RWAs (Real World Assets) is one of the strongest growth verticals in DeFi, and for a good reason. RWA is an umbrella term used for all types of assets, like commodities, cash, real estate, and anything else you can think of.

Our interest lies in the tokenization of these assets.

Tokenization - in simple terms creating a digital token hosted on a blockchain as a representative of your physical/traditional assets

This allows for a shift in the way these assets are accessed. Users with tokenized RWAs gain access to whole new avenues in the form of blockchain based financial services i.e. DeFi (Decentralized Finance)

The firsthand benefits that are unlocked post-tokenization include:

1. Instant Liquidity Acquisition : Assets like the ones we mentioned above are traditionally illiquid assets, once tokenized, these can be deployed as collateral or used for other cases, allowing users instant liquidity as per their convenience.

2. Risk Profiling : Tokenized RWAs allow for instant transparency and auditability, making it easier to prepare a risk profile for any party, enabling more accurate asset valuation.

3. Capital Based Opportunities : Traditionally, putting RWAs to use would have been a time-consuming process but with tokenization we expedite the process of leveraging RWAs and make value extraction easier by a lot.

With over $27 billion in Total RWAs onchain, primarily driven by private credit, the potential is enormous. The tokenized private credit sector has ~60% market share of the RWA sector, but still is very small when compared to the traditional lending sector. YoY, we see huge growth as more institutional liquidity providers deploy pools to establish credit lines for higher yield, while maintaining stability.

With this blog we aim to summarize and make the whole lending system easy to understand for someone who may not be as familiar with the working of cryptocurrency overall.

Evolution of Lending: Banks to Private Credit

A couple of decades ago, if you wanted to get your hands on some capital, any sane person would head to a bank and apply for a line of credit. This process was tedious and opaque, with interest rates set by the bank. In 2008, we saw a complete downhill run of the credit industry due to the housing crisis in the West. Banks kept issuing bad loans. The loans were being defaulted upon, ultimately hurting the economy, in short.

However, with every crash comes opportunity. We saw a surge in NBFIs (Non Banking Financial Institutions), private debt funds, and direct lenders establishing themselves in the private credit space and becoming the go-to choice. Regardless of these shortcomings, the private credit sector market capitalization stands at a huge $1.67 trillion. If we assume an 11.62% CAGR, we can see it nearing $3 trillion.

After securing capital, we saw two distinct use cases post-deal finalization:

Consumption — Loans were used to pay off active payments like mortgages, credit cards, and more.

Leverage — Loans were used to acquire more assets that would outperform the current cost of capital; popular examples would be trading, business loans, etc.

What happened earlier ended up repeating itself in some senses: borrowers saw more friction in the means of opaque terms of the deal, extended lock-up periods, and higher funding rates. This made the solution seem like the problem once again.

Another change was needed and not in the form of ideology but infrastructure, with
Decentralized Finance picking up, the lending ecosystem was sure to see changes.

An example of bad underwriting is, as we mentioned above, the 2008 housing crisis, where we saw bad underwriting lead to huge amounts of loan defaults, causing a tear in the economy at the time.

Here’s how this age-old practice translated into DeFi.

Out of all use cases, Blockchain in loan verification is at just a 10% adoption rate compared to others. This is due to the underlying complexity that comes when assessing risk of a loan. This process of risk assessment is called underwriting.

DeFi Lending

Lending has been a huge market with >$78 billion Total Value Locked onchain. DeFi summer brought lending into focus, OG protocols like Aave and Compound have evolved over the past four years. There have been new entrants like Morpho, Euler, etc., but the market has been largely dominated by Aave with ~50% share of the TVL on lending protocols.

In DeFi, lending generally falls into two categories:

1. Collateralized Lending

Under-collateralized Lending (Tokenized Private Credit)

Collateralized Lending Products

Collateralized lending products, such as those offered by Aave and Compound, follow two primary principles:

• LTV (Loan-to-Value Ratio): This metric determines how much you can borrow for a given amount of collateral. LTV is driven by both the price and volatility of the asset. Lower volatility results in higher LTVs and vice versa.

• Liquidation Threshold: If the value of your collateral falls below a set threshold (e.g., 125% of the loan value), the contract will automatically liquidate the collateral to recover the lender's funds.

In these lending pools, interest rates are also determined by interest rate curves, which adjust based on the pool’s utilization. The higher the utilization, the steeper the curve—meaning interest rates rise as the pool gets closer to being fully lent out. Put simply, pool saturation is proportional to increase in interest rates for borrowers.

Why Collateralized Lending Works

The primary advantage of collateralized lending is security. Borrowers are required to post collateral, creating a failsafe mechanism: if the collateral value declines, liquidation is triggered before any default risk becomes significant. This system is highly effective because it allows lenders to recover their funds by selling the collateral, eliminating the worry about defaults.

However, this approach is only feasible for those who have assets to pledge as collateral. So, what happens when borrowers don’t have onchain assets to back their loans?

Collateralized borrowing is a common practice among both households and businesses. In fact, early studies on U.S. bank lending show that nearly 70% of commercial and industrial loans are secured by collateral “(Berger and Udel, 1990)”. This method is designed to address market frictions caused by information asymmetry, where lenders struggle to distinguish between low- and high-risk borrowers. By requiring collateral, lenders gain the assurance that, in the event of default, they can at least partially recover their funds.

One of the most notable examples of collateralized lending is real estate-backed loans, where homeowners use their properties as collateral to secure financing. The value of real estate generally appreciates over time, providing lenders with a solid level of security. In the U.S. alone, this market is valued at approximately $2.8 trillion, with relatively low delinquency rates, making it a significant and stable segment of collateralized lending.

The Hard Part: Under-collateralized Lending

Under-collateralized lending means borrowers can access funds without posting any collateral. Sounds great, right? This is a huge market with very simple examples in real life - credit cards.

About 190 million Americans hold credit cards, and nearly 60% carry a balance. It’s a trillion dollar market with different companies using data coming from sales, revenues and salaries to issue loans to individuals and corporations.

On the corporate side, almost all of the companies avail working capital through their existing revenues, sales and profits numbers. This is popularly known as revenue based financing. Companies like pipe.com have been doing it for years without defaults, kudos to their strong underwriting algorithms.

The bottom line is, establishing a line of credit is crucial for businesses to keep operations running smoothly. A supply of instant liquidity helps keep expenditures afloat for the company and lets them focus on the operational side.

How is this enabled?

This is a growing segment as the users are increasing their digital footprint which could be used for underwriting. Alternate data sources like social, shopping interactions, and payment behaviour are used to allow different lending products altogether.

Importance of data and underwriting

Unsecured loans success depends on two things: very accurate credit data and strong credit risk models. If there’s a misinformation or lack of critical data, it can lead to adverse selection. It causes catastrophic losses and even bankruptcy due to defaults as there is no collateral to recover money from, it's all unsecured.

These markets are high-yielding and can enable enormous value to flow onchain. It could enable folks with good credit history to avail loans onchain, just by attaching their identity and credit scores to their wallets. DeFi has tried to do it, but falls short at the risk evaluation piece, making it hard to scale onchain.

If risk is evaluated correctly we can see stable investor upside as well as less borrower defaults, leading to a sustainable capital deployment and repayment lifecycle.

How big is the opportunity for DeFi ?

While overcollateralized lending is the status quo in DeFi, loans in traditional finance are often under-collateralized or even fully uncollateralized in the form of unsecured loans. Typically, this takes the form of personal loans, student loans, and credit cards. For instance, when a consumer makes a purchase with a credit card, they are borrowing funds uncollateralized from a bank and settling at a later date.

With over 485 million issued credit cards, 43 million student loans, and 20 million personal loans in Q4 2021, the market for unsecured debt is a massive part of the US economy, touching $500 billion this year.

The unsecured personal loan market in the US alone is greater than the entire value locked in DeFi and an order of magnitude greater than the value locked across all DeFi lending protocols today.

Introducing undercollateralized lending into DeFi at scale would enable a massive amount of economic value to enter the ecosystem. Rather than dealing with the friction of borrowing capital from centralized intermediaries, consumers can take loans from decentralized applications in minutes with nothing more than an Internet connection.

With smart contracts reducing the counterparty risk of financial platforms, lenders can generate a greater yield on their capital and borrowers can be provided loan terms with superior capital efficiency without the fear of discrimination.

State of under-collateralized lending in DeFi

There have been a lot of attempts at under-collateralized lending in DeFi with focus on different underlying real world loan products, there have been ~$28 billion worth of loans issued till date.

On a high level, there are two main categories

1. Loans to fintech asset originators : This category involves real-world loans to non-crypto businesses like fintechs. These originators are lending companies/funds offering structured debt, real estate bridge loans, SME financing.

2. Loans to crypto market makers : Borrowers in this category generate revenue by trading or providing liquidity to crypto exchanges, their revenues are primarily driven by the crypto trading growth.

If we look at the distribution, market makers segment have achieved higher volumes compared to fintech, primarily driven by high volume short term loans. Most volume is from loans which were distributed to market makers in 2022 before FTX collapse.
However, fintech originator category has more active loans now attributed to recent growth of protocols.

Yields

This brings us to the comparative returns of under-collateralized versus collateralized lending products. The higher risk in un-collateralized lending involved is reflected in the higher annual percentage yield (APY) on their loans compared to overcollateralized lenders like Aave and Compound.

Current APYs are in the range of >10%

Here are some of the notable players in the industry working on it:

Risk Assessment Methods

Risk assessment is a very important piece here because the assets are not onchain and it has default risk. There are different types of techniques used by protocols to assess the risks involved in the underlying assets. We can see different protocols using different types of collateral, underwriting techniques and varying investor bases too.

Here’s how each of them work.

Defaults

Under-collateralized lending in DeFi has grown quickly, with leading protocols already tokenizing over $30 billion onchain. But alongside this growth, the sector has suffered major losses. Several high-profile defaults have exposed weaknesses in how private credit is managed onchain, with RWA.xyz reporting nearly ~$120 million in defaults till date across protocols.

The Core Problem: Adverse Selection

Under-collateralized lending in DeFi faces one central challenge: adverse selection — the tendency for weaker borrowers to dominate, which leads to higher defaults and losses.

A common argument is that the “best” borrowers go to traditional finance (TradFi), while the “worst” are left to borrow in DeFi. While that may be true in some cases, it doesn’t tell the full story. In fact, there are high-quality institutional borrowers actively seeking credit from DeFi platforms. The significant TVL on private credit protocols and our own borrower pipeline — many of whom also borrow from TradFi — prove that demand exists. The reason is simple: DeFi offers new capital sources and, in some cases, more competitive rates.

So if good borrowers exist, why does adverse selection persist? The issue isn’t just who comes to DeFi — it’s how underwriting is done. Adverse selection in DeFi is fundamentally an underwriting problem, driven by two phases: data gaps and incentive misalignments.

1. Lack of Reliable Data & Risk Infrastructure

• Many protocols lack the infrastructure — or willingness — to capture complete borrower financials and creditworthiness.

• Due diligence is often limited to the asset originator, not the underlying loan pool, leaving gaps around asset quality, risk correlations, and borrower-level health.

• Active monitoring (collateral tracking, covenant checks, performance triggers) is rare post-loan issuance.

• By contrast, fintech lenders in TradFi lend to the same borrower base with far lower NPAs because they follow disciplined practices around data collection, risk modeling, and ongoing monitoring.

2. Lack of Incentive Alignment in Underwriting

• In most DeFi protocols, underwriting is performed by asset originators, pool delegates, or credit committees. These groups often have little or no skin in the game.

• Capital comes from crowdsourced liquidity providers, but the decision-makers face limited downside if defaults occur.

• This creates a bias toward volume over quality, prioritizing filling pools rather than selecting the strongest assets.

• Worse, the underwriting process remains centralized and opaque — driven by reputation, relationships, or even “vibe-based” borrower selection instead of transparent, data-driven models.

• Although some protocols have tightened standards after recent defaults, the market is still far from operating at the rigor needed for sustainable growth.

  
  

The evidence is clear: without robust, transparent, and verifiable credit underwriting frameworks, the promise of tokenized credit markets cannot be fully realized. DeFi must evolve toward the same risk management discipline that underpins traditional finance—only then can investor confidence and sustainable growth follow.

Closing

The movement of credit onchain opens one of the most significant opportunities in global finance. With stablecoins and blockchain rails, capital can move instantly, across borders, and into real-world use cases such as supply chain financing, capex expansion, trade financing, and even DePIN infrastructure. This is the foundation for a more open, efficient, and inclusive credit market.

Yet, the biggest challenge still remains: underwriting. Without accurate credit evaluation, aligned incentives, and strong risk management, onchain private credit cannot scale sustainably. Losses will persist, and investor confidence will lag.

That is why the next frontier for DeFi is not just faster money movement, but verifiable, transparent underwriting. This is where the future of private credit will be won. And it’s exactly what Qiro is building toward, ensuring that lending is not only onchain, but trusted to stay there, forever.