of conservative oracles, stricter collateral standards, and circuit breakers to prevent cascading failures [2]. These measures could help align the speed of tokenized markets with the realities of real-world asset dynamics, reducing the likelihood of a crisis. Meanwhile, the projected growth of the sector to $16 trillion by 2030 underscores both its potential and the urgency of robust risk management. As tokenization bridges traditional finance and DeFi, the challenge lies in ensuring that the digital representation of real assets does not undermine the stability of the broader financial system.

Source:

[1] Tristero Research Warns RWA Tokenization Could Trigger 'On-chain Subprime Crisis' (https://finance.yahoo.com/news/tristero-research-warns-rwa-tokenization-092141834.html)

[2] When Slow Assets Meet Fast Markets - Tristero Research (https://tristero.substack.com/p/when-slow-assets-meet-fast-markets)

[3] Tokenization: 'Transformational Change' or Ticking Time Bomb? (https://finance.yahoo.com/news/tokenization-transformational-change-ticking-time-130525300.html)

[4] The Rise of Tokenized RWAs: A Game-Changer for Global Retail Investors (https://www.ainvest.com/news/rise-tokenized-rwas-game-changer-global-retail-investors-2509/)