The Case for Asset-Backed Securities on Blockchain

The Tokenization Hype: Misalignment with DeFi Reality

In recent years, “tokenization” has dominated discussions around blockchain’s role in transforming traditional finance. From stablecoins to tokenized investment funds, various asset classes have been brought “on-chain.” Institutional adoption is also accelerating, as seen with Ethereum’s dedicated institutional initiatives with @Etherealize_io. These frameworks further legitimize tokenized asset markets and pave the way for scalable, regulated deployments.

Yet, in practice, these efforts have rarely met expectations. Despite the compelling narrative, most tokenized assets remain largely inactive. Regulatory restrictions, KYC/AML requirements, and a lack of native on-chain utility have led to significant underutilization. Institutional players may hold these as proofs-of-concept or for optics rather than as meaningful tools for yield optimization or risk management. Typically, trading is limited, redemptions are constrained, and organic user adoption remains elusive. The result is an ecosystem where assets are mostly mirrored on public ledgers rather than fundamentally transforming the existing capital structure.

Asset-Backed Securities: A Natural Fit for Blockchain

Among various candidates for on-chain integration, asset-backed securities (ABS) stand out due to unique structural features that align closely with blockchain’s technical capabilities. Unlike other financial instruments, ABS have rigid, deterministic cash-flow rules and involve a complex network of intermediaries, many of which can be partially eliminated by using smart contracts. According to PIMCO, the global ABS market is estimated to be worth $14 trillion in 2025. Given this scale and complexity, there is a tremendous opportunity for blockchain to streamline ABS issuance and administration while reducing costs and increasing transparency. Smart contracts can automate the intricate payment waterfalls of ABS, remove redundant intermediaries, and provide real-time, tamper-proof recordkeeping. This modernization could drastically transform the on-chain landscape.

What are Asset-Backed Securities?

Asset-backed securities (ABS), which include related terms such as securitization, structured products, and structured credit, refer to financial instruments backed by pools of income-generating assets such as auto loans, mortgages, or credit card receivables. These assets serve as collateral, and the cash flows generated are allocated to investors according to a “waterfall” structure that defines the order of payments. Senior tranches are paid first, followed by mezzanine tranches, and then subordinated or equity tranches. Lower tranches absorb losses first and therefore carry higher risk, but also offer the potential for greater returns.

Previous and Emerging Institutional Experiments

Previous attempts to launch purely on-chain imitation versions of ABS, such as Tranchess or BarnBridge, have struggled to gain substantial traction. In contrast, traditional asset managers like Janus Henderson (@JHIAdvisors) have begun experimenting with tokenization by bringing their AAA CLO ETF (JAAA) on-chain in partnership with @Centrifuge. While these efforts represent tokenization of established products rather than true native on-chain ABS protocols, they offer a promising model for integrating real-world assets and legacy capital markets with blockchain infrastructure.

Key Advantages of Tokenizing ABS

1. Deterministic Waterfall Logic

Asset-backed securities cash flows follow strict rules that dictate the priority and amount of each payment. The typical hierarchy for distribution is as follows:

• Fees & expenses (trustee, servicer, legal, etc.)

• Senior note interest and principal

• Mezzanine note payouts

• Junior/subordinated note payouts

• Residual payments to equity holders

These allocation rules are entirely algorithmic, allowing cash flows to be mechanically apportioned when specific collection and expense thresholds are met. This deterministic structure is ideal for smart contract automation. Since cash flow allocations strictly adhere to contractual terms, there is no ambiguity or need for subjective interpretation. Unlike other financial products that require human judgment and interpretation, ABS waterfalls can be executed precisely and transparently, effectively eliminating operational risk.

2. Eliminating the Intermediary Tax

Traditional asset-backed securities (ABS) structures involve numerous intermediaries:

• Trustee

• Servicer

• Backup Servicer

• Calculation Agent

• Accountants

These intermediaries perform essential functions such as administering the trust, overseeing cash flow disbursements, managing delinquencies, and conducting audits. However, each charges fees and introduces reconciliation delays, contributing to the “intermediary tax.” While some cannot be eliminated due to legal obligations, a significant portion of monitoring, calculation, and disbursement can be automated through smart contracts. This reduces costs and allows a larger share of underlying asset yield to reach tranche holders, improving efficiency and attractiveness.

3. Streamlining Information Flow and Transparency

ABS administration today requires multi-party reconciliation:

• Servicer: Tracks individual loan performance

• Trustee: Maintains trust accounts and payment records

• Calculation Agent: Manages the waterfall payment calculations

• Rating Agencies: Update surveillance models

• Investors: Monitor positions separately through custodians

Each month or quarter, these separate systems must reconcile with each other. This reconciliation process is time-consuming and can take 25 days or more from the moment servicers receive loan payments to when investors receive statements. During this period, capital remains idle in collection accounts, tying up funds and reducing capital efficiency. Blockchain provides a single, immutable ledger accessible in real-time, reducing errors and delays while ensuring regulatory compliance via tamper-proof audit trails.

Broader Market Access and Implications

ABS markets have traditionally been dominated by institutional investors. However, on-chain tokenization could enable fractionalized, around-the-clock trading, opening AAA-rated tranches and even riskier tranches to a wider investor base, including treasuries and DAOs within DeFi ecosystems. These tokenized ABS could also serve as collateral for stable yield products, such as SKY’s sUSDS or USDC, especially as yields for treasuries and money market funds compress in a lower interest rate environment.

This shift not only broadens access to ABS but also enhances the utility of tokenized assets within DeFi protocols. Looking ahead, these innovations may pave the way for expanding ABS availability to retail investors, likely with regulatory safeguards and restrictions. One potential example could be asset managers like @plumenetwork or @gauntlet_xyz creating vaults blending multiple ABS products and tranches, abstracting underlying securities and complexity for diversified and simpler yield exposure. This conceptual development represents a promising path to expand access for both retail and institutional participants alike.

Closing Thoughts

This article does not aim to predict which blockchain or company will pioneer the tokenization of asset-backed securities (ABS). However, the ABS market stands to benefit significantly from on-chain integration. Earlier attempts to onboard financial institutions onto blockchain have often lacked clear and tangible benefits, and competition among L1 chains has fragmented efforts.

ABS’s defined payment structures and smart contract compatibility make them an ideal blockchain use case. Although full automation of all intermediary roles may take time, smart contracts promise substantial reductions in cost, friction, and settlement times, creating value for originators and investors.

As TradFi and DeFi converge, practical applications like ABS tokenization offer a compelling pathway forward, driving adoption, transparency, and efficiency where most needed. Despite uncertainty over which platforms or protocols will adopt, continuous experimentation and innovation are essential to disrupt the established status quo. Tokenized ABS could be more than mere optics: This is a use case worth building.

Source

• PIMCO, “Understanding Securitized Products,” 2025

• Guggenheim, “The ABCs of Asset-Backed Securities,” 2023

• UK National Audit Office, “Introduction to Asset-Backed Securities,” 2016.