A 2007 Lesson Risking Repetition
As Real World Assets (RWA) continue to be tokenized, a surge of seemingly “low-risk, high-yield” investment products has appeared on-chain. Many of these products are backed by assets like accounts receivable or real estate rental income, yet offer investors annualized returns of 8% or more, well above the expected yields of the underlying assets. This mismatch warrants a serious discussion of the structure, risk sources, and sustainability of such products.
RWA: Real Assets, Real Risks, Now On-Chain
Tokenized RWAs mirror real-world assets, but they may also replicate traditional methods of obscuring risk, often in more sophisticated ways. The use of blockchain enables the packaging of complex structures under the veneer of decentralization and transparency, potentially masking leverage and risk.
Structured Products: Redistributing Cash Flows, Not Creating Yield
At the heart of structured finance is not the creation of new value, but the redistribution of cash flows from a single asset pool. This is done through tranching, dividing investments into different layers with distinct risk-return profiles. This mechanism, widely used in traditional finance through CDOs and CLOs, looks like this:
- Senior Tranche (e.g. AAA): First in line for repayment; offers lower risk and fixed returns.
- Junior or Equity Tranche: Last to be repaid; carries the most risk, but offers the highest return potential.
The underlying assets do not change; only the distribution of risk and returns does.
Case Study:
Centrifuge’s Tinlake and the Power of Tranching
Centrifuge’s Tinlake platform provides a textbook example of on-chain structured RWA products. On this platform, real-world assets such as SME invoices or real estate loans are pooled and tokenized into two investment tranches:
| Token | Role | Risk Profile | Expected Return |
| Drop Token | Senior Tranche | First loss protection | ~4–6% (fixed income) |
| Tin Token | Junior Tranche | High risk | ~10–15% or higher |
This structure allows risk-seeking investors to pursue higher returns via the Tin tranche, while risk-averse players (such as DAOs or institutions) can opt for Drop tokens and enjoy more stable yields.
How is the Tin tranche able to offer such high returns? Once the Drop layer receives its fixed yield, the remaining cash flows are allocated to Tin. Provided that default rates remain low, the Tin tranche experiences high returns with relatively low actual losses, creating a form of high-leverage equity.
Notably, Centrifuge was among the first platforms recognized by MakerDAO for providing RWA collateral, an example of a compliant and transparent pioneer in this space.
Structured Complexity:
Tranching Is Just the Beginning
Today’s RWA products borrow extensively from real-world financial engineering. Beyond simple tranching, products now include:
- Duration/liquidity repricing
- Treasury-backed stablecoins paired with crypto staking (e.g., LST/LRT strategies)
- NFT-backed loans
- On-chain venture debt
- Leveraged LP tokens
- Yield swaps, and more
Don’t Let Yield Blind Risk: A Subprime Echo
Despite the technical merits of structured finance, history offers a stern warning. During the 2007 financial crisis, many AAA-rated CDOs were built on poor-quality subprime loans. Tranching served to “sanitize” the assets technically, but couldn’t eliminate the underlying economic reality.
Key vulnerabilities at that time included:
- Rating models detached from asset fundamentals
- Yield assumptions based on perpetual market growth
- Rapid contagion of losses once defaults began, even into senior tranches
Much of today’s RWA product performance rides on a bull crypto market and favorable regulatory momentum. But if sentiment shifts, will these complex structures hold up? The answer remains uncertain.
Financial Role and Merits of High-Yield RWA Structures
While concerns are valid, it’s important to recognize that these products do offer real utility:
- Access for High-Grade Capital
Institutional players (banks, insurers, funds) restricted to AAA/AA assets can now invest via the senior tranches. - Efficient Capital Matching
Tranching allows issuers to target investors across the risk spectrum, lowering overall funding costs. - Increased Transparency and Settlement Efficiency
On-chain structuring is more trackable and composable than traditional CLOs, and often more liquid. - Defined Risk–Reward Profiles
With full disclosure and investor understanding of tranche positions, these structures can improve risk-adjusted return allocation.
Conclusion:
Caution Behind the Innovation
RWA tokenization is an important evolution in financial infrastructure. But as structures grow more complex and returns appear more attractive, investors must stay anchored to fundamentals: What are the real assets, what is the true liquidity, and where is the leverage?
The lesson from the subprime crisis is simple: financial innovation cannot replace risk understanding. The future of RWA depends on our ability to stay grounded, clear-eyed, and skeptical when necessary.