The first question a lender asks during data center buildout is whether you have a contracted offtaker. Without that, your site will not be built. So one must ask, how can we build an on-demand supply when bringing that compute online requires multi-year dedicated contracts?

When solving a problem, look to history

The farm model. A perfectly competitive and volatile market for the output, variable input costs, large fixed capital expenses (interest, insurance, equipment).

Farms, power plants, oil refineries, natgas generators, bitcoin mines, and (soon) data centers.

All of these farms are essential to a functioning economy, yet as a lender who fronts the capital to purchase the machines that make modern farm businesses possible you are exposed to the volatility of the farm’s inputs and outputs (and the spread between them). So how could a farm finance the seeds, the fertilizer, and any other costs?

In the early 1800s economy, factor/commission merchants were the dominant model for cash crops like tobacco and cotton. A factor in a port city (New Orleans, Liverpool, Charleston) would advance credit to a planter against the anticipated harvest. The factor then sold the crop on consignment, took a commission, and netted out the advance. The factor bore price risk and crop risk simultaneously but in exchange, they captured the entire downstream margin (warehousing, transport, sale).

GPU data centers are at the same crossroads right now. Large scale lenders will only lend to build capacity for the hyperscalers and the frontier labs, while the average rental consumer is stuck with a fragmented and supply-constrained rental market. To build an economically efficient compute market, we need dedicated suppliers for on-demand markets.

Notes on the on-demand premium

On-demand GPU rentals fetch a higher rate than a long-term contract because the user gets flexibility and immediate availability. That flexibility translates into risk borne by the provider, where they take on the risk of having idle capacity and unpredictable utilization. While rental markets are by no means perfectly efficient, the liquidity premium compensates providers for absorbing utilization risk.

Recent on-demand pricing: credit to GPU.io

A Proposed Solution: Build the world’s best tenant

The core issue here is that data centers have massive fixed liabilities - they must finance PPE, their contracted power purchase obligations, service loans for their cooling equipment, the loans for the GPUs, energy inputs (gas / power), and the talent to build these facilities. Adding in the risks of the on-demand markets (which lenders will not price at the moment) is unacceptable to the majority of financing partners.

Now I don’t know much about computers, but I know a lot about loans.

I went through a thought experiment on how I would think about lending against GPUs for an on-demand only asset. As a lender I am equally as exposed to the whims of the on-demand markets as the operator (although the physical collateral does have a residual), and it is very, very volatile. Too volatile for any non-sophisticated trader to hedge well enough to cover my risks. What I want to see, like anyone else, is guaranteed, fixed cash flow and utilization on the parts that haven’t been paid back yet. How can we transform this cash flow volatility into a stable, cash-flowing asset that protects me (the lender) and makes sure I get paid back? We can’t fully eliminate it, but we can work to turn the revenue risk into counterparty risk.

What you need is the factor merchant, or in more modern terms, the commodity trader. The trader becomes the guaranteed offtaker, bearing the risk of the long term contract with the data center and earning the spread between its fixed contract and the premium for shorter-term on-demand rentals. The trader delegates its capacity on open rental markets to earn a premium, while being the investment grade offtaker that guarantees the baseline revenue a lender wants.

This is a tenancy swap. Buyers receive a fixed return on their hardware for some predetermined duration, sellers receive the floating rate and bear the utilization risk in exchange for the rental market premium. It’s a bit more complex in practice, but let’s take a look.

Here’s how it would work operationally

Terms and references:

• Reference Cluster: specific GPUs, count, location, power envelope pinned to a reference deployment

• Reference Capacity: GPU-hours available per calculation period

• Reference Price: This is a very challenging bit as prices are difficult to benchmark, but this must importantly sit near the price for a rental contract of a similar duration as the weighted average life of the loan

  • (a) operator’s actual realized $/GPU-hr

  • (b) a published index from a trusted provider (SemiAnalysis)

  • (c) a basket of venues like Runpod, Lambda, Vast, SF Compute

  • (d) must reflect networking topology, storage tier, interconnect bandwidth. Indices are tough to do!

• Strike Utilization: e.g. 65%

• Realized Utilization: GPU-hours sold / reference capacity, per period

• Realized Revenue: Reference Price x GPU-hours sold

• Calculation Period: likely weekly, but flexible based on the contract

• Notional Schedule: amortizing with the loan principal, so the trader’s obligation declines as the lender’s principal risk declines

• Performance Covenant: SPV must achieve a minimum realized utilization on a trailing basis to avoid moral hazards

Reference GPU Loan Structure

• The GPUs live in a bankruptcy-remote SPV separate from the PPE. This entity borrows capital secured by the hardware itself, with all cash flows from rentals flowing through the sweep account controlled by the lender.

• Waterfall

  • Realized revenue → opex (power) → debt service → swap settlement → reserves → operator equity

Designing the Contract

Legs

1. Trader → SPV (Fixed Leg): Reference Price * Reference Capacity * Strike Utilization * notional factor. Trader pays as if the cluster ran at strike utilization at a contractually fixed price

   1. **you could decompose the price and utilization risk into two legs here by having the trader pay the cluster a fixed $/period for reserved access which covers fixed costs, then having a pass-through leg where realized revenue - opex goes to the trader. Closer to a spark spread trade

   2. It enables splitting price risk from utilization, but the correlation between them is so high right now because availability is super low

2. SPV → Trader (Variable Leg): min(realized revenue, reference price * reference capacity * strike utilization * notional factor). The SPV passes realized revenue up to the strike level

3. Net retained by SPV: max(realized revenue - strike revenue, 0). Upside above the strike stays with the SPV

Settlement: If the cluster underperforms at the end of the period, the trader will cover the gap between the realized revenue and the strike payment. If the rental rates overperform vs. the reference rate, the trader keeps the profits up until the strike utilization. Returns above the strike utilization rate are kept by the operator to incentivize the operator to keep utilization high.

The Amortization Schedule (a unique piece of the contract)

Earlier I said this: utilization on the parts that haven’t been paid back yet.

Most hardware loans are amortizing, meaning the borrower pays back their principal over time. As such, lenders shouldn’t really care too much if the already amortized components of their loan have a guaranteed revenue as that capital has already been recovered. Because of this, we can structure the swap agreement such that the operator retains the full economics of their hardware as the debt on each piece of hardware amortizes. The trader’s fixed liability is also decreasing over time as the operator pays their loan back.

This has several benefits for all parties:

1. The operator gets more ownership over the economics of their deployment in step with them paying back their loan

2. The trader’s biggest risk at the moment is new hardware making old hardware obsolete and lowering the long-term average on-demand basis that they can earn. While the agreement amortizes, the trader’s fixed payments decrease on the same schedule and their hardware exposure automatically tapers off

3. The lender has a baseline cashflow guarantee on the loan, especially in the riskiest stages (early deployment) when the majority of payments cover interest payments.

