179% during the year! RWA has skyrocketed, are institutions really entering the market?
Source: Token Dispatch
Author: Vaidik Mandloi
Compiled and organized by: bitPushNews
The tokenization of real-world assets (RWA) has surged 179% this year. Hyperliquid's trading volume on stocks and commodities now surpasses even crypto tokens. Everyone seems to have finally come to the conclusion: traditional finance (TradFi) is finally about to fully enter the chain.
But when you go back to the roots and find out who is actually buying these RWAs, you'll find that this isn't a grand story of institutions entering the market at all — because most of the money actually comes from within the crypto industry. The treasury of major agreements and DAOs is frantically hoarding stocks and converting their reserves into tokenized US debt.
This article will explore in depth: why this RWA spree looks more like a “dollarization” event of cryptocurrencies themselves than an institutional downgrade attack; and what it actually means when crypto protocols themselves become the biggest buyers of these tokenized US bonds.
Who is actually trading RWA?
Let me take you back to a few years ago: if you follow DeFi in 2020 and 2021, you'll see simply outrageous returns. Lending pools attract dollar deposits with an annualized yield of 15% to 20%, sometimes as high as 40%. Tens of billions of dollars are pouring in, yet almost no one is questioning where this money actually came from.
Because these benefits come from token emissions — the agreement mints its own governance token, distributes it as a “reward” to depositors, and counts this subsidy as revenue. This is the ultimate trick to attract investors and increase TVL (total hedged value), but it only works on one condition: the token price must continue to rise. Later, when the market crashed and governance tokens plummeted by 80%-90%, the real organic yield of DeFi was actually only 2%-3%.
This is even less than the yield on US short-term treasury bonds, and the risk is much higher. This revealed the harsh truth: the crypto world took years to build a financial system that simply couldn't generate competitive returns from its own economic activity. Because those benefits come from fresh capital to buy governance tokens, not from any productive use of the capital itself. Once the inflow of this new capital slows down, the entire model will return to its original form.
As a result, major agreements can only protect treasury worth hundreds of millions of dollars, denominated in self-governing tokens, but are unable to earn any competitive returns within the crypto world. Then in 2023, many tokenized versions of US Treasury bonds and dollar credit products began to be launched on the chain; for the first time, the agreement was able to deposit reserves into assets that can earn real dollar returns without even leaving the on-chain ecosystem.
Since then, this has become the norm. A recent study of on-chain buyers by Arrakis tracked a total of $91.3 billion in deposits across more than 10 tokenized dollar yield products. They found that of the $124 billion in high-profile buyer funds that can be clearly attributed, the full two-thirds are solely treasury funds attributable to crypto protocols and DAOs. The rest is scattered among local crypto investors, exchanges, and market makers.
(Image credit: Arrakis)
Of the funds being tracked, the amount from institutions such as pensions, asset management companies, or banks is zero. In this $36.2 billion market, which is constantly being hyped up by the industry as “institutional entry,” traditional investors are simply hard to find.
BlackRock has launched a BUIDL fund aimed at bringing institutional funding to Ethereum. It's a fully regulated, tokenized treasury bond fund with a risk-free interest rate, designed specifically for pensions, so they can buy cryptocurrency directly without explaining it to the board of directors. But as of today, 98% of the capital is in the hands of local crypto buyers. Ethena alone accounted for more than half of the fund's total value through its USDTB product. The remaining seats of the top 10 holders were also split by agreements such as Ondo and Sky's Spark Sub DAO.
(Image credit: Arrakis)
BUIDL is no exception; looking at the entire market, almost every top five holder of a tokenized RWA product controls more than 90% of the supply.
If you want to anticipate the future, the best example is MakerDAO. In 2021, the agreement held only around 17 million DAI in real-world assets. Today, that number has soared to $4 billion, and more than half of its total pledged assets are US Treasury bonds rather than cryptocurrencies. Maker's initial panoramic blueprint was to run a stablecoin backed by cryptographic native asset pledges to absorb the volatility of Ethereum (ETH) through excessive staking. This compromise is expensive because the value of the money you lock in far exceeds the tokens you've minted, but the idea at the time was that decentralization was worth paying part of the cost of capital efficiency.
What it ultimately proved, however, is that you can't do this at all, at least on a large scale, unless you use the traditional financial system it once tried to replace. Since then, the agreement has been renamed, and the governance structure has been restructured to build a dedicated sub-DAO and manage its treasury portfolio.
This phenomenon occurs frequently throughout the industry, and is by no means unique to Makers. The core pain point is that no protocol can hold a large amount of self-governing tokens as reserves, because its value is in a logical cycle. The price of the token depends on the success of the agreement, and the success of the agreement also depends on the health of the treasury, and even the health of the treasury is linked to the token price.
Uniswap's DAO sits in a treasury worth nearly $6 billion, but almost all of them are UNI tokens. Last year, its community passed a governance proposal called “Mobilizing the Uniswap Treasury” (Mobilizing the Uniswap Treasury), which aims to diversify assets, transfer them out of native tokens, and allocate them into stable assets. The agreement's own voters also acknowledged that they are better than holding anything unless the price of UNI rises forever. Holding local tokens as reserves is like a central bank in an emerging market counting domestic government bonds in foreign exchange reserves. As long as you never have to sell it, it looks like there are no payment issues at all.
In international economics, there is a specific term for this dilemma called “Original Sin” (Original Sin). What it means is that only about five currencies in the world can actually maintain borrowing and reserve accumulation at their own face value. All other countries eventually had to be denominated in dollars — whether their governments wanted to or not — due to the dollar's absolute dominance as the global unit of measure, as well as the high cost of switching and the accumulation of liquidity already there.
Every agreement with a huge treasury eventually comes to the same conclusion: governance tokens cannot maintain value in the downturn cycle, the ecosystem cannot generate sufficient returns over the long term to maintain sustainability, and the only rational choice is to convert them into dollar-denominated assets. It is this network effect that maintains the dominance of the US dollar in global finance, which also maintains the dominant position of stablecoins in DeFi. The move towards tokenizing treasury bonds is actually the last step in the dollarization process.
The economic logic of “dollarization”
The economics literature on dollarization explains a very accurate “two-stage process,” and the crypto world has now completely completed these two stages.
The first stage is Asset Substitution (Asset Substitution). People in emerging countries tend to no longer trust their currency to preserve value, so they start saving in dollars instead. They may still receive salaries and price goods in their home currency, but their savings are transferred to dollar accounts because the dollar's purchasing power is more stable.
The second stage is Currency Substitution (Currency Substitution). Once enough savings are held in dollars, people will start borrowing and financing directly in dollars, because it will be easier to do business in the currency everyone has on hand. These two stages nourish each other, and in traditional emerging markets, the whole process usually takes years or even decades.
Interestingly, the crypto world completed these two steps in just three years. Asset replacement occurred during a bear market when the protocol treasury began routing its dollar-denominated reserves (such as fee revenue and any funds not locked in governance tokens) to stable assets rather than redeploying them back into DeFi. Although the governance token still appears on the balance sheet, working capital has been converted to US dollars.
Once these treasurers began holding USDC and USDT, the second phase of currency replacement began almost immediately. The lending market began to be denominated in stablecoins, and yield products began to be quoted in dollars. Previously ETH-denominated trading pairs have also switched to stablecoin-denominated pairs. Now, with the advent of all tokenized treasury bonds, this type of valuation has progressed more thoroughly: it has evolved directly from synthetic dollars (synthetic dollars) to real dollar instruments issued by the US government, and earns risk-free returns on the chain.
Oliver Wyman mentioned in a report earlier this year that stablecoins are shrinking the traditional dollarization timeline from decades to just a few months. They were discussing emerging markets at the time, but this set of analysis is more appropriate in the crypto world, where no central bank is trying to slow this process through exchange control or compliance resistance. The switching cost to enter the market is almost zero.
But it is also the paradoxical curse of dollarization: switching out is extremely expensive. Economists call this the lag effect. Once dollarization takes root in an economy, even if the conditions that initