null Author | @ballsyalchemist Compiled by | Odaily Planet Daily (@OdailyChina) Translator | Dingdang (@XiaMiPP) Liquidity is a prerequisite for assets to gain confidence. When the market has sufficient depth, large sums of money can be absorbed smoothly, whales can freely build positions, and assets can be used as reliable collateral. This is because lenders know they can withdraw at any time if needed. However, if the asset itself lacks liquidity, the situation is completely reversed. Shallow liquidity makes it difficult to attract users, and insufficient users further compress trading depth, ultimately forming a self-reinforcing "liquidity depletion cycle." Tokenization was initially highly anticipated: it was seen as a key tool to improve capital liquidity, unleash the financial utility of DeFi, and connect on-chain and off-chain assets. Ideally, trillions of dollars of traditional financial markets would be brought on-chain, allowing anyone to trade freely, borrow and lend collateral, and perform combinations and innovations in DeFi that are difficult to achieve in the traditional financial system. However, the reality is that beneath the surface of prosperity, most tokenized assets operate in extremely fragile, illiquid markets, simply unable to support meaningful capital volumes. "Liquidity," a prerequisite for financial composability and practical utility, has not truly materialized. These problems are not apparent in small transactions, but once funds attempt to flow at scale, the hidden costs and risks quickly surface. The Current Liquidity Reality The first hidden cost of tokenized assets is slippage. Taking tokenized gold as an example, the following chart compares the expected slippage of major centralized exchanges and the traditional gold market at different transaction sizes; the difference is immediately apparent. PAXG/XAUT Perpetual and Spot vs CME Deliverable Gold Futures: Trading Size and Slippage As trading size increases, the slippage of PAXG and XAUT perpetual contracts rises rapidly and exponentially. At a notional trading volume of approximately $4 million, the slippage is already close to 150 basis points. In contrast, the CME slippage curve is almost flush with the horizontal axis, nearly imperceptible. At the spot market level, the liquidity constraints of PAXG and XAUT are even more pronounced. Even when selecting their respective most liquid spot trading venues, the effective depth provided by their order books on either the buy or sell side is less than $3 million. This liquidity cap is directly reflected in the fact that the curves "truncate" prematurely at smaller transaction sizes. The right side separately shows the slippage curve of CME, whose nearly flat shape directly reflects the depth advantage of traditional markets. Even with transaction sizes far exceeding $4 million, expected slippage remains highly stable. A $20 million gold futures trade experiences a price impact of less than 3 basis points. In terms of scale, CME's liquidity depth is far beyond that of any similar product in the crypto market. This difference has direct consequences. In traditional deep markets, even large transactions have negligible price impact; however, in the shallow markets of tokenized assets, the same operation immediately incurs considerable costs, and the difficulty of closing positions increases rapidly with the size of the transaction. The daily average trading volume comparison below clearly illustrates this gap, and this problem isn't unique to the gold market; it applies to other assets as well. CME Gold Futures vs PAXG / XAUT Perpetual and Spot: Daily Average Trading Volume Comparison The above discussion primarily focuses on CEXs. So, would the situation be better if we switched to AMM DEXs? The answer is quite the opposite; the situation would only be worse. For example, in an XAUT transaction in February 2025, a user spent 2,912 USDT but only received XAUT worth approximately $1,731 based on the then-current gold price, effectively paying a premium of 68%. In another transaction, a user exchanged approximately $1.107 million worth of PAXG (at the then-current gold price) for 1.093 million USDT, resulting in a slippage of approximately 1.3%. While not as extreme as the former, such slippage is still unacceptably high when price shocks in traditional markets are typically measured in single-digit basis points. Furthermore, over the past six months, the average slippage for XAUT and PAXG transactions on Uniswap has consistently remained between 25 and 35 basis points, and has even exceeded 50 basis points at certain times. Average Absolute Slippage of XAUT and PAXG on Uniswap V3 This article chooses gold as the primary subject of analysis because it is currently the largest non-USD, non-credit-based tokenized asset on-chain. However, the same issue arises in the tokenized stock market. NVDAx / TSLAx / SPYx vs Nasdaq NVDA / TSLA / SPY: Trading Volume and Slippage TSLAx and NVDAx are currently among the top-ranked tokenized stocks by market capitalization. On Jupiter, a $1 million TSLAx trade experiences slippage of approximately 5%; while NVDAx slippage reaches a staggering 80%, virtually rendering it untradeable. In contrast, in traditional markets, a similarly sized Tesla or Nvidia stock trade experiences price shocks of only 18 and 14 basis points respectively (this doesn't even include over-the-counter liquidity such as dark pools). These costs are easily overlooked in small trades, but become unavoidable as trade size increases. Insufficient liquidity directly translates into real losses. Why are tokenized markets more dangerous? The problems caused by insufficient liquidity extend beyond transaction costs; it directly undermines the market structure itself. When market liquidity is thin, price discovery mechanisms become vulnerable, order book noise is significantly amplified, and oracle data sources are also affected by this noise. In highly interconnected systems...Even extremely small transactions can trigger huge ripple effects. In mid-October 2025, PAXG experienced two noticeably "abnormal" events on the Binance spot market within a week. On October 10th, the price fell by 10.6%; on October 16th, the price surged by 9.7%. Both fluctuations quickly returned to their original levels, almost certainly not due to changes in fundamentals, but rather a direct manifestation of order book fragility. Due to the highly interconnected nature of tokenized asset ecosystems, such instability is not confined to a single exchange. Binance spot accounts for the highest weight in Hyperliquid's oracle construction; therefore, during these two abnormal fluctuations, $6.84 million in long positions and $2.37 million in short positions were liquidated on Hyperliquid, exceeding the scale of liquidations on Binance itself. This result is worrying. It illustrates that a single illiquid market is sufficient to amplify and spread volatility across multiple trading venues. In extreme cases, this structure can even increase the risk of oracle manipulation. Even without participating in the original spot market, other traders may passively suffer losses due to liquidation, price distortion, and widening spreads. Ultimately, all these problems stem from the same fact: the main market lacks genuine, scalable liquidity. (PAXG liquidation chart on Coinglass) Insufficient liquidity is a structural problem. The lack of liquidity in tokenized assets is a structural problem. Liquidity doesn't automatically arise simply because an asset is tokenized. It depends on the continuous supply from market makers, who are themselves subject to strict capital constraints. They allocate funds to markets where inventory turnover is efficient, risks can be continuously hedged, and positions can be exited with minimal time and cost friction. Most tokenized assets fail to meet these key requirements. First, for market makers to provide liquidity, they must first complete asset minting. But in reality, minting itself involves definite costs. Issuers typically charge minting and redemption fees ranging from 10 to 50 basis points. Furthermore, the minting process often involves operational coordination, KYC verification, and settlement through custodians or brokers, rather than direct on-chain execution. Market makers need to advance funds and wait hours or even days to actually receive the tokenized assets. Secondly, even if inventory is generated, it cannot be redeemed immediately. The redemption cycle for most tokenized assets is measured in hours or days, not seconds. Common redemption rules are T+1 to T+5, accompanied by daily or weekly limits. For larger positions, a complete exit often takes several days or even longer. From a market maker's perspective, this type of inventory is largely equivalent to "low-liquidity assets," which cannot be quickly recovered and redeployed. To maintain market depth, market makers must hold inventory for extended periods, continuously bearing and hedging against price volatility while waiting for redemptions to complete. During this period, the same capital could have been invested in other crypto markets—where inventory is almost unnecessary, hedging is continuous, and positions can be closed at any time. This is why the opportunity cost is particularly high in the crypto market. Given this trade-off, rational liquidity providers will naturally choose to allocate capital to other markets. The existing market structure is also insufficient to solve this problem. AMMs transfer inventory risk to liquidity providers but do not eliminate redemption constraints; and order book-based trading venues disperse market maker liquidity across multiple exchanges, further weakening overall depth. The end result is persistent liquidity shortage, creating a vicious cycle. Insufficient liquidity inhibits participation, and insufficient participation, in turn, further weakens liquidity. The entire tokenized asset ecosystem is thus trapped in this cycle. A New Market Structure Insufficient liquidity is a structural obstacle to the scalable development of tokenized assets. Shallow market depth cannot support meaningful position sizes, while a fragile market structure amplifies local volatility and transmits it to different protocols and trading venues. Assets that cannot be successfully exited under predictable conditions are naturally difficult to use as reliable collateral. Under current mainstream tokenization models, liquidity is consistently limited, and capital efficiency remains low. For tokenized assets to achieve true usability at scale, the market structure itself must change. What if asset price discovery and liquidity supply could be directly mapped from off-chain markets, rather than being rediscovered and relaunched on-chain? What if users could acquire tokenized assets at any transaction size, no longer forcing market makers to hold low-liquidity inventory for extended periods? What if redemption mechanisms were fast enough, with clear and unrestricted pathways? Asset tokenization has not failed due to the technical path of "asset on-chaining." Its true failure lies in the market structure supporting these assets.