Abstract CD70 is an attractive target for chimeric antigen receptor (CAR) T-cell therapy for the treatment of both solid and liquid malignancies. However, the functionality of CD70-specific CAR T cells is modest. We optimized a CD70-specific VHH-based CAR (nanoCAR). We evaluated the nanoCARs in clinically relevant models in vitro, using co-cultures of CD70-specific nanoCAR T cells with malignant rhabdoid tumor organoids, and in vivo, using a diffuse large B-cell lymphoma (DLBCL) patient-derived xenograft (PDX) model. Whereas the nanoCAR T cells were highly efficient in organoid co-cultures, they showed only modest efficacy in the PDX model. We determined that fratricide was not causing this loss in efficacy, rather CD70 interaction in cis with the nanoCAR induced exhaustion. Knocking out CD70 in nanoCAR T cells using CRISPR/Cas9, resulted in dramatically enhanced functionality in the DLBCL PDX model. Through single-cell transcriptomics, we obtained evidence that CD70 knock out (KO) CD70-specific nanoCAR T cells were protected from antigen-induced exhaustion. In addition, we demonstrated that WT CD70-specific nanoCAR T cells already exhibited signs of exhaustion shortly after production. Their gene signature strongly overlapped with gene signatures of exhausted CAR T cells. On the other hand, the gene signature of KO CD70-specific nanoCAR T cells overlapped with the gene signature of CAR T-cell infusion products that led to complete responses in chronic lymphatic leukemia patients. Our data show that CARs targeting endogenous T-cell antigens negatively affect CAR T-cell functionality by inducing an exhausted state, which can be overcome by knocking out the specific target.