Using tokenized RWAs as collateral in DeFi lending markets
- Christian Amezcua
- 11 minutes ago
- 15 min read
1. Executive Summary / TL;DR
The tokenization of real-world assets (RWAs) on public blockchains has moved well beyond pilot stage: the market (excluding stablecoins) has grown from ~US$5 billion in 2022 to over US$24 billion by mid-2025. (RedStone blog)
This growth is largely driven by yield-bearing asset classes such as private credit and U.S. Treasuries: one study shows ~58 % of tokenised RWAs are private credit and ~34 % are U.S. Treasury debt. (The Defiant)
Using tokenised RWAs as collateral in DeFi lending markets is an emerging frontier: the yield-bearing nature, regulatory momentum and the drive for wider asset classes in DeFi make this an area of strong potential.
That said, material risks and frictions remain: liquidity, valuation assurance, legal enforceability, and the still-early nature of collateral usage in DeFi should temper expectations. (arXiv)
The article will define the relevant terminology, explore market size and growth (Sections 1-3 here), then move into how tokenised RWA collateral works, current adoption, benefits, risks, and design considerations for DeFi protocols.
2. Defining Key Concepts
What are Real-World Assets (RWAs) in a blockchain/DeFi context?
“Real-world assets” refer to physical or financial assets whose value originates outside the blockchain ecosystem (e.g., real estate, bonds, private credit, commodities). When such assets are tokenised, they are represented by digital tokens on a distributed ledger, granting fractional ownership, tradability, or programmable rights.
What is Tokenisation?
Tokenisation is the process of converting ownership rights or economic interests in a real-world asset into digital tokens recorded on a blockchain or distributed ledger technology (DLT). The token serves as a digital representation of the asset or right, enabling features such as fractionalisation, 24/7 transferability, and smart-contract enabled rights/obligations. (Katten)Key attributes:
Legal wrapper / underlying asset + rights (custody, servicing, redemption)
On-chain ledger/tracking
Token standard/interoperability (for blockchains)
Often includes compliance, KYC/AML and regulatory considerations.
What is Collateral in DeFi Lending Markets?
In DeFi lending, collateral is an asset pledged by a borrower to secure a loan. If the value of the collateral falls (or the borrower defaults), the protocol may liquidate the collateral to protect the lender(s). Key metrics/policies include:
Loan-to-Value (LTV) ratio: maximum borrowing relative to collateral value
Liquidation threshold and mechanism
Mark-to-market / valuation frequency
Quality of collateral (liquidity, volatility, enforceability)In traditional crypto lending, collateral tends to be highly liquid crypto-assets (e.g., ETH, BTC) with transparent pricing and robust markets. Using tokenised RWAs pushes the collateral frontier into less conventional asset classes.
Intersection: Using Tokenised RWAs as Collateral in DeFi
Bringing these together: tokenised RWAs become collateral within DeFi or DeFi-adjacent protocols. Rather than the borrower pledging only crypto-native assets, they may pledge a token representing a real-world asset (e.g., a tokenised treasury fund, invoice token, real estate slice). The key innovation: such tokens may be yield-bearing, lower-volatility (in some cases) or diversified differently from crypto-native assets. For DeFi protocols, this offers potential benefits (diversified collateral pool, institutional inflows) — but also introduces structural and operational complexities (off-chain linkages, valuation challenges, liquidity risks).
Assumptions / Clarifications:
When we say “tokenised RWAs as collateral”, we assume the token meets eligibility criteria for a protocol (i.e., tokenised rights, on-chain representation, accepted by a lending pool).
We distinguish between simple tokenised assets (yield-bearing tokens) and those specifically used as collateral in a lending market — the latter is still emerging and less common.
Collateral effectiveness depends on the token’s liquidity, legal enforceability, transparency, valuation and integration into protocol risk models.
3. Market Size & Growth of RWA Tokenisation
Providing current data and growth context for tokenised RWAs, highlighting the scale, pace and segmentation.
