Private credit is the most active category for on-chain tokenized assets. Recent bankruptcies and value write-offs in private credit are causing concerns about the crypto space and the usage of tokenized loans.
Private credit is one of the fastest-growing categories in traditional finance, which has crossed over into the crypto space. Private credit is estimated to grow to $2.6T by 2029, according to Morgan Stanley estimates. Others put the industry size at $3T already toward the end of 2025.
Private credit invited extra scrutiny after US Senator Elizabeth Warren urged for more oversight of the sector. The call for investigation arrived after the recent implosions of Tricolor Holdings and First Brands Group. The expansion of private credit raised concerns of toxic, non-transparent risk. Tokenized private credit is still finding its way into the DeFi space, but it has shown how the uncertain valuation of loans can affect crypto projects.
Private credit may inject more risk into crypto space
Private credit lumps together loans from multiple sources. According to RWA.xyz, $2.1B in private credit has been tokenized, up from just $49,000 at the end of 2024. The rapid inflow of tokens based on private credit is raising questions about whether crypto finance can absorb the risk.
Over $14B in private credit is already carried by the Figure HELOC token, although the asset is only traded on its internal market. Other tokenized private loan tokens have found their way into DeFi.
Tokenizing a basket of loans further obscures the quality of assets and can threaten crypto protocols.
Morpho turned into a vector for private credit risk
Morpho, one of the most widely used lending protocols, has already gained a reputation for supporting risky vaults and allowing user-generated curation. Most of the vaults on Morpho use crypto assets as collateral.
Some specialized vaults have started giving credits for packaged, tokenized private loans. Morpho adopted Fasanara’s F-ONE products, one of the fund’s flagship products. The package of private loans was tokenized by Midas, with the mF-ONE ticker. Fasanara has created its product mostly based on small and medium enterprise private credit.
Selected Midas users can borrow USDC against mF-ONE tokens, tapping around $2B in stablecoin liquidity.
The vault used mF-ONE as regular collateral, causing no problems for Morpho. The lending market was also curated by Steakhouse Finance.
The problem arrived when Fasanara had to write off 2% of its fund value to better reflect the valuation of the packaged loans. This affected the high-risk Smokehouse USDC vault, curated by Steakhouse Finance.
The vault is still considered reasonably risk-free, currently carrying over $23M in available liquidity. The Smokehouse mF-ONE USDC vault turned a year old today and has been healthy in terms of collateral and liquidity. Only 36 wallets hold mF-ONE tokens, based on Etherscan data.
Steakhouse explained that a 2% drop in the collateral price was not a problem, especially given the much higher crypto volatility.
Despite the low impact, startups like D2 Finance warned that tokenized private loans may not be suitable for crypto DeFi platforms. D2 also warned Obex about using RWA collaterals in the Sky Ecosystem.
Obex raised $37M, aiming to turn into an incubator, issuing RWA-backed stablecoins. A move like that can increase the contagion potential from tokenized private loans. Issuing stablecoins based on private loans can lead to the loss of collateral value and de-pegging.
