March 26, 2025

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Hi readers,

Today's newsletter features a special release! Axel Jester of Particula and David Vatchev of Fasanara Capital write about how tokenization and the very foundations of DeFi can help solve the major problems associated with private credit, making the market more efficient, transparent and accessible to many more participants.

Thanks for joining us.

– Nelson Wang

From the Analyst

Unlocking Private Credit's Potential: How Tokenization Brings DeFi Innovation to Traditional Finance

Could the crypto revolution's legacy extend beyond democratizing money? Today, it's paving the way to reinvent private credit. Envision a future where lending to mid-sized businesses or financing infrastructure projects mirrors the efficiency and openness of a decentralized exchange. That's the aim of tokenization, a blockchain-powered innovation breaking down decades-old barriers in a $1.7 trillion (and growing) private credit market.

Private credit 101: the invisible engine of global finance

Private credit is an integral element of non-bank lending in which institutional players like hedge funds, private equity firms and specialized lenders provide loans directly to businesses. These aren't your typical bank loans — think bespoke financing for startups, real estate developments or corporate expansions, often offering higher yields than public bonds, averaging 8-12% vs. 4-6% for corporate debt. But here's the catch: this potentially lucrative market has long been gated by TradFi's legacy systems.

Why crypto natives should care

If you're familiar with DeFi's ethos — permissionless access, composable assets and real-time settlements — you'll instantly recognize private credit's pain points:

Locked-up capital: Investments are often trapped for 5+ years with no secondary market. (Imagine an NFT you can't sell until 2029.)
High barriers to entry: Minimum investments start at six figures, shutting out retail and smaller institutions.
Analog inefficiency: Manual underwriting, paper-based contracts and monthly — not real-time — performance updates.
Black box risk: Pricing and creditworthiness assessments lack the transparency that crypto markets demand.

Tokenization flips this script. By converting loans into blockchain-based digital tokens, it injects DeFi's superpowers — liquidity pools, fractional ownership, smart contract automation — into a market starving for innovation. Suddenly, private credit can operate with the efficiency of a stablecoin transaction, the transparency of an on-chain ledger and the accessibility of a crypto exchange.

Tokenization 2.0: rewiring private credit's DNA with blockchain

We believe that bringing private credit on-chain isn't just a technical upgrade — it could be a fundamental shift in how lending markets function.

1. Fractional ownership: breaking the barriers to entry

Tokenization shatters private credit's exclusivity by slicing loans into bite-sized digital tokens, democratizing access to yields once reserved for private equity whales.

Wider accessibility: Platforms can offer private credit exposure in smaller denominations, mirroring how crypto exchanges fractionalized bitcoin.
Global investor pools: A developer in Nairobi or a DAO treasury in Denver now has the potential ability to finance a solar farm in Spain, with no intermediaries and no borders.
New yield strategies: Composability lets investors mix tokenized loans with DeFi primitives (e.g., using private credit tokens as collateral for stablecoin loans).

2. Liquidity unleashed: from locked vaults to 24/7 markets

Private credit's illiquidity has always been a trade-off for higher returns. Tokenization rewrites the rules by creating programmable secondary markets. Imagine a marketplace where tokenized loans trade peer-to-peer, with pricing reflecting real-time risk data. Smart contracts could automate liquidity reserves, letting investors exit positions early by tapping into pooled capital. And on-chain activity — like a borrower's revenue milestones or loan repayments — could auto-adjust token values, killing TradFi's stale monthly NAV updates. No more waiting for a quarterly fund window to exit, since the market never sleeps.

3. Instant settlements and lower costs

TradFi settlement can drag for days, riddled with custodians, agents and banks each taking cuts. Tokenization would be able to clear transactions in seconds. Here's how:

Atomic transactions: Loan funding, interest payments and secondary trades settle instantly via smart contracts. No more "wire confirmation delays."
Costs slashed: Cutting out intermediaries such as lawyers and transfer agents could reduce fees, passing savings on to both borrowers and investors.
Cross-chain synergy: A loan tokenized on Ethereum could be used as collateral on Solana, bridging private credit with DeFi liquidity rails.

It's the TradFi→CeFi→DeFi pipeline, accelerated.

Challenges and additional risks introduced by tokenizing private credit

Tokenizing private credit streamlines funding and unlocks new liquidity pathways, but it also introduces complex challenges that must be addressed before the market can scale.

Regulatory uncertainty. Compliance remains a moving target. While jurisdictions are shaping digital securities laws, legal enforcement of tokenized credit agreements is still evolving. Institutions must navigate securities classifications, investor protections and AML requirements — all without a standardized global framework.
Smart contract and cybersecurity risks. Transparency doesn't equal security. Bugs, governance flaws and cyberattacks can all lead to capital losses. Unlike traditional credit markets, smart contracts operate without centralized dispute resolution, making risk mitigation strategies like contract audits, insurance and fallback mechanisms critical.
Liquidity fragmentation. More platforms are issuing tokenized private credit, but without standardization, liquidity remains siloed. Secondary market depth depends on consistent credit risk assessments, uniform token structures, and legally enforceable transferability - all of which remain work in progress.
Valuation and credit risk complexity. Tokenization doesn't erase borrower credit risk - it just moves it on-chain. While real-time financial data and automated risk models improve transparency, fundamental underwriting, default management, and legal enforceability still require off-chain verification. Pricing tokenized private credit relies on a hybrid approach, blending traditional credit models with blockchain-based risk signals.
Operational challenges. Early issuers of tokenized private credit have faced high costs replicating legal agreements on-chain, limiting initial efficiency gains. Meanwhile, DeFi-based private lending markets have encountered problem loans in emerging economies, proving that tokenization can't fix credit risk — it only changes how it's structured and monitored.
Interoperability issues. The challenge isn't just blockchain compatibility; it's aligning legal structures, credit risk methodologies and secondary market infrastructure across different ecosystems. For example, a tokenized credit instrument on Ethereum may not be legally equivalent to one on Avalanche, limiting cross-platform liquidity. Without credit risk standardization and regulatory harmonization, true scalability remains elusive.

Despite these hurdles, tokenized private credit is gaining momentum. As compliance frameworks solidify, credit models improve and institutions enter the space, the market is inching closer to institutional-scale adoption. However, risk management will define its trajectory.

Future outlook: the road ahead for tokenized private credit

We believe the next decade won't just evolve private credit — it will redefine it. Tokenization is merging TradFi's institutional strength with DeFi's agility, creating a financial ecosystem where loans function as programmable assets and liquidity moves seamlessly across markets.

Key trends to watch

Stablecoins as settlement rails. With $1.5 trillion in monthly volume, stablecoins are emerging as the default cash settlement layer for tokenized lending. Instant, frictionless transfers eliminate settlement delays and reduce counterparty risk.
Multichain credit markets. While Ethereum currently hosts 89% of tokenized assets, Solana, Avalanche and Polygon are rapidly gaining traction, paving the way for loans that move across chains as fluidly as do digital transactions.
AI-powered risk assessment. On-chain data is fueling AI-driven models to build dynamic, privacy-preserving credit scores. By continuously adjusting risk models based on borrower activity, tokenized lending markets can offer smarter underwriting, instant assessments, and lower default risks, all without compromising privacy.

Tokenized private credit isn't just another asset class — it has the potential to become the operating system for a global capital market. As regulatory clarity improves, infrastructure matures and TradFi deepens its involvement, expect an explosion of new products, enabling borderless syndication, dynamic risk pricing and compliance mechanisms embedded directly into token structures.

- Axel Jester, senior vice president at Particula

- David Vatchev, head of tokenization at Fasanara Capital