Market Size and Growth
According to the RedStone / Gauntlet / RWA.xyz “Real-World Assets in On-chain Finance Report” (June 2025): The RWA tokenisation market grew from ~US$5 billion in 2022 to over US$24 billion by June 2025 (≈ +380% in three years). (RedStone blog)
In 2025 alone (first half) the market exceeded US$23 billion, with >260% year-to-date growth reported. (Cointelegraph)
According to a report by Katten, the RWA tokenisation market reached ~$24 billion in 2025, growing ~308% over three years. (Katten)
A broader tokenisation market (all assets, not just RWAs) is projected to reach ~US$1,244 billion in 2025 and ~US$5,254 billion by 2029 (CAGR ~43 %) per data compiled by CoinLaw. (CoinLaw)
Asset Class Segmentation
Within the tokenised RWA category (excluding stablecoins), asset class breakdown: private credit ~58 %, U.S. Treasuries ~34 % according to one report. (The Defiant)
According to the RWA.xyz/RedStone report: private credit was the largest segment (~US$14 billion as of June 2025) in the tokenised RWA market. (RedStone blog)
Tokenised treasury/money-market fund assets: one source reports ~$7.4 billion in 2025. (CoinLaw)
Interpretations & Context
Although US$24 billion is modest compared to global financial markets (where asset pools are in the hundreds of trillions), the growth rate is very high and indicates institutional momentum.
The rapid growth suggests tokenisation is transitioning from niche pilots to broader adoption, particularly in yield-bearing categories attractive to institutions.
Yet the still‐small absolute size means that using tokenised RWAs as collateral in DeFi is fundamentally a nascent phenomenon — the infrastructure, risk modelling and market liquidity remain under development.
Projection / Future Growth
Several forecasts are ambitious: e.g., the RWA report cites that tokenised assets could represent 10-30% of global assets by 2030-34 (which, if global financial assets are ~US$400-500 trillion, implies a multi-trillion to even tens-of‐trillions outcome). (RedStone blog)
Some caution is warranted: a recent JPMorgan report (August 2025) suggests that tokenisation is “under-performing expectations” in traditional finance and remains heavily crypto-native for now. (FinancialContent)
4. Why Use Tokenised RWAs as Collateral?
Key Benefits
Yield-bearing collateral: Unlike many crypto-native collateral assets (which may pay no yield, or only staking yields), certain tokenised RWAs (e.g., tokenised treasuries, money-market funds, private credit) provide underlying yield streams. This enables borrowers to both pledge collateral and benefit from yield generation (or at least reduce opportunity cost). (Webisoft)
Diversification of collateral pool & lower volatility: By introducing asset classes outside of crypto (real estate, invoices, treasuries), a DeFi protocol may reduce reliance on highly volatile crypto-assets. Some RWAs may display lower correlation with crypto markets. (AlphaPoint)
Access to institutional / TradFi capital: Tokenisation of real-world assets helps bridge traditional financial assets into on-chain systems. This can attract institutional capital, increase the total collateral availability in DeFi, and improve credibility. (S&P Global)
Liquidity unlock of illiquid assets: Owners of assets like invoices, receivables, real estate may use tokenisation to access liquidity (via pledging as collateral) without selling the asset. This has important implications for companies/borrowers needing capital. (rwa.io)
Use-Case Examples
A business owner tokenises invoices or receivables and uses those tokens as collateral to borrow funds through a DeFi-enabled lending pool. (rwa.io)
A treasury or DAO holds tokenised U.S. Treasuries or money-market fund shares on-chain; those tokens might be accepted by a DeFi lending protocol as collateral to mint stablecoins or borrow crypto. (Webisoft)
A property owner tokenises a real estate participation and pledges it as collateral, enabling collateralised borrowing without selling the property. (Webisoft)
Why this matters for DeFi Lending Markets
For lending protocols: Accepting RWA collateral expands the set of eligible collateral, potentially improving capital efficiency and risk diversification.
For borrowers: They gain access to liquidity without liquidating underlying real-world assets, and potentially on better terms (due to the perceived stability or yield of the asset).
For the ecosystem: It strengthens the connection between on-chain finance and traditional finance, possibly accelerating the size-and-scope of DeFi lending markets.
Assumptions / caveats:
The benefit depends significantly on the quality, liquidity, and enforceability of the RWA token—that the underlying asset rights are sound, the token properly structured, and the collateral can actually be monetised in stress.
Yield-bearing tokens may still carry substantial risk (non-crypto risk, counterparty risk, regulatory risk) so this is not “risk-free”.