Credit and Collateral

• Credit Support Annex: daily MTM with variation margin posted in a HQLA yield bearing instrument (it’s 2026, we have instantly transferable MMFs that you can liquidate in minutes, let’s use them)

• Initial margin can be sized to cover a stress scenario (e.g. Spot price down 50%, utilization to 20% for 30 days). Can be reduced if the trader counterparty is highly creditworthy

• Swap receivables are assigned to the lender at the SPV level

• Cross-default scenario: if the trader defaults or the loan defaults, best efforts must be made to assign the swap agreement to another counterparty or it triggers a rate negotiation. If the operator defaults, the trader is junior to the lender and receives any residual value after the lender is made whole.

• Trader credit degrades: increase initial margin

Risk and Returns

The trader is effectively long cluster revenue (price * utilization) up until the strike, and flat above it. They effectively have synthetic ownership of the baseload slice of cluster revenue and are short a put at the strike revenue. Their premium is the spread between the on-demand rate they expect and the fixed rate they pay you in exchange for absorbing the downside if revenue falls short. Fortunately, they are in the winning position as they are net long GPU rental rates and long utilization up to their strike. If the on-demand spot stays high and clusters stay full, both they and the operator are very happy.

• Lenders are always short volatility and care about opportunity cost, P(default), and their loss-given-default after recovery. Their interest rates will likely come down from the 12-15% range we see now on the USD.AI facilities to ~7% that is more in line with high-yield/private credit rates that you may see with a highly creditworthy offtaker. While they give up some of their premium interest rates, agreements like tenancy swaps will result in more lenders moving into the GPU lending arena because the likelihood of default decreases.

• The trader’s economics are quite favorable as well. If they are highly creditworthy, their margin ratio (initial and variation) enables them to access significantly more leveraged long exposure to GPU rental and utilization rates than you would be able to access anywhere else besides building a cloud.

• Operators have effectively sold a floor of the combined price * utilization factor, and hold a call on revenue spikes. As their loan amortizes, they retain more and more of the cash flow from their hardware which enables them to focus on maximizing their utilization. If the financing gap closes, edges in orchestration and finding unusual sources of profitable on-demand revenue will make small deployments significantly more competitive.

Regulatory

Real swaps are a regulated product and any payment based on a reference price index lies within the jurisdiction of the CTFC. You would likely have to structure your contract in such a way that it falls under the FCA or Forward Contract Exclusion, which enables non-dealers to buy or sell nonfinancial commodities. This enables your agreement to be exempt from the incredibly stringent clearing and reporting rules required for swap dealers post-2008.

Your agreement must be a nonfinancial commodity (check), have deferred shipment/delivery (check), and the intent to physically settle (ehh). There are some nuances regarding cash-settled physical delivery obligations, which I think you could make a case for given the non-tangible nature of compute resources. I am not a securities lawyer and this is not legal/financial advice but be careful!

Hedging?

Your two stochastic, but not independent, factors are on-demand prices and utilization.

To be honest, I still haven’t figured out how a trader could effectively hedge their rental rate exposure in size. Compute forwards and futures are still quite early. Indices are not established. Utilization is impossible to hedge as it is highly operator specific. Traders simply need to find strong operators who have an edge in originating demand and operating GPU workloads, or they can set up systems that enable operators to route demand through an internal desk in exchange for a bigger piece of the pie. That would get closer to a mining pool model, where they pay miners a fixed rate and capture the premium, although the on-demand rental game is less of a dice roll.

Your best bet is to build a diverse portfolio of operators to hedge your operator-specific utilization exposure, then either wait for cash-settled compute forwards to become functional or accept the price risk.

**You could also rent on SF Compute or another cloud that offers long-term rentals + subletting, then transform your price risk into basis risk between SFC and small operators

Perhaps this is a company, if there is not one already.

NFA

I’ll link the SEC’s official statement for you to read https://www.sec.gov/newsroom/speeches-statements/corp-fin-statement-tokenized-securities-012826

And a great infographic made by @borjaneira

To be honest, I don’t really care how assets are brought onchain. For the end user, it really makes no difference besides whether it makes more sense to allocate capital onchain or offchain. Nobody cares if it’s direct issuance or done via the DTCC in the slightest. If you think anyone cares, please wake up.

What I really want to speak about is why tokenize equity

The basics: When you issue a security - the purpose is to raise capital. Equity entitles you to some share of ownership of the company. That ownership is a right to some of the profits generated, and to the broader governance of said company. Companies may offer their equity to the public as part of their capital raising process. After the fact (assuming an efficient market) - a market participant is entitled to buy or sell shares of the company to other willing market participants for an agreed upon price.

As we all know very well, the public equity market is massive. It is so large and so efficient that it is effectively an aggregator of all currently available information/opinions of any market participant in the developed world! Onto tokenized stocks.

Tokenized stocks in their current state are, well.. Bad. At least at being equity.

The most liquid spot tokenized stocks are the least defensible regulatory-wise, and fundamentally over you little/no legal protection that you actually hold equity in the company. You own exposure to the price - which met the onchain markets where they were at the time. All the users wanted was to gamble. Gambling on stocks had a higher hit rate than gambling on equities, and the gamblers were mostly denominated in USDC or SOL. I call on xStocks here as the poster child for no-KYC equity exposure instruments. Perpetual futures on equities were still quite early at the time - revealing themselves to be the much better instrument for gambling.

One must ask themselves what the point of bootstrapping a brand new marketplace for the most liquid instruments (outside of FX/treasuries) would be. Said marketplace also being DEXs, a high latency and expensive marketplace for spot trading compared to the ultra low latency and efficient market infrastructure built by the NASDAQ, NYSE, Nikkei, and LSEG. Efficient overnight trading is offered by most electronic markets at this point, with some ATS platforms like BlueOcean offering fairly liquid overnight markets (averaging $1B per day, with a very recent session topping $4B in notional volume). To be candid, the most efficient spot markets for large cap equities are not going to live onchain for the foreseeable future. The average equity market participant with a vested interest in the stock market has absolutely 0 reason to allocate to equities onchain.

If you want further proof that liquidity is not the purpose, see below.

Transfer volumes for the largest equities available through Ondo Global Markets are just repeat tiny washing transactions between a cluster of wallets to present the illusion of trading volume

My point: I don’t think building a brand new venue for large cap stocks as a non-incumbent is going to attract any meaningful business or onboard any net new capital.

I address a few common arguments for tokenizing equity - keep in mind that I do not necessarily agree with all of them, but I want to give each one the time of day such that readers have a gauge on the developments being made in the space.

Capital Market Hegemony and the next era of American imperialism

The simplified thesis of the entire ‘neofinance’ sector is that there is an ongoing paradigm shift in current capital markets. For the first time ever, anyone with a connection to the internet can and will become a participant in capital markets. The primary force for widespread modernized finance will be stablecoin usage in economically unstable portions of the world. The longest tails of currencies will likely be irrelevant (to many sovereign nation’s chagrin). Any rational person or corporation connected to the internet will elect to save their earnings in the most useful currency in their daily life. The US dollar stablecoin is the obvious contender to become the global reserve currency for the vast majority of the world. There are no serious attempts at a non-USD denominated private stablecoin achieving any kind of meaningful market share.

