🤯 Tokenized Credit’s Secret Weapon REVEALED! 🤑

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Ah, the tokenized credit market! A grand spectacle it is, soaring like a hot air balloon 🎈 filled with promises of riches. Over the past decade, it has indeed risen, converting ye olde traditional credit products – loans, bonds, and such – into digital tokens. Fancy, isn’t it? These tokens, like mischievous sprites, flutter about on the blockchain, democratizing investment for all and sundry. Each token, a mere sliver of the grand credit asset, allowing even the humblest peasant to partake in the feast! 🍽️

To this day, a king’s ransom – $10 billion, no less! – in tokenized bonds have been issued by the high and mighty, including the World Bank and the City of Lugano. Imagine, Lugano! A place where even the cobblestones seem to whisper of financial innovation. This market’s popularity? Well, it’s as plain as the nose on your face. Enhanced liquidity, transparency that would make a saint blush, and accessibility for all! Investors, bless their cotton socks, can now dabble in portions of loans and bonds, making these once-stodgy assets as nimble as a squirrel. 🐿️ And the blockchain, that immutable ledger, ensures all transactions are as secure as a miser’s hoard. Fraud? Bah! Reduced to a mere whisper. A broader pool of investors now flocks to the scene, eager to invest in assets once reserved for the fat cats. As more institutions embrace tokenization, the market will, undoubtedly, expand, transforming credit products as surely as a caterpillar transforms into a butterfly. 🐛

Yet, despite this grand dance, a shadow lurks. A critical issue, as they say: return on investment. Oh, the disappointment! Decentralized finance lending, alas, offers lower yields than traditional markets. Especially in this age of high-interest rates. A tragedy, I tell you! 🎭

But fear not! For a solution emerges, shining like a beacon in the night. Funding cross-border payments! Yes, it’s the golden goose 🦢, the ideal use case to expand the tokenized credit market and unlock higher yields. Consistent cash flows, a natural fit for blockchain’s speed and cost-efficiency. Huzzah! 🎉

The core challenges: Low yields and volatility

The total allocation, alas, remains but a pittance compared to the multi-trillion-dollar global bond market. A mere drop in the ocean!🌊 The limited allocation, you see, stems from challenges in liquidity, investor hesitancy (those timid souls!), and regulatory uncertainty (oh, those pesky regulations!).

Concerning returns, the tokenised credit market currently offers an average yield of around 9.65% on $10 billion of tokenised credit assets. While this might seem attractive compared to traditional bond yields, tractional private credit markets saw average yields of 12% from 2018 to 2023, leading many investors to still view DeFi as volatile and uncertain. Therefore, to unlock further growth, it is critical that the industry addresses yield-related issues and enhances investor confidence in the pioneering asset class.

Institutional investors, those demanding creatures, crave not just high yields but also stability and predictability. In traditional credit markets, low volatility and reliable income streams are the keys to their hearts (and wallets). But the DeFi sector? Still seen as a babe in the woods, prone to tantrums and volatility. The ecosystem must prove it can generate attractive, risk-adjusted returns for all – institutional and retail investors alike. This means improving the robustness of the platforms and expanding the range of available asset classes, such as into payments.

Increasing yields to boost growth

To drive greater adoption and attract more capital into tokenised credit markets, several strategies are necessary to make yields more attractive:

  1. Enhance liquidity. One of the key factors limiting yield attractiveness is liquidity, as tokenized assets must have deeper secondary markets to allow investors to exit positions easily without significantly affecting prices. This can be achieved by expanding the number of platforms that offer trading of tokenized debt assets, and increasing institutional participation can help create the necessary liquidity for more stable returns.
  1. Broaden asset classes. The tokenized credit market is currently focused on a narrow range of assets, such as mortgages and corporate bonds. However, to make yields more appealing, the market needs to diversify into other asset classes. Tokenizing revenue-generating assets like payments, real estate, and infrastructure projects could provide higher yields and open up new opportunities for investors who are seeking different risk-return profiles.
  1. Leverage stable asset classes. Integrating more stable, low-risk asset classes into the DeFi ecosystem could help balance the risk-reward equation. For example, tokenized government bonds or investment-grade corporate debt could offer lower but more stable yields, which may be attractive to institutional investors or pension funds looking for secure, long-term returns.

Finding new asset classes for tokenization

To ensure sustained growth in the tokenized credit market, new asset classes must be explored. The current landscape focuses heavily on fixed-income instruments, but there are untapped opportunities in sectors including real estate, intellectual property rights, royalties, and even carbon credits.

However, the payments industry presents the best asset class for the expansion of the tokenized credit market. Playing a fundamental role in all global commerce, the payments industry handles extremely high transaction volumes with largely consistent returns. Cross-border payments are of particular interest; each provider must maintain sufficient liquidity in each jurisdiction in which it operates to provide fast and low-cost transactions, forming a significant burden for aspiring founders and scaling payment companies.

This burden creates huge inefficiencies and locks up capital that could otherwise be invested or otherwise used more productively elsewhere. The tokenized credit market offers an effective solution to this problem, lending to cross-border payment companies to enable them to operate pre-funded accounts in more jurisdictions, reaching a market untapped by traditional lenders due to high perceived risks and archaic due diligence processes. Utilising on-chain collateral for loans and offering highly flexible lines of credit, the tokenised credit market can go where the traditional private lending market never could, gaining access to a key source of transaction volume and higher yields.

The future of tokenized credit markets

As the tokenised credit market continues to evolve, funding payments companies stand out as an important asset class that can generate higher yields and attract more capital, enabling the tokenised credit market to take the next step in its growth.

To ensure the broader DeFi ecosystem thrives, the sector must focus on enhancing liquidity, stabilising yields, and diversifying into new asset classes, be that the payments industry or any other sector with high demand for flexible, on-chain liquidity.

Mouloukou Sanoh

Mouloukou Sanoh

Mouloukou Sanoh is an experienced investor and operator, with private equity and investment banking in his arsenal. He co-founded Cassava, Africa’s largest web3 platform, and led key investments at Adaverse, Cardano’s venture arm. He was on Forbes 30 Under 30 2023.

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2025-04-18 12:55