5. How the Mechanics Work: Tokenised RWAs as Collateral in DeFi Lending
Tokenisation and collateral cycle
Asset selection & structuring: An issuer selects a real-world asset (e.g., Treasury obligation, invoice, real estate share) and structures the legal wrapper, custody arrangement and token specification. For on-chain use, proper legal and asset-back guarantee mechanisms must be in place. (Chainlink)
Token issuance: The asset is tokenised (for example via an ERC-20 token) and rights/underlying value are represented on-chain. The token may embed or refer to legal rights, yield flows, redemption rights, etc. (Tokeny)
Collateral integration: The tokenised RWA is accepted by a lending protocol (or underwriting platform) as eligible collateral. Collateral parameters (LTV, liquidation threshold, valuation update frequency) are set accordingly. (rwa.io)
Borrowing workflow: The borrower pledges the tokenised RWA as collateral and receives a loan (in crypto or stablecoin). The protocol monitors the collateral value; if it drops below a trigger, liquidation may occur or additional collateral is required.
Repayment/Exit: The borrower repays the loan (plus interest) and the collateral is released. Alternatively, in default, the protocol/underwriter realises the token to recover value.
Key Parameters & Design Considerations
LTV (Loan-to-Value) ratio: Because RWAs may be less liquid or harder to value than standard crypto tokens, the protocol typically sets more conservative LTVs.
Liquidation threshold & mechanism: Because the tokenised asset may be harder to liquidate on-chain, protocols must plan for how to realise the value (e.g., via off-chain redemption, trusted custodian, auction).
Valuation / mark-to-market: Accurate, frequent valuation is critical. Some tokens may rely on oracles, custodian reports, or periodic audit. For RWAs, valuation lag is a material risk. (arXiv)
Liquidity of collateral token/market: The tokenised RWA must have sufficient market liquidity (or exit paths) so that in a stress event the protocol can recover value. As one study notes, many RWA tokens today show limited trading volumes. (arXiv)
Legal enforceability and custody: Unlike purely on-chain collateral, tokenised RWAs link to off-chain assets, so legal frameworks (jurisdiction, rights of token-holders, recourse) and robust custody are essential. (Webisoft)
Integration architecture: The protocol must integrate with the tokenisation platform/custodian/oracle ecosystem. For example, verifying asset backing, chain interoperability, oracle feeds. (Chainlink)
Example Architecture
An asset issuer (e.g., a fund) issues a tokenised treasury (T-bill) token on Ethereum.
A DeFi lending protocol (or a permissioned RWA lending pool) accepts that token as collateral, sets LTV at 50 % (for instance) due to lower risk profile and higher liquidity.
Borrower deposits token; protocol issues loan (say in stablecoins). The collateral remains on-chain but the underlying asset is held via custody/trust and periodically verified via oracle.
If treasury yields drop, or token value changes, the protocol monitors; if value falls to liquidation threshold, collateral is auctioned or redeemed to cover loan.
Borrower repays loan + interest, collateral is returned.
Practical Use-Case Scenario
From the article “Lending Against Tokenised Real-World Assets”:
“Imagine a small business owner using tokenised invoices as collateral to get a loan … or a real-estate developer funding a project by borrowing against tokenised property.” (rwa.io)Such workflows illustrate how RWA token collateral unlocks new borrowing pathways and business use-cases.
