1. Introduction
The tokenization of real-world assets (RWAs) represents a paradigm shift in finance, promising fractional ownership, global accessibility, and programmable settlement for traditionally illiquid assets like real estate, private credit, and fine art. While technical infrastructure has advanced rapidly—with over $25 billion in tokenized RWAs on-chain as of 2025—a critical bottleneck persists: liquidity. This paper investigates the disconnect between the act of tokenization and the reality of tradability, drawing on recent academic research and market data from platforms like RWA.xyz. We document that most RWA tokens exhibit low trading volumes, long holding periods, and limited secondary market activity, challenging the core promise of 24/7 global markets.
$25B+
Tokenized RWA Market Value (2025)
Low
Secondary Trading Volume
Buy & Hold
Dominant Investor Behavior
2. The Liquidity Paradox: Tokenization vs. Tradability
The central thesis of this research is that tokenization, in its current form, has been more effective at digitizing ownership and enabling primary issuance than at creating vibrant, liquid secondary markets. There exists a fundamental paradox: the technology enables instantaneous, global trading, yet market behavior remains static.
2.1 Market Growth vs. Trading Stagnation
Growth in tokenized RWAs is concentrated in yield-generating instruments like private credit and tokenized treasury funds (e.g., BlackRock's BUIDL). These are often integrated into DeFi protocols but held for income, not traded. Assets that would benefit most from liquidity enhancement—like real estate—remain a small fraction of the market. The data suggests a market growing in size but not in dynamism.
2.2 Empirical Liquidity Observations
Analysis of on-chain data reveals consistent patterns:
- Minimal Transfer Activity: Low frequency of token transfers between wallets indicates a lack of trading.
- Limited Active Addresses: A small number of addresses hold the majority of tokens, suggesting concentrated ownership.
- Long Holding Periods (HODLing): The average duration tokens are held is significantly longer than in purely crypto-native asset markets.
- Negligible Market Depth: Order books on platforms that support RWA trading are shallow, leading to high slippage for any meaningful trade size.
3. Structural Barriers to RWA Liquidity
The liquidity gap is not a technological failure but a consequence of deep-rooted structural, regulatory, and behavioral factors.
3.1 Regulatory and Compliance Gating
RWAs are subject to securities laws, KYC/AML requirements, and jurisdictional complexities. These regulations, while necessary, create friction. Trading often requires whitelisted, accredited investor wallets, instantly shrinking the potential buyer pool and contravening the "permissionless" ideal of blockchain.
3.2 Custodial Concentration and Whitelisting
To manage compliance, tokenized RWAs are frequently held by licensed custodians (e.g., Fireblocks, Anchorage). Trading requires moving tokens between whitelisted addresses within these custodial systems, a process that is neither seamless nor decentralized. This recreates the walled gardens of traditional finance on-chain.
3.3 Valuation Opacity and Information Asymmetry
Unlike a stock with continuous price discovery, the value of a tokenized office building or private loan is not easily determined. Lack of frequent, transparent valuation feeds (oracles) creates uncertainty. Would-be buyers face significant due diligence burdens, chilling trading activity. The valuation problem can be modeled as an information asymmetry where $V_{true}$ (true asset value) is obscured, leading to a bid-ask spread $S$ that is a function of uncertainty $\sigma^2_V$: $S \propto f(\sigma^2_V)$.
3.4 Lack of Decentralized Trading Venues
Automated Market Makers (AMMs) like Uniswap are ill-suited for large, infrequently traded assets. The constant product formula $x * y = k$ leads to devastating slippage for RWAs. Order book DEXs lack the liquidity to function effectively. There is no native, decentralized trading venue designed for the unique constraints of RWAs.
4. Pathways to Improved Liquidity
Solving the liquidity challenge requires moving beyond pure tokenization to address market microstructure.
4.1 Hybrid Market Structures
The future lies in hybrid models: decentralized settlement with compliant, licensed intermediaries for order matching and custody. Think "NYSE meets Ethereum." Platforms could operate periodic batch auctions or dark pools that aggregate liquidity and settle on-chain, minimizing front-running and improving price discovery for large blocks.