Micro

Hundreds of billions, if not trillions worth of USD stablecoins are soon to onboard into savings apps, neobanks, and exchanges that offer the services to live a life denominated in dollars. The only differentiator for a platform enabling you to live your life denominated in dollars is to offer the best possible routes for a user to allocate their dollars. The focus is primarily on retail and small businesses to start. When users want to spend in dollars - businesses will want to accept dollars, and will demand the software required to custody and earn with said dollars. For the first time, capital market innovation is going bottom up.

These new dollar holders will not demand the same investment services that our legacy financial products like Schwab, IB, or Fidelity offer. Tax structures like 401ks and IRAs don’t exist and don’t apply overseas - where the majority of the aforementioned legacy investment products source their AUM. Their products are functionally useless in the new onchain capital market environment. The neofinance era of investment product builders are currently building to enable the new class of capital market participants to access the full range of dollar denominated investment products. From treasury yields, to cash-futures basis, to private credit, and ultimately to stocks.

From the perspective of the retail user, the US stock market is arguably the single most attractive aspect of our capital markets based on returns. Holders of dollars are actively encouraged to allocate to the stock market at an extremely young age, such that the compounding effects of market performance build a portfolio that delivers a meaningful capital base in the later years of their life. New dollar holders will want access to stocks, and tokenized equity providers are competing to offer the best possible services to the new customer base.

To win in the neofinance sector, you are competing entirely on distribution. I genuinely do not think the quality of your product matters very much beyond your abilities to sell it. Most of the current equity tokenization companies absolutely suck at widespread consumer distribution besides Backed Finance. I think most of the equities providers besides Backed are betting that their compliance will be a moat - and current regulatory restrictions prevent them from any aggressive consumer growth strategies. I echo their sentiment. Given the green light from regulators, I think we will at least see the various market participants try to get more aggressive in their distribution efforts (beyond volume washing).

Macro

Taking the micro-scale thesis and expanding it to a strategic opportunity for nations - the prospective growth of capital market participants presents an interesting prospect to sovereign markets. The currency that the world transacts in will be the currency that the world invests in. If USD stablecoins remain the dominant consumer savings currency, we have the opportunity to expand the breadth of all U.S. based assets to the wallets of users all over the world. The federal government is heavily invested in stablecoin dominance because of the potential implications that owning all retail capital markets presents.

A successful stablecoin is an extremely potent geopolitical weapon and source of cheap funding for sovereigns. The Federal Reserve effectively subverts the powers of its peer central banks in dictating inflation and interest rate targets at the consumer level. DeFi yield products will effectively be Eurodollar banks that aggregate offshore capital and reinject that capital into the U.S. economy through tokenized assets. There are other macro implications on trade, and FX but that is outside the scope of the conversation. .

Side catalyst: A deep source of cheap funding for the U.S. enables Congress to continue borrowing to sustain investing into our domestic growth, and domestic firms that are strategically important to our defense technology capabilities will eat very well.

The whole world will be invested in the U.S. and the government is incentivized in making that happen.

The return of the pink sheets

There is an exponentially increasing number of assets onchain, simply because the cost of issuing an asset is so low. The technical and regulatory hurdle for capital formation is so low that it brings up an argument to turn to tokenized markets to build out new equity issuance.

The issue

IPOs have rapidly slowed down in recent years. They are extraordinarily expensive for the companies who wish to raise capital in public markets and require the managing company to be prepared for the scrutiny of public markets. If raising capital in private markets requires a medium-sized finance team and a few investor calls to explain the vision, why even take a company public?

However the unfortunate reality of bubbly private markets is that private market investors have fund timelines to return capital - and pent up demand to sell shares in your company results in poor stock performance upon IPO regardless of how the company performs. Every failed venture-backed IPO compounds the anti public market sentiment that constricts new assets from being available to the market.

There is actually pent up demand for new assets from both retail and institutional investors and asset issuers are not incentivized to touch public markets. Case-in-point, crypto ETFs. Bitcoin ETFs in particular have quickly become the most profitable products in the ETF manager world because they take a new asset and wrap it in a familiar format. The key function is structural familiarity and some operational blocker from accessing that asset. Using fund wrappers to raise capital from public markets while forgoing the high levels of scrutiny that a regular public company goes through might be the next private market magic trick.

The solution?

There are two conflicting markets - one demands new assets and the other (onchain) is so saturated with bad assets that finding quality is impossible. An emerging concept is to tokenize private company equity and offer it through a crypto-native ATS(alternative trading system) to offer better quality assets to the user base that desires it. Private companies aren’t forced to deal with public market scrutiny and risk-on investors get access to the products they want. Thus we arrive at the onchain IPO.

Unfortunately, the likelihood of a serious company IPOing onchain is quite slim unless it is for PR purposes (hi Galaxy). If the “new asset” still sucks, onchain IPOs will remain niche and pointless. Adverse selection is extremely real. Those who wish to sell their equity to onchain markets probably have the same perverse intentions of the crypto companies offering worthless tokens to speculators. Many companies currently offering preIPO stocks have acquired their positions through layers of vehicles separated from the end product, and are usually scams. Very few private companies would approve any active trading for their equity, as it removes their power to argue for their own valuation.

The other big downside is that by chasing both the rabbit of traditional and crypto-native capital markets, you attract none. Most tokenized ATS like Securitize, Oasis Pro, Texture Capital, etc that enabled users to trade tokenized securities in a compliant manner ended up going completely unused. I generally think their failure was a function of terrible GTM efforts made by a bunch of 50 year olds who are simply too far from the metal. Bootstrapping a marketplace for anything is extremely challenging, let alone one with such excessive KYC regimes.

How to ATS right

There are a few buckets of very successful ATSs that someone in the industry can take some inspiration from. The big lesson is that these products offer exclusive access to some in demand asset classes.

• OTC Markets Group - Operates the three largest penny stock markets and has an effective monopoly on the penny stock trading industry. They are quite profitable and will likely report a low 40% EBITDA margin for FY 2025 on ~$35M of EBITDA. They actually are quite decoupled from the taker fee - maker rebate gridlock that other exchanges get bogged down with. They thrive on their low volume business because they aggregate the vast majority of ‘gambler’ flow onto their products. The asset issuers actually pay a subscription fee to remain on exchange. Hilariously OTC Markets was the first crypto exchange.

• Forge, EquityZen - preIPO stocks. They were both acquired this year by Schwab and Morgan Stanley respectively. The marketplaces themselves are far less interesting than their new owners. Both Schwab and MS are powerhouses in wealth management, and the goal of their acquisitions was to offer exclusive access to some of the highest upside assets only available to private markets. There is also an interesting trend of launching 1940 Act funds that own private companies, which Schwab explicitly mentioned as an intention of theirs in the acquisition statements. https://robostrategy.co/ is another 1940 Act fund managed by a slightly more crypto native team. However, Forge and EquityZen are legit. Tokenizing a fourth layer SPV is retarded and absolutely nobody wants to buy that shit. If you want to tokenize something, you better make sure it’s good.

• UBS ATS, Sigma X2, JPM-X, Level - Dark pools dark pools dark pools. The highest volume ATS systems in the world are anonymous dark pools run by investment banks to facilitate large block trades of stocks without moving the market. For the same reasons I doubt a new venue for equities has any legs, you simply cannot compete with the pre-existing capital bases of the massive investment banks who operate these ATSs and are liquidity providers themselves. However there is a lesson to be had here - internal MMs are a very important feature to the modern token exchange. To establish a liquid market, you must put up your own capital to establish early liquidity.

• Tradeweb, MarketAxess - Credit. Credit is a challenging asset class to establish centralized liquidity in given that the various forms of credit are all very different. Equity is just equity, the rules are defined and the major differences are just between share classes and public vs private. Credit is a very very broad asset class. Every credit product is structured somewhat differently. Every credit product has a different maturity, interest rate benchmark, issuing company, exposure, seniority, and set of features. Some assets have initial lockups (rule 144), and buyer qualification restrictions. Some credit products have issuer calls embedded, some have custom interest rate structures over the term of their life. Ie there is no single ‘bond’. For that reason, investment banks still serve as the primary market makers for large trades and esoteric instruments. Their large balance sheets and access to hedging products within their internal credit derivative desks or within the inter-broker dealer markets reinforce their abilities. Tradeweb and MarketAxess products are beginning to compete with banks for smaller trades, particularly in the IG corporate bond world where products are somewhat standardized.

Again - access to assets people want to buy and access to features people want (anonymity etc) with a balance sheet to support initial markets. The internal market maker is actually a critical piece of infrastructure for any upstart trading environment. Market makers will not provide any liquidity unless there is flow to start, and traders can’t trade without makers. Be prepared to take risks and lose money to build up initial liquidity. Besides that, build a core set of assets that people care about and can trade in a compliant manner. If you want to take some inspiration from our friends in traditional finance, building private company 1940 Act funds for directional exposure to key sectors like robotics, payments, and AI may attract a crowd of traders looking to add risk.

If you want to start a new stock exchange for whatever reason, get better marketing and get some interesting assets. To be honest I am not an expert on the exchange operations subject - any and all intelligent ideas were from @thatalexpalmer and @ak0.

Anything is collateral now

The growth of the Canton Network has proven that blockchain based collateral is simply superior to the current collateral movement architecture. There are no more questions as to whether most collateralized lending volume will move to onchain systems.

The current architecture for moving stocks to borrow against them is quite complicated and archaic. Your first option (as an institution moving in considerable size) is to use your prime broker for financing.

When using a prime broker, your equity positions are already in their custody and the PB’s internal ledger is adjusted to reflect their lien on your position. They credit some cash to your trading account and you are set to go. This option is extremely fast and is suitable for most financing needs. You have access to multi-collateral margin, constant collateral substitution, and built in settlement handling. Prime brokers offer a very efficient packaged product that is suitable for the majority of hedge fund platforms.

Without a prime broker borrowing against large blocks of securities is a bit tougher. It starts by requesting a loan from a lender that you need to find, then delivering an official snapshot of your equity positions to said lender (either by requesting your custodian to send it or having them verify your own). Once you and the lender agree on the interest/haircut terms, you have to generate delivery instructions to debit securities from your current custodian to your lender of choice. Once the DTC settles that movement of securities and both your custodian and lender’s ledgers reflect the change in equities, the lender will deliver cash to your custody account through Fedwire. You have now successfully borrowed against your equities. The same logic can be applied to most non-brokerage securities lending.

If you are a larger trusted borrower - you can use legal agreements to debloat the operational process. You sign an agreement that gives the lender control of your assets upon default and your custodian marks your collateral as blocked from moving around. Any operation burden is delayed until default. Your custodian’s statements verify your positions.

The key point of failure here is just asset provenance and custody. Moving securities is overly challenging so custodians and clearinghouses have to step in to provide truth and security for lenders. DeFi is built around solving a lot of these core problems.

Because of the high complexity baked into moving securities, it’s very hard to use equities as collateral for short term financing. Smart contract based collateralized lending is so much better than non-brokerage secured lending that it is ridiculous to use anything else. So long as the lender trusts the token posted as collateral, smart contract based lending allows you to take the entire above flow and simplify it into a couple steps. You move securities to the lender collateral contract -> lender calculates desired and withdraws said funds from pool -> sends you tokens of your choice. It can even be done atomically. It will functionally enable near prime broker quality financing for any holder of a tokenized asset. While simple and programmable collateralized borrowing against spot positions may sound like a niche use case, I call upon the niche but growing sector of RETURN STACKING. Fuck yeah lfg @coreyhoffstein 🦅America loves return stacking

Unique use cases for equities

Return stacking is the idea of creating a portfolio with leverage baked in to offer the spot returns of a target index and investing excess cash into an alternative product to offer spot + yield in a single product. It is usually done by using a market linked derivative (futures, swaps) to offer the spot returns of something like SPY then taking unused cash and deploying it into an interest generating asset.

An alternative methodology of offering a return stacked product is to take your spot asset, borrow against it, and deploy the borrowed funds into a yield generating asset to capture the yield - borrow rate spread. The second method has been far more popular in DeFi given you can constantly mark your entire position, ensuring that the wrapper is close to par with the spot index. Swaps/futures are a little more challenging to mark in practice, and assets without consistent marks will have trouble scaling on DeFi lending markets. Only a few large equity index futures are liquid enough to use as a primary index replication methodology, and total return swaps for single stocks will be costly and are usually only marked daily. A great example of a return stacked product succeeding in DeFi has been Mellow’s lidoStrategy vault, a great ETH denominated yield fund. Another recent example is both mHyperBTC and mHyperETH by Hyperrithm, following the DeFi native methodology to achieve a return above the typical risk free rates for BTC and ETH. Given the hit success of levered spot products in DeFi, we are going to see SPY+, NVDA+, MSTR+, etc as a super popular DeFi use case among traditional users looking to amplify their equity returns. P.S. You can use perps/or standard futures as a stand-in for borrowing against the equity position if the derivative market is liquid enough.

Moneyness of Securities

The big unlock is just instant settlement between the various counterparties you may interact with. Blockchains add structural ‘moneyness’ for any asset. Blockchains will essentially become Fedwire for securities. For example, equities can be integrated as margin collateral for various derivatives exchanges and the ideal case is that clearinghouses will be able to quickly route to other exchanges to maintain margin health. When I say everything is collateral, the ideal institutional use case for blockchains is that any centrally cleared obligation between two parties will get a receipt token to be utilized elsewhere. Your stock receipt could be used to remove collateral on exchange X, and post collateral with exchange Y in a few seconds. As I mentioned earlier, moving securities really sucks at the moment and moving them around faster will make trading more capital efficient. The current system is the equivalent of going to the club and everyone has to carry their own coats, if the DTCC’s monopoly remains - they’ll make a coat check. As long as you have your tag, you have your coat.