6. Current Adoption & Use-Case Examples
Protocols & Platforms Supporting RWA Collateral
The ecosystem map published by Tokeny lists protocols such as RainFi (“a lending protocol with Real-World Assets and tokens as collateral”) and Defactor (“platform that works with the broader DeFi ecosystem to bring real-world assets to the blockchain”) as early movers. (Tokeny)
According to analytics from RWA.xyz, there is mounting use of tokenised RWAs in DeFi lending, though still small in scale relative to crypto-native collateral. One study estimates tokenised RWAs at over US$25 billion as of 2025, but notes low liquidity and usage in many cases. (arXiv)
Data & Metrics
As of Q2 2025: the use of tokenised RWAs as collateral is gaining traction. For example, one summary notes that 2024 saw RWA issuance (excluding stablecoins) increase from US$8.4 billion to US$13.5 billion. (CoinLaw)
Yield metrics: A 2023 piece found that RWAs used in DeFi credit protocols offered an average yield of ~9.65 % and ~US$579 million in active loans at that time. (T-Blocks)
Use-Case Examples
Invoice/Receivables-Backed Loans: Platforms like Centrifuge and Goldfinch enable companies to tokenize invoices or receivables and use those tokens to obtain on-chain financing. (Webisoft)
Tokenised Treasury / Money Market Fund Tokens: Some tokenised products offer exposure to U.S. Treasuries or money-market funds and can feed into DeFi pools either as collateral or liquidity sources. (Webisoft)
Real Estate / Fractional Assets: Projects tokenize real-estate participation (e.g., rental property shares) which may in future serve as collateral in lending pools, though uptake is still modest. (Hacken)
Observations & Trends
While the infrastructure and market size for tokenised RWAs is growing, the actual use of RWA tokens as collateral in public, permissionless DeFi lending pools is still at a nascent stage. Many of the current uses are permissioned or semi-permissioned and involve institutional or specialised underwriter models.
One major constraint: many tokenised RWA products exhibit low secondary trading volumes and limited liquidity, which limits their attractiveness as collateral in DeFi where quick liquidation may be required. (arXiv)
We observe a bifurcation: more mature use-cases (treasury/money-market tokens) are closer to being viable collateral, whereas more illiquid asset classes (real estate, art, private credit) still face hurdles around valuation, liquidity and enforceability.
7. Benefits – What Tokenised RWA Collateral Enables
This section details the major advantages that incorporating tokenised real-world assets (RWAs) as collateral can bring to DeFi lending protocols, borrowers, and the broader ecosystem.
Key Benefits
Yield-bearing collateral: Unlike many crypto-native assets that may sit idle when pledged, tokenised RWAs (for example, treasury bills, money-market fund shares, private credit) often carry underlying yield streams or cash flows. This means collateral can be productive rather than static. (growthturbine.com)
Diversification of collateral pools & lower volatility exposure: Because RWAs originate outside the pure crypto ecosystem, they may behave differently than cryptocurrencies (which tend to have high correlations and volatility). This opens the possibility of constructing collateral sets that are less crypto-cyclical. (Galaxy)
Improved capital efficiency and unlocking of illiquid assets: Asset owners who hold real-world assets (e.g., receivables, real estate shares, private credit) can obtain liquidity via pledging tokenised versions as collateral rather than selling the asset outright. This unlocks capital while retaining ownership. (rwa.io)
Bridge between TradFi and DeFi – institutional inflows: By bringing traditional financial assets into on-chain collateral pools, DeFi protocols can expand their institutional use-cases, attract non-crypto native investors, and improve protocol credibility. (Galaxy)
Programmability, transparency and improved settlement features: Tokenisation enables fractionalisation of assets, 24/7 global access, and on-chain visibility of ownership and flows. These features support new lending and collateral use-cases that were difficult in traditional finance. (Braumiller Law Group)
Why This Matters for DeFi Lending Markets
For lending protocols: Accepting RWA collateral means extending beyond volatile crypto assets, potentially reducing liquidation risk in turbulent markets and attracting new collateral classes.
For borrowers: They obtain loans secured by real-world backed tokens rather than purely crypto-assets, possibly improving access and terms.
For the ecosystem: These developments bring actual off-chain economic activity (assets, income-streams) into the on-chain financial layer, enabling a deeper link between DeFi and the real economy.
Assumptions & Caveats
The benefits presume that the RWA tokens are of high quality: properly backed, legally enforceable, sufficiently liquid, and transparently audited.
The magnitude of the benefit depends on the asset class (treasuries and money-market assets are more liquid; real estate or private loans are less so).
While collateral diversification is beneficial, it does not eliminate risk altogether — the underlying asset classes still have their own exposures (credit risk, legal risk, liquidity risk).
8. Risks & Challenges
Despite the promising benefits, using tokenised RWAs as collateral in DeFi introduces a set of unique and material risks. This section summarises the principal risk categories and the implications for protocols and participants.
Principal Risk Categories
Liquidity Risk: Many tokenised RWAs currently lack deep secondary markets, have concentrated holders and low trading volumes, making rapid liquidation difficult in stress. (Chainlink)
Valuation / Mark-to-Market Risk: Real-world assets often require off-chain appraisal, periodic updates and may not have continuous market pricing like crypto assets. This makes monitoring collateral health more complex and subject to lag or mis-valuation. (rwa.io)
Legal, Regulatory & Custody Risk: Tokenised assets necessarily link on-chain representation to off-chain underlying assets and legal structures. Questions remain around enforceability of claims, jurisdictions, custodian insolvency, asset tracing. (Aurum)
Counterparty & Operational Risk: Since traditional finance participants (issuers, custodians, underwriters) often underpin tokenised RWAs, the risk of mis-management, fraud, or operational failure is substantial. (Antier Solutions)
Smart Contract / Oracle / Bridge Risk: The on-chain representation and collateral mechanics rely on smart contracts, oracles, cross-chain bridges etc., introducing the well-known DeFi operational risks (bugs, hacks, oracle manipulation). (Hedera)
Liquidity Mismatch / Concentration Risk: If many loans are collateralised by the same RWA type or issuer, or if underlying liquidity dries up, a systemic stress could cascade. (Bank for International Settlements)
Implications for Protocol Risk Modelling
Protocols must assume longer liquidation horizons and set more conservative LTVs and liquidation thresholds for RWA collateral than for highly liquid crypto assets.
Because valuation lag and limited liquidity can delay corrective action, modelling must include scenarios of delayed liquidation or fire sale discounts.
Governance should account for the fact that while tokenised, RWAs still have off-chain dependencies (custody, legal rights) which may behave differently than pure smart-contract-based collateral.
Protocol risk-frameworks should integrate TradFi-style risk assessment (credit, asset class, legal enforceability) along with DeFi-style risk (liquidations, smart-contract risk, market risk).
Monitoring systems should include additional signals: collateral market trading volumes, underlying asset cash-flow performance, issuer/custodian risk indicators.
9. Best Practices & Design Considerations for DeFi Lending Protocols
In order to safely and effectively integrate tokenised RWAs as collateral in DeFi lending markets, protocols should adopt a set of design and governance practices reflecting both on-chain and off-chain risk dynamics.
Recommended Design Framework
Asset Eligibility Criteria
Define rigorous onboarding criteria for RWA tokens: issuer credibility, asset class, liquidity history, legal structure, custody arrangements, audit history.
Prefer assets with established yield-streams, transparent valuation and track record.
Maintain a whitelist of accepted RWA collateral types and regularly review.(Aurum)
Conservative Collateral Parameters
Set lower LTV ratios compared to volatile crypto assets.
Establish tighter liquidation thresholds and wider buffer zones recognizing slower saleability.
Apply higher haircuts to account for valuation uncertainty and limited market liquidity.
Valuation & Oracle Infrastructure
Use trusted oracles or proof-of-reserve frameworks to validate backing of RWA tokens and asset-linkage. (Chainlink)
Incorporate periodic off-chain audits and transparency reporting of underlying assets and cash flows.
Design oracle fail-safe mechanisms (e.g., manual fallback, governance intervention) for assets with less frequent price updates.
Liquidity & Exit Planning
Ensure that collateral tokens have sufficient secondary market liquidity or redemption mechanisms so that liquidation in a downturn is feasible within protocol timeline.
Protocols may include special liquidation mechanisms (such as off-chain redemption, trusted custodian auction) for illiquid assets.
Maintain reserves or insurance buffers to cover scenarios of difficult collateral realisation.(Aurum)
Legal and Custody Governance
Tokenisation vehicles should use bankruptcy-remote Special Purpose Vehicles (SPVs) or segregated portfolios to isolate assets from originator insolvency. (Aurum)
Custody arrangements should be transparent, regulated where applicable and audit-ready.
Legal rights of token-holders (in case of default) must be clearly documented and legally enforceable across relevant jurisdictions.
Risk Monitoring & Stress Testing
Protocols should model stress scenarios: e.g., sharp drop in yield, sudden illiquidity, underlying asset default, legal challenge.
Monitor health factors, collateral concentration, borrower exposure, token circulation and underlying asset performance.
Governance should include mechanisms to adjust parameters, delist RWA types if risk profile deteriorates, and trigger mitigation processes.(Deloitte Brazil)
Transparency & Disclosure
Provide clear, on-chain and off-chain disclosures of collateral types, underlying asset information, risks, and redemption/liquidation mechanisms.