4.2 Collateral-Based Liquidity Solutions
Inspired by MakerDAO's use of RWAs as collateral for DAI, liquidity can be unlocked without selling. Protocols could allow RWA holders to borrow stablecoins or other liquid assets against their tokenized holdings. The loan-to-value ratio $LTV$ would be conservatively set based on asset volatility: $LTV = \frac{Loan\,Amount}{Collateral\,Value} \leq LTV_{max}(\sigma_{asset})$. This provides exit liquidity without requiring a buyer.
4.3 Transparency and Standardization Initiatives
Standardized data schemas for RWA metadata (e.g., using IPFS or Ceramic) are crucial. Regular, attestation-based valuation reports from licensed appraisers, published on-chain, can reduce information asymmetry. This mirrors the role of credit rating agencies in traditional bond markets.
4.4 Compliance Innovation and Regulatory Sandboxes
Technologies like zero-knowledge proofs (ZKPs) can enable privacy-preserving compliance. A user could prove they are an accredited investor in Jurisdiction X without revealing their identity. Regulatory sandboxes, as seen in the UK and Singapore, are essential for testing these new models without full regulatory burden.
5. Case Studies and Empirical Analysis
Case Study 1: Tokenized Real Estate Fund (e.g., RealT): While offering fractional ownership of US properties, secondary trading is limited to their proprietary platform with a small user base. On-chain analysis shows tokens rarely move to new wallets outside of primary subscriptions or redemptions.
Case Study 2: Tokenized Treasury Fund (BlackRock BUIDL): A success in digitizing a traditional product, with billions in assets. However, its primary use is as a yield-bearing stablecoin alternative in DeFi. Trading is minimal because its value is pegged to NAV and it serves a specific utility (collateral, yield) rather than a speculative asset.
Case Study 3: MakerDAO's RWA Collateral: A pioneering model for generating utility from illiquid RWAs. Over $3 billion in RWAs back DAI. Liquidity is provided not through trading the RWA token itself, but through the fungible DAI stablecoin it helps mint. This is a clever workaround, not a direct liquidity solution.
Chart Description (Hypothetical): A dual-axis chart would illustrate this paradox. The left axis (bar chart) shows the exponential growth of Total Value Locked (TVL) in RWA protocols from 2020-2025. The right axis (line chart) shows the flat or only marginally increasing trend in daily secondary trading volume as a percentage of TVL over the same period. The widening gap between the two lines visually represents the growing "liquidity gap."
6. Technical Framework and Mathematical Models
To model RWA liquidity, we can adapt traditional market microstructure models. The probability of a trade $P(Trade)$ can be expressed as a function of several constrained variables:
$$P(Trade) = \alpha \cdot \frac{1}{Regulatory\,Friction} + \beta \cdot \frac{1}{Valuation\,Uncertainty} + \gamma \cdot Available\,Counterparties - \delta \cdot Slippage$$
Where $\alpha, \beta, \gamma, \delta$ are weighting coefficients. For most RWAs, the first two terms (friction and uncertainty) dominate, driving $P(Trade)$ towards zero.
Analysis Framework Example (Non-Code): To assess the liquidity potential of a specific RWA project, an analyst can use a weighted scoring framework across key dimensions:
- Regulatory Clarity (Weight: 30%): Is there a clear securities exemption (e.g., Reg D, Reg S) or approval? Is the investor pool global or restricted?
- Valuation Mechanism (Weight: 25%): How frequent, transparent, and credible are the asset valuations? Is there an on-chain oracle feed?
- Trading Venue Design (Weight: 25%): Is there a dedicated secondary market? Does it use an order book, AMM, or hybrid model? What are the fees and slippage parameters?
- Asset Fungibility (Weight: 20%): Is the token standardized (ERC-20/ERC-1400/ERC-3643)? Are tokens from different issuers/properties interoperable?
A project scoring low on Regulatory Clarity and Valuation Mechanism is likely to remain illiquid regardless of its technical tokenization.
7. Future Applications and Market Evolution
The next phase of RWA tokenization will focus on "liquidity by design." We will see:
- Specialized RWA DEXs: Next-generation DEXs using batch auctions, request-for-quote (RFQ) systems, or bonding curves parameterized for low-volatility assets.
- Fractionalized Derivatives: Trading derivatives (options, futures) on tokenized RWAs, which are more capital-efficient and fungible than the underlying assets.
- Interoperable RWA Standards: Widespread adoption of standards like ERC-3643 (security tokens) and ERC-1400 (partially fungible tokens) to create composable, cross-platform liquidity pools.
- AI-Powered Valuation Oracles: Machine learning models trained on real estate, commodity, and credit data providing continuous, probabilistic valuation ranges on-chain.
- Institutional-Grade DeFi Vaults: Vaults that accept a basket of tokenized RWAs as collateral and mint a fungible, liquidity-provider token, effectively securitizing the illiquidity premium.
Analyst's Insight: A Reality Check on the RWA Narrative
Core Insight: The paper delivers a crucial, sobering reality check: tokenization is a necessary but far from sufficient condition for liquidity. The industry has been conflating technological possibility with market reality. We've built the digital shelves, but forgot that people need a reason to browse and a easy way to buy. The $25B+ figure is a vanity metric that masks profound market failure in secondary trading.
Logical Flow & Strengths: The argument is logically airtight. It moves from the observed paradox (growth without trading) to empirical proof (on-chain data), then systematically dissects the root causes (regulation, custody, valuation, venue design). Its strength lies in grounding a often-hyped topic in cold, hard data from RWA.xyz and academic literature. The case studies on BUIDL and MakerDAO are particularly effective—they show that even the most successful projects are workarounds, not solutions to the core liquidity problem.
Flaws & Omissions: The paper could go further in criticizing the current business models. Many RWA platforms are essentially digitizing private placements—a lucrative but niche business that doesn't scale to a global, liquid market. It also underplays the behavioral hurdle: investors in real estate or private credit are culturally buy-and-hold; changing that mindset is as hard as changing the technology. Furthermore, it doesn't sufficiently address the existential threat: if the primary utility of an RWA token is to be locked as collateral to mint something else (like DAI), then the token itself may never need a liquid secondary market. This could be the actual end-state.
Actionable Insights: For investors and builders, the message is clear: stop chasing the "tokenize everything" hype. Focus on assets where liquidity is a realistic outcome. This means prioritizing:
1. Reg-light assets: Start with assets that are not clearly securities (e.g., certain commodities, revenue-sharing agreements) or operate in clear regulatory sandboxes.
2. Build liquidity first: Design the trading venue and incentive mechanisms (e.g., liquidity mining for market makers) concurrently with the tokenization standard.
3. Embrace hybridity: Purist decentralization has failed here. Partner with licensed intermediaries for custody and compliance; use blockchain for immutable settlement and transparency. The winning model will be a hybrid.
The paper's conclusion is correct but stark: realizing the liquidity potential demands a coordinated siege on legal, technical, and institutional fronts simultaneously. We're in the trench warfare phase of this revolution, not the blitzkrieg.
8. References
- Mafrur, R. (2025). Tokenize Everything, But Can You Sell It? RWA Liquidity Challenges and the Road Ahead. arXiv preprint arXiv:2508.11651.
- Catalini, C., & Gans, J. S. (2020). Some Simple Economics of the Blockchain. Communications of the ACM.
- RWA.xyz. (2025). The State of Tokenized Real World Assets. Market Data Report.
- Gensler, G. (2023). The Implications of Crypto-Tokenization for Securities Markets. SEC Public Statement.
- World Economic Forum. (2023). Blockchain and Digital Assets: Transforming Real Estate.
- MakerDAO. (2024). Real-World Asset Collateral Status Reports.
- BlackRock. (2024). BUIDL Tokenized Money Market Fund Prospectus.
- Zhu, H., & Zhou, X. (2021). The Economics of Decentralized Market Making. Journal of Financial Economics.