Fragile Links: Private Credit Tokenization and DeFi Contagion

Abstract

Private credit has grown into a multi-trillion-dollar asset class embedded within modern financial networks, yet the pathways through which stress in that sector can propagate into digital asset markets remain poorly understood. This paper examines two distinct contagion channels linking macroeconomic shocks to decentralized finance (DeFi): a macro deleveraging channel in which broad risk-off behavior spreads from traditional markets into cryptocurrencies, and a direct tokenization channel in which blockchain-based tokens representing private credit portfolios serve as collateral within automated DeFi lending protocols. Drawing on recent empirical developments, including the redemption restrictions imposed by a large BlackRock private credit fund in early 2026, the bankruptcy of First Brands Group in September 2025, and the associated stress in tokenized credit instruments on the Morpho lending protocol, the analysis constructs a conceptual contagion framework. The paper also situates these dynamics within the shadow banking theory of Gennaioli, Shleifer, and Vishny (2013), arguing that tokenized private credit instruments exhibit a liquidity paradox: while blockchain infrastructure enables continuous trading, the underlying credit exposures remain illiquid. The paper concludes that as tokenization expands the integration between traditional and digital finance, regulatory frameworks must evolve to monitor cross-market contagion channels, enforce transparency in tokenized asset structures, and account for the systemic implications of automated liquidation mechanisms.