Encourage standardisation of metrics (LTV, haircuts, liquidity buffers) to allow market participants to assess collateral quality comparably.
Governance & Protocol Design Considerations
Given the hybrid nature of RWA collateral (on-chain token + off-chain real asset), ensure governance covers decision-making for parameter changes, collateral eligibility review, and crisis response.
Consider adopting hybrid governance models that combine DAO oversight with external expert committees for TradFi risk elements.
Implementation Checklist (Brief)
10. Outlook: Where It’s Headed
Market Growth Projections
As of mid-2025, the tokenised RWA market (non-stablecoins) exceeded ~US$24 billion, up ~380% since 2022. (pointsville.com)
Forecasts vary:
One projection expects the broader tokenisation market to reach up to US$30 trillion by 2034. (Katten)
Another projects ~US$16 trillion by 2030 for tokenised real-world assets. (Yahoo Finance)
For the tokenised real estate segment alone: the global market could hit ~US$4 trillion by 2035 from ~US$0.3 trillion in 2024. (Deloitte Brazil)
These projections suggest that while current RWA collateral use in DeFi is nascent, the growth path is steep, offering meaningful runway for protocols that prepare.
Key Trends to Watch
Institutional adoption accelerating: Major asset managers and financial institutions are increasingly engaging with tokenisation (issuance, custody, platforms). (rwa.io)
Regulatory and infrastructure maturation: Jurisdictions and regulators are moving toward clearer frameworks for tokenised assets; infrastructure (oracles, custody, standardisation) is improving. (World Economic Forum)
Collateral expansion in DeFi: As tokenised RWAs mature (yield-bearing, legally clear, liquid), DeFi lending protocols are likely to broaden acceptance of these tokens as collateral—particularly for use-cases requiring lower-volatility or institutional engagement.
Composability and product innovation: Tokenised assets may evolve from simple single-asset collateral to more advanced structures: baskets of RWAs, yield-bearing token collaterals, synthetic exposures, secondary markets. (growthturbine.com)
Cross-chain and interoperability improvements: With multiple chains and token standards in play, frameworks for cross-chain RWA settlement and collateral mobility will become more important. (arXiv)
Strategic Implications for DeFi Lending Markets
Protocols that build early capability to accept well-structured RWA tokens as collateral may gain first-mover advantage in attracting institutional and non-crypto collateral flows.
Capital efficiency may improve: collateral that earns yield or is lower-volatility may permit higher utilization and lower funding costs (all else equal).
Liquidity and risk management will remain differentiating factors: protocols that embed robust governance, legal review and liquidity planning for RWA collateral may enjoy stronger credibility and lower risk premiums.
Traditional finance (TradFi) and DeFi convergence may accelerate: RWA collateral is a bridge between the two domains, potentially increasing total addressable collateral for on-chain lending.
Risks to the Outlook
The large projections depend heavily on regulatory clarity, liquid secondary markets, standardised tokenisation frameworks and institutional comfort—each of which is still evolving.
If tokenised RWAs remain illiquid or predominantly permissioned, their effectiveness as “go-to” collateral in public DeFi lending may remain limited.
Protocols that fail to anticipate or model the off-chain risk layers (legal, valuation, custody) may face latent exposures as RWA collateral scales.
11. Conclusion
In summary:
The tokenisation of real-world assets (RWAs) is no longer theoretical—it has achieved meaningful scale and is rapidly growing.
Using tokenised RWAs as collateral in DeFi lending markets offers a compelling potential: diversification of collateral, yield-bearing tokens, institutional bridge, improved capital efficiency.
That said, this is still early: liquidity, valuation, legal enforceability and infrastructure remain real hurdles. Protocols must incorporate these structural challenges explicitly in their design.
For DeFi lending markets, the shift toward RWA collateral represents both an opportunity and a requirement: protocols that integrate high-quality RWA tokens wisely may capture non-crypto pools of collateral, but must do so with discipline and robust risk governance.
Looking ahead, if regulatory frameworks mature, tokenisation standards emerge and liquidity deepens, tokenised RWAs may become a foundational component of the on-chain finance ecosystem—transforming how collateral is sourced, managed and utilised in DeFi.
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