Takeaways

Equities are one very small and very niche piece of the new era of financial plumbing. Sure NYSE is going to launch a chain with LayerZero, and I’m sure LZ will make a boatload of money from it, but the average person is not gonna give a shit about tokenized equities. Equities are very standardized already and most of the massive institutional parties who drive the stock market have access to services that are damn near as good as an onchain system. I would suggest dulling your excitement about equity tokenization, as it’s a marginal improvement to an already efficient system.

The only real new edge is wider international distribution for U.S. assets. That is primarily a function of stablecoin growth, and you are competing with Robinhood and other perpetual futures exchanges for the same service without the same functionality.

On Instant Settlement

The DTCC is a government sponsored monopoly and for good reason. It is super heavily regulated and serves as a great recordkeeper/plumbing agent for U.S. markets while maintaining a high level of privacy for market participants. Will blockchains end up serving as the primary ledger for equity recordkeeping? Definitely. However the DTCC is definitely not going away. Recordkeeping must remain private but accessible to regulators, and the DTCC will likely remain responsible for shielding the addresses of market participants from one another. The difference is that the DTCC will be continuously clearing throughout the trading session vs. clearing daily. I promise you that CitSec is not going to trade equities on ETH mainnet when all of their competitors are block building. Any meaningful volume will occur on privacy protected chains that are heavily regulated and cleared by the DTCC i.e. equity tokenization does not matter to you unless you sell blockchain infrastructure. Hilariously, chain infra sales bros are going to be buying all the tables at Little Sister for the foreseeable future.

How to win as an equity tokenization company

The only success case for non-institutional tokenized equity products will be high quality direct to consumer plays that enable international users using neofinance apps to get equity exposure. These users will probably care more about asset liquidity and composability across their onchain wealth stack than settlement features. Get a good BD team and try to be everywhere. Work with perps exchanges to get your assets listed as margin collateral, work with curators to access borrow liquidity.

Things to build

• Privacy tooling that leaves information gateways for regulators

• Equity backed credit lines

• Chain infra, traditional institutions absolutely suck at building this stuff

  • Probably going to be a lot of big RFPs for infra firms in the upcoming years

• Spot asset denominated structured products (return stacked)

• ‘Liquidity insurance’ for exchanges to guarantee JIT liquidity when utilizing non-USDC margin.

Good luck

I’ve spent the past few days thinking and working on some words to help the average defi user get a better understanding of private credit as it exists onchain today.

Primer: How does tokenization really work and what do you own?

Read this to start - https://www.investopedia.com/terms/s/spv.asp

• To start, I want to clear the air on a big word you see a lot. There are now 10 announcements per week of some large financial institution ‘tokenizing’ some boring assets with a massive number attached to it. Unfortunately this does not mean JPM is TWAPing $500M into your favorite token. Tokenization can be boiled down to this - your token legally entitles you to a share of an entity or you own another entity’s debt.
  
  The entity and its legal structure is where you see the most variance. Equity is fairly simple - if I buy a share of ACRED from our friends at @securitize today, I legally own a share of a “feeder fund” or special purpose vehicle whose sole purpose is to purchase shares of Apollo’s Diversified Credit Fund. I now have legal and economic rights to the returns and distributions of the entity’s assets. It’s like buying stocks

Debt is where you see some more variance. Why? There are hundreds of different forms, and ways to define rights within credit as an asset class. When I lend money to my counterparty, they have a lot of freedom in terms of how they utilize that new capital. All I get is a little receipt token that hopefully pays me back once a month. Credit feels scary because credit is naturally an asset class with lots of breadth in the types of assets. Think about all the different types of loans you could get today! Borrowing against your house vs. using BNPL to pay off your doordash vs. looping your USDe on Morpho are all different levels of risk. They all have different rules. This holds true in the real credit world as well - the different types of borrowers and their collateral make credit a very difficult asset class to bucket, despite the fundamental concept holding true.

The basic concept of credit: I would like to access liquidity today, and I will compensate you accordingly to borrow that liquidity.

1. What are the types of private credit we see and how is it treated in traditional markets

So what is this nebulous “private credit thing” and why do people who look like the below image tell me to buy it?

Private credit as an asset class has been around for a long time. Not necessarily as it exists today, but it generally fell under a certain category of company that could not justify the strenuous legal cost of raising money through public credit markets or couldn’t fly under bank lending risk constraints. These smaller OTC credit markets leaned on private placements, or non-exchangeable notes that you wouldn’t have to register with regulators. Most of the time, very small companies that wished to buy out larger public companies would raise high yield debt collateralized by equity in the target company, that way they could punch way above their weight class. If you want to read more - The Predator’s Ball is a decent book that talks about high yield markets in the 1980s, centered around Drexel Burnham Lambert and Micheal Milken’s high yield bond desk.

Skipping ahead to post-2008, banks were heavily restricted from higher-risk corporate lending and as a result a subsect of corporations who required debt financing but couldn’t access public credit markets had to seek it from alternative sources. There was a kind of perfect storm due to a regulatory one-two punch of ZIRP (zero interest rate policy) and Basel-3 risk weighting rules that meant banks had more trouble lending to riskier corporate borrowers. As a result of ZIRP, investment-grade + HY fixed income market yields were not so attractive anymore, so the institutional allocators who had a mandate for yield were left unsatisfied. The dynamic of fairly-high quality borrowers who couldn’t access public debt markets simultaneously being shut out from bank financing left a funding gap that was filled by the star of today’s piece, private credit. While collateralized loan obligations existed as a corporate credit exposure product - CLOs had a price, and that meant you had to report the credit beta exposure on your quarterly reports. Institutional allocators loved private credit because it was packaged as non-volatile access to higher yield corporate lending. A key feature of assets that are fundamentally illiquid is that they tend not to be volatile. If you plan to hold an asset for 10 years, but have to report their value every quarter, why not just hold the one that won’t be volatile?

In recent years private credit (particularly megafunds) has hit some very public, and eventful bumps. Managers realized that the double edged sword of the large institutional private credit allocator, is that large institutions are informed. If your fund was a sponsor on a high profile bankruptcy - your LPs will know before the K&E partner gets their retainer. After two high profile bankruptcies in fall 2025 (Tricolor and First Brands) several managers have seen redemption requests spike from their LPs or have had to mark large losses on their respective funds. For those managers, playing defense to retain their current AUM is not going to work forever, especially as a publicly traded company who is expected to grow their AUM quarter over quarter. This is why asset managers are looking for AUM in lots of new places, like retail markets, insurance firms, and crypto. (hint: $APO, $KKR, and $HLNE were early issuers on Securitize).

