Layer One: Could tokenization help avert a private credit crisis?

Welcome to Layer One: the newsletter and podcast on the intersection of crypto and the real world. Hosted by Steven Gates and Kelvin Sparks, Layer One brings you inside the conversations driving blockchain forward.

Last week we were joined by Santiago Santos, founder and CEO of Inversion Capital, to discuss his fundamentals-first investment thesis and how some major blockchains could be significantly overpriced.

In this edition of the Layer One newsletter, we're looking at how the tokenization revolution is overhauling business models across traditional finance (and how this could help the health of the entire industry).

Could tokenization help avert a private credit crisis?

Last week, Inversion Capital CEO Santiago Santos gave us insights into his firm’s investment thesis: “margin expansion through rails substitution.” In other words, acquiring low-margin businesses then rewiring them with stablecoins. This increases their profitability by eliminating the fees associated with legacy payment systems.

Inversion’s website estimates that $1.25 trillion of global 30-day stablecoin volume represents $19 billion in fee savings. These figures are set to grow further as stablecoins increasingly become the default payment rail for modern finance. Last month, stablecoin trading volume on Solana alone surpassed $650 billion (more than double the prior record).

BlackRock CEO Larry Fink suggested last year that “tokenisation could advance at the pace of the internet” as more firms embrace the enhanced efficiency it brings. One golden example of this is private credit firm Figure, which uses its own Provenance Blockchain to run onchain consumer loan markets. The firm specializes in home equity lines of credit (HELOCs), which allow users to leverage their real estate as collateral for loans.

Santos estimated that tokenization has brought down the average cost to service such loans by almost 95%, from $11,000 to just $700. This in turn means Figure can service segments of the market that were previously not financially viable. This business model has seen it grow to a market cap of over $6.5 billion, with $8.4 billion in yearly loan volume processed on its marketplace.  

The potential for companies like Figure to modernize the private credit markets is only just beginning to be explored. According to data from The Block, tokenized private credit volume recently topped $22 billion, representing just over 40% of the total RWA volume onchain. Yet still this pales in comparison to the $4 trillion global private credit market.

This sector — which broadly covers any non-bank lender —  saw explosive growth in the wake of the 2008 financial crisis, when banks were forced to retreat into more conservative lending strategies. Private lenders stepped in to fill the gap, driving a fivefold increase in privately issued loans over the following 15 years.

However, the collapse of several private credit firms in recent months has renewed fears that the sector may be overdue for a reckoning. Most recent was the collapse of London-based lender Market Financial Solutions last week. The firm is alleged to have engaged in double-pledging — using the same collateral to take out multiple loans — ultimately leaving them short of $1.3 billion in collateral.

This echoes the collapse of US auto loan company Tricolor in September last year, which has led to federal fraud charges against its executive team. In both cases, major banks exposed to these businesses were forced to absorb losses and watch their own stocks take a hit. The UK’s Barclays is reportedly due around $667 million in the wake of this most recent incident.

What these incidents lay bare is the opaqueness and inefficiency of these systems. Loans are processed in much the same way as 100 years ago, largely out of sight of regulators. Ultimately, this means the scale of the problem is unknowable, but as Jamie Dimon of JPMorgan Chase put it: “when you see one cockroach, there are probably more.”

There’s a clear need, then, for crypto firms to continue retrofitting this antiquated system, bringing efficiency and transparency to a space that’s notoriously short on both.

Podcast Recap: Santiago Santos' framework for surviving cycles

In the Headlines: The stories driving the conversation this week

• Eric Trump has labelled major US banks “anti-American” and “anti-consumer” for lobbying against stablecoins. The latest episode in this long-running saga saw the US president’s son berate major banks, including JPMorgan Chase and Bank of America, for “spending millions” to ban crypto firms from offering 4-5% yield on stablecoins. The two industries remain in a deadlock which has kept key crypto market structure legislation tied up in the Senate since 2025.
• Sui has launched its own stablecoin in partnership with Bridge. The USDsui coin — “a unified digital dollar, purpose-built for scalable finance and global payments" — has been in development since last year and went live this week. Stablecoin issuer Bridge was acquired by payments giant Stripe last year for a reported $1.1 billion: a high-profile example of the growing crypto adoption among fintech firms.
• The Avalanche Foundation has launched a multimillion-dollar grant incentive for builders in the C-Chain ecosystem. The Retro9000 initiative sees protocols awarded with retroactive grants from a $40 million pool for generating transaction volume on the chain. Participation applications for this latest round will remain open until March 18.

Top of the Charts: FIGR shares peaked at ~$74 during its January highs

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Layer One is brought to you in collaboration with Avalanche.