The Liquidation Illusion
On chain lending protocols use the same liquidation function for tokenized private credit that they use for ETH. One can be sold in a block. The other lives off chain in a structure like a Luxembourg SICAV. Nine months of on chain data from a live RWA lending market shows what happens: zero liquidations, a self reported oracle that rarely marks down, and borrowers sophisticated enough that they borrow well below the liquidation threshold because they have the capital and information to manage their own risk.
1. Liquidation in One Block
A borrower posts ETH as collateral and borrows USDC. ETH drops below the liquidation threshold. A bot buys the ETH at a discount, sells it on a DEX in the same block, pockets the spread. Done.
Three things make this work: the asset can be sold instantly, the price is independently verifiable, and the buyer can exit in the same transaction they entered. Remove any one and the mechanic breaks.
For tokenized real world assets, all three are missing.