2. How does it exist onchain today?

Today we see a few buckets of onchain private credit.

1. Traditional funds reformed to exist onchain (ACRED, HLSCOPE, mF-ONE)

2. Crypto-native debt (Maple, Arkis, FalconX, Wildcat, Galaxy, 3jane)

3. Metric for sale (Tradable, PACT, Mercado Bitcoin, ~Figure)

4. Low quality credit - couldn’t raise money in the real world so they raise money here (too many to name individually)

All 4 categories have been absolutely booming over the past year.

Traditional → Digital

A) A lot of the buzz has been surrounding the big name traditional issuers launching their funds on the major public chains through their respective tokenization partners. Some of them have achieved some non-trivial amount of DeFi adoption, particularly mF-ONE on Morpho and ACRED on Loopscale. Yet, this still feels a bit small. RWAs promised trillions, and have reached a pretty small fraction of that. For the managers, the calculus of tokenizing a fund starts as the idea of there being hordes of retail capital in crypto who will buy “anything.” Unfortunately they are met with the Sky diligence team, who does care about allocating to a share class with a slightly higher management fee. Ironically, the megafund manager and the triple Z rated snake oil salesman approach DeFi through a similar lens. “If they will buy this stuff, my junk must be gold.” In reality - compliance restrictions leave most private credit products exclusively for the most well-capitalized institutions in crypto.

To give credit to the institutional players, their strategy has changed. They see that DeFi has potential to transform their products in a brand new way. They are able to adjust their returns and liquidity at the fund level. Why is this so interesting? 1. Managers are able to offer leverage at the share level, meaning they can take one fund share and provide 10 different levels of risk/return options depending on how much leverage the LP demands. Rather than taking on that leverage risk internally, clients can now pick their own poison and it isn’t the manager’s issue. Example - mF-ONE is currently usable as collateral on Morpho at a 91.5% LTV, at the issuer reported NAV. If you want to aggressively lever up your returns - you could get into the 30% APY range. Now at those levels you are taking on a lot of additional risk, but moderate fund level leverage is likely tolerable for the LPs who want to amplify their returns. The other half of additional LP optionality is liquidity. The typical private credit fund is committed to allowing ~5% of NAV out per quarter. This is not a guarantee, it’s more an idea of a target. However, they are lending on 3-6 year terms to their borrowers. Some of the more astute readers may see a duration mismatch waiting to happen. Managing illiquid asset-heavy fund liquidity is a feat of modern financial engineering, but it has its limits. So what does one do when they are last in a redemption queue?

They sell their shares. And the fund shares receives the most evil thing in the alternative asset world, a price. I’m mostly kidding, but credit fund shares are genuinely quite difficult to transfer. The world of secondary buyers is limited and difficult to access, and share transfer is super slow (requiring lots of approval and compliance procedures). The manager also usually has the right to reject any transfers. As a result of the poorly developed secondary market infrastructure, the discounted price per share can be extremely low. Despite the infrastructure hurdles, private credit secondary volume 3Xed from 2024-2025 according to Evercore, and will likely continue to increase at a similar pace moving forward. Building out a more robust secondary market for megafunds, without the scrutiny and legal implications of issuing a publicly listed fund product is a pretty great use case for tokenization. Now liquidity is obviously not a fixed problem in DeFi quite yet, and one I will go into depth on later, but financial innovation happens about 20x faster in this industry so I imagine it will become hyper competitive by EOY.

The big issuers are definitely trying, but they have mostly been dragged into innovation by their more nimble tokenization platform counterparties. I will give one shoutout here for someone who is setting the example, and I keep bringing them up because they are the only example of a manager that takes my above points into consideration and then acts on it. Fasanara has been remarkably ahead of the curve in terms of innovation - their internal liquidity mechanisms that enable them to get such aggressive LTVs on Morpho are born directly from LP feedback. I suspect them starting up a crypto hedge fund back in 2017 has brought up some good DNA. I’m very excited to see what this team does moving forward.

Footnote: NAV lending is the term used to describe the action of a firm borrowing against its underlying investments as collateral to bridge LP liquidity needs and avoid needing to sell their assets. For reference a typical NAV loan from a specialist lender may range from 10-30% LTV, and they are not cheap. It requires drawing up complex collateral commitments (lawyers), provisions against additional leverage (lawyers), and juniorizing all of your LPs in case of a decline (lots of lawyers). NAV lenders also have their own LPs to satisfy - meaning your rates will not be great.

Crypto-native credit

B) The second category of onchain private credit is another that has piqued my interest since August/September. I listed a few issuers that I pay close attention to above, but the core product is just high quality crypto-native private credit wrapped in a crypto-native form. It really is quite simple. I loop some Payfi style products in here (Zynk, Axiym, end of list..)

As an asset class, crypto and DeFi products are more volatile than in more developed markets. Volatility is higher because the driving force behind price is speculation, counterparty risk is higher because but not limited to [exchanges being untrustworthy, billions of laundered money, hacks, 0 financial recourse, no insurance, no regulation, cross-jurisdictional risk, scams…], and you have no legal entitlements whatsoever as a holder if an asset goes to 0 in seconds. So lending in coinland is a pretty brave activity, and you are able to make a lot of demands as a function of the structural risk you take.

A: You can charge a very high interest rate.

B: You can get a fully liquid asset that you can sell in size any day of the week, at any time of day as collateral for said loan.

C: You can take on very little duration risk for said loan.

D: You take no mark-to-market risk on your loan as there is not even a concept of a credit market in crypto.

Secured

In short, you are compensated handsomely to be comfortable with crypto as an asset class. Side note: DeFi’s discomfort with duration risk is nicely matched with the short term capital needs of crypto institution counterparties. I call on a few great products here.

Maple is the obvious one - they have successfully built a private credit fund that you can swap out of at NAV any time of day through building great infrastructure. I expect great things / or a large acquisition by a lender.

FalconX is a sneaky up and comer in the onchain asset management world. They are the biggest prime broker in the game at the moment, and they serve a very wide range of trading firms. They have a tokenized CLO product with Pareto which enables you to lend to Falcon, secured by their margin financing loan book. They are currently paying ~11% APR with only 30days of duration.

Galaxy Digital recently released their CLO with Arch Lending that is an adjacent style of lending to Maple, and their asset is structured like secured and isolated debt. It’s not bad, it is just built for a different class of allocator. If crypto lending is going to make serious headway as a serious debt product in TradFi markets, this will likely be the one to do it.

Unsecured

Unsecured crypto credit is a very tough game that I don’t fully understand, but I understand why it is essential to the ecosystem. Consider all of onchain finance its own macroeconomy. Current fully secured lending requires holding liquid assets to use as collateral. It stunts the process of liquidity transformation, where a lender borrows short-term from depositors, and lends long-term to an economically productive use case. By allocating capital into activities that increase the amount of net capital in the ecosystem (building houses, making widgets, etc), the ecosystem grows long term and adds new capital to be borrowed by others later on. Liquid asset secured lending only transforms risk. Assuming that the collateral asset and the borrowed asset have an equivalent moneyness, your loan is as liquid an asset as the capital lent out and does not add any net liquidity to the ecosystem. Borrow short, lend short. If you apply this principle to DeFi, more products that use onchain capital to generate a real world return will help the ecosystem grow.

Unfortunately, the risk profile is pretty much untenable for most, and as such you are able to demand incredibly high interest rates, and take ~24 hours of duration risk if you wish. Shoutout to 3jane and Divine for doing the hard thing tbh, incredibly ambitious and I wish them both very well.

The big issue with overindexing on crypto credit, is that your yields are a direct function of how crypto is performing. Higher prices -> more speculation -> more volatility -> more demand for capital. The opposite is also true. Trading firms are the power borrowers, and trading firms make their money when markets are very active. Essentially every borrower has some cost of capital that is dependent on their ability to generate yield in a given market. Your yield ends up being some derivative of the average borrower’s IRR. If there’s no money to be made, why borrow? It hits the same wall as the basis yield where lenders are dependent on the market growing, or the prices increasing.

Metric for Sale

C) The third category is the ‘Metric for Sale’ category. It’s not particularly relevant to this conversation as it has little to no impact on any DeFi systems.

Scams

D) Scams. Don’t care but if you aren’t in one of the other categories you are probably here.

3. How will it exist onchain tomorrow?

I think DeFi has a lot of potential to be the new edge that an asset manager can offer its clients over competitors. I don’t know if most managers have fully realized that potential quite yet. As I mentioned earlier, DeFi is the only way to offer new alpha for your fund at the share level. What do I mean by that? When you subscribe into a fund, you are buying a share of an entity whose purpose is to deploy the capital you invest in a structured fashion to earn a return. Currently, the fund manager can only manipulate returns and liquidity from within the fund. Their capital deployment schedule, dividend payment frequency, and leverage must all be carefully managed to offer a single and consistent return/liquidity profile across investors. DeFi functionality enables managers to offer a different return and liquidity profile to every single investor for one single fund depending on their individual preferences for risk and liquidity. More features = wider range of potential investors = more surface area to grow their AUM. But there are some kinks to work out before DeFi is ready to be offered as a structured product.

The Duration Problem

The big ugly obvious one is that private credit intentionally trades off liquidity for low volatility. Why doesn’t this work in DeFi?

DeFi was built around volatile and liquid assets. Money markets were an ideal setup to solve a market problem in DeFi of matching those who want yield and those who want risk in a decentralized fashion. It is significantly more efficient than anonymous OTC/bilateral lending, and gives the risk-taker the security that their collateral was not being rehypothecated. Deposits and collateral are pooled into a protocol, and borrowers can choose how much risk they want by paying the pool rate. The big annoying thing is that money markets are not great for duration-heavy collateral. Private credit funds often can only provide liquidity once a quarter, and money markets require it instantaneously in case of liquidation. To exit a position, they rely on liquidators and AMM pools to minimize bad debt risk for lenders. Unfortunately liquidators are not guaranteed to be around (especially in black swan situations) in which any collateral must have some base amount of atomic liquidity to function. So onto the AMM problem.

AMMs require LPs to provide dual sided liquidity. They get exposure to trading fees in a certain range of prices in exchange for being on the losing end of a directional move either way, which functionally means they are short gamma in exchange for some trading fee premium. As I’ve said, private credit NAV is not very volatile. On an asset with a predictable upwards drift, you will usually end up holding more of the lower-drift asset as the price continually moves through your range. So as an LP, you take on the credit risk of the asset and then earn close to nothing on the stablecoin side of the pair in exchange for some meager trading fees. In most cases, holding the illiquid asset will outyield the LP position. The closest onchain equivalent is the yield-bearing stablecoin, whose issuers usually fix the problem with a combination of Curve and by giving LPs a ton of free money. Unfortunately for Apollo, the shareholders would sue if there were $APO incentives to sell shares of the fund. Without a way to incentivize LPs, you can’t guarantee that a money market can sell its position without accumulating bad debt, which means it’s hard to get a loan against it.

Leverage is the killer use case for tokenization in most cases, and it has to function without duct tape to be a trustworthy product. In order to make packaged leverage a reality, we must solve the liquidity problem. I listed some companies who are working on a solution right now and their solutions.

• Multiliquid is a pretty new protocol, but they just launched a backstop liquidity facility on Solana specifically meant to give investors and lenders in a couple Securitize products (mainly ACRED) early exit liquidity for a fixed fee. They partnered with a fund that raised some capital for the specific purpose of generating alpha by earning that fee + the native yield of the underlying asset by providing secondary liquidity. In theory the returns should be pretty good given there is enough flow to earn those fees. The thesis is that if there is liquidity available, there should be more users willing to invest. We’ll have to see how it plays out. Worst case scenario, nobody uses it and there is no additional alpha.

• PRIME by Figure solved it by making a gargantuan Raydium pool that can take a 1-2M sell clip at any time. Interestingly, they paired it with $CASH which is a stablecoin issued by Phantom that doesn’t get a ton of DeFi usage. The cost of capital on CASH is therefore very low. For new stablecoin issuers, especially those who are GENIUS regulated, promoting AMM pools with high quality RWAs as a yield source may be a workaround to the yield rules.

• Midas model: Midas is arguably the most battle-tested tokenization platform in terms of putting mTOKENS as collateral on various lending markets without them blowing up. They implemented a shared liquidity model, where some % of every deposit into a Midas vault is used as a shared buffer across every product. They aim to allow for about 10% of each vault to be instantly redeemable, for the purpose of day-to-day redemptions and derisking. The underlying credit fund from Fasanara in mF-ONE also holds some buffer in HQLAs for safety, before allocating to its private credit strategies. To be honest it works quite well in practice and is a palatable solution. Unfortunately the cash drag is a pretty difficult sell as an institutional product, and a buffer is not a perfect solution to the liquidity issue. It delays bank run risk, but doesn’t remove it.

• Securitize model: None, sell to people who don’t care about duration.

• Cork: From what I can tell market participants on Cork sell a put option on the illiquid asset to lenders, which is honestly great for lender protection and largely solves the money market issue. I hope they can build up the TVL to offer their solution. Do I think DeFi will naturally sell insurance? No. I find that expecting a market solution to work in DeFi is a waste of time given every company has the ability to artificially inflate their product’s returns out of proportion to the risk. I am a big proponent that neutral DeFi infrastructure in 2026 is a waste of time, and if you offer a financial product you need to take agency and sell that risk yourself.

• Rava: New, but has been on my radar for a while. They are offering a put option style product for curators similar to Cork, but they are taking on the risk themselves. Their goal is to generate a specialized alpha by offering a niche financial product to hedgers. They also have a specialized pricing model for NAV-based assets which reflects their ‘fair-market’ price rather than the issuer-reported value. Adjusted share pricing is interesting for lending market oracles, since as I mentioned earlier NAV ≠ price and not many liquidity solutions will be able to account for the jump risk baked into opaque fund structures.

