The headline yields on tokenized private credit - often well into the double digits - are real, but so is the reason they exist: you are being paid to take credit risk that can produce losses, sometimes suddenly and in clusters. This is the advanced end of RWA investing, where the right question is not "what does it yield?" but "does the yield compensate me for the actual risk?" Answering that means understanding where losses come from, how the deal's structure shares them, and how to judge underwriting quality. High yield is not a reward you capture for free; it is a premium you earn by correctly pricing danger.

Why the yield is high

Private credit pays more than Treasuries or investment-grade bonds because the borrowers are riskier and the loans are illiquid. Small and mid-sized businesses, trade finance, and specialty lending cannot borrow as cheaply as governments or blue-chip firms, so they pay up. You, the lender, collect that premium as yield.

The premium is genuine compensation, not a market inefficiency. Over time, a portion of it is meant to be eaten by defaults - that is the deal. The yield only becomes "excess return" if defaults come in below what the pricing assumed.

Where the risk actually sits

Counterparty risk - borrowers failing to repay - is the core danger, and it has a nasty property: defaults correlate.

In good times, defaults are low and the yield looks like easy money. In a downturn, borrowers fail together, and a pool that seemed safe can take concentrated losses fast. On top of borrower risk sit underwriting risk (loans chosen poorly), liquidity risk (you cannot exit mid-term), and structural risk (where you sit in the distribution waterfall when losses hit). The senior tranche is insulated and yields less; the junior tranche is paid most but absorbs the first losses.

How to judge whether the yield is worth it

Compare the yield to the realistic loss rate, not to zero. A deal yielding 12% that historically loses 4% a year to defaults is really offering roughly 8% for its risk and illiquidity - decide if that is enough. Scrutinize the underwriting track record across a full cycle (not just good years), the collateral behind the loans, the diversification of borrowers, and the manager's incentives. Thin disclosure on any of these is itself a risk signal.

Do the due diligence a lender would, because that is what you are. If you cannot assess credit quality, that is a reason to stay in a senior tranche, size the position small, or skip the deal - not to trust the yield.

How it fits a portfolio

Treat tokenized private credit as a satellite, not a core: a limited allocation that adds yield, sized so a bad vintage does not sink you. Diversify across managers and deals rather than concentrating in one high-yield pool, and expect to hold to term. Used this way, the premium can meaningfully lift portfolio income. Used carelessly - chasing the top yield, ignoring the loss rate - it is where overconfident RWA investors get hurt. For the broader loss landscape, see the ways you can lose money.

Where to go next

• Next: best tokenized commodities to invest in.
• The risk overview: the ways you can lose money.
• Glossary: counterparty risk.

Sources: rwa.xyz; U.S. SEC (sec.gov), as of 2026.