• Traditional crypto MMs: They are generally not comfortable with taking on unhedgeable duration risk, and are currently unreliable partners.

• Specialized managed AMM pools (Arrakis, propAMM models). While it hasn’t been tried before - in theory this is the ideal solution to the liquidity problem (state held constant). AMM liquidity is available for atomic redemptions and the MM operator can customize their pricing to adjust to optimize for yield and inventory-aware pricing. Ac​tive inventory management is the key unlock here, given the pool can redeem its illiquid positions to rebalance as needed. If pool A desires more USD liquidity, they can lower their price on the illiquid asset until pool B deems the yield-to-maturity to be worth making a market for pool A. With enough competition, we should be able to land on fair market pricing.

  • You may ask why I said state-held-constant. If DeFi innovation stagnates here, and the Lindy effect of Aave and Morpho prevent a competitor from achieving meaningful growth, then optimizing AMMs to solve the duration problem will likely be enough. I don’t imagine this will be the case. Specialized credit products like Loopscale, Gearbox, and 3F will probably gain enough market share in RWA leverage to deprioritize AMMs in favor of smarter leverage solutions.

  • Yield: Will a specialized DEX pool generate enough yield to make economic sense? It depends on the amount of flow. If the pool can buy enough of the illiquid asset at a lower price and redeem when available, in theory the LP position yield to maturity should be superior to buying the illiquid asset. Obviously the LP needs to retain some cash to make markets, so there is a cash drag on the LP position. Truth is, we do not know yet. I imagine there will be some protocol or chain willing to incentivize a managed DEX pool just to say they ‘solved the liquidity problem’ and fail in the long term.

• RFQ-based system: Needs users.

• EulerSwap style integrated lending + DEX: It could be a great solution for day-to-day liquidity needs but it internalizes a lot of tail risk if the EulerSwap pool becomes the primary DEX venue. The plus side is that it minimizes losses from cash drag as inactive capital can be lent out. However there are a couple requirements: it only works if the illiquid asset can be used as collateral on Euler, it requires advanced LPs who can price the illiquid credit assets to manage the curve, and comfortably take on a lot of leverage to provide liquidity.

  • The worst case scenario is the ‘when it rains it pours situation’. In the case where EulerSwap is the primary liquidity venue, if the DEX LP has already taken on a lot of leverage to allow swaps out, there is likely some outside event that is forcing large liquidity withdrawals. The LP is likely now heavily imbalanced and may not be able to continue borrowing. The LP’s price for additional duration is sky high and lenders effectively have unrealized bad debt while waiting for settlement. Any lenders that can pull out of a vault will, and the borrowers will be stuck paying triple digit borrow rates while waiting for the redemption request to settle. While bad debt risk can never explicitly disappear, a market’s reliance on the available liquidity for a settlement price is seriously pervasive and hides a lot of risk. Euler is also pretty damn complicated and generally requires advanced management.

• Tap into regular secondary markets: This would require tokenized share = regular share, which currently it does not. Tokenized fund shares are typically feeder funds or are 2-3 entities removed from the asset

My take on where things will end up

• Issuer-offered credit lines: I think several fund issuers will begin to use DeFi products as “credit lines” that they can use to provide liquidity to their offchain LPs. They can skip over complex bilateral NAV loans and offer an ‘early exit’ feature for a fee to those who want it. They can take the LP’s shares as collateral, borrow against them and add leftover equity from within the fund to make the LP whole, taking on the levered position themselves until they decide to close the position. There are a lot of permutations to how this could work, but the key unlock is that they can sell liquidity as a feature to LPs and make money from it. Again, this would require a lending market willing to accept the illiquid asset as collateral.

• Specialized lending markets: This is my best guess to where things are headed. I imagine that we will see programmable lending markets that enable illiquid assets as collateral become the norm. Borrowers take on floating (SOFR-adjusted rates) + fixed duration loans that fit the needs of long term borrowers seeking a levered position on a credit product of their choice. The fixed duration loans may be packaged into vaults, or ABS-like products that could have a secondary market of their own. Instead of purely optimizing for loan-level liquidity, the more efficient solution may be to optimize for lender position liquidity. A functioning credit market will end up looking a lot more like TradFi credit. Fixed income markets will get smarter, its participants will evolve, and they may look totally different. This type of market will mesh very well with my ‘DeFi as a feature’ thesis for asset managers.

  • Shoutout to Loopscale, 3F, and Gearbox. Pay attention as they are making the right moves.

Long term View

My guess for private credit in DeFi is that its current state will not be around for very long. Tokenization will become so cheap and commoditized at the fund administration + custodian level that we will forget the idea of a “tokenization platform.” They will be relics of a different time. Therefore, competition for onchain AUM will increase dramatically. If launching a fund onchain is cheap and easy, everyone can have a tokenized share class and onchain users will have access to anything they want. Fund managers will begin to offer ‘levered’ or ‘liquid’ shares with additional fees that build on the fund’s DeFi composability, and I guarantee that these products will become significant competitive advantages for the managers who are forward thinking enough to adopt them. DeFi will quickly become the world’s greatest feature in the world of private credit.

Will everything move onchain?

Imo this is more of a function of stablecoin adoption rather than asset tokenization adoption. Currently the origination process for credit, real estate, PE, and liquid assets all happens with fiat. People borrow and accept fiat, so those with capital provide fiat. Until businesses and consumers have a good enough reason to use stables for everything (meaning their consumers spend in stables, their suppliers accept stables, and their creditors accept stables) then all of finance being fully onchain is unrealistic. If stablecoins become the primary currency for anything besides crypto trading, then I definitely think the full credit origination system could move onchain. Users deposit stablecoins into vaults managed by Apollo, Blackrock, KKR -> those managers lend out said stablecoins against the tokenized collateral of their borrowers. Maybe all that tokenized collateral will be tradable and have a price.

We don’t know yet!

Interesting things to build:

1. Liquidity systems that get capital onboard. Take some agency as well, raise your own capital and offer your own financial products. Nobody cares about infrastructure anymore; it is now the protocol’s responsibility to offer risk. Take risk, you are more likely to succeed as a market participant than as a marketplace in the current environment.

2. DeFi simplification. Make it so LPs can get a levered share, or exercise instant liquidity without having to use a crypto product.

3. Lending markets that work for RWAs

4. Not a tokenization platform if you are not a custodian, transfer agent, asset manager or fund admin. You sell a Blackberry.

5. Credit origination with stablecoins. A great start would be receivables origination that can prevent borrowers from using the same invoice twice

6. Data analytics with real-time monitoring on redemption windows, yield, secondary market transactions, etc. None of this information is in an API as far as I know and secondary market participants will pay.

7. Private credit fund-of-funds. Chains will incentivize you to deploy capital into assets you are already comfortable with on their blockchain.

Reach out to me if you have been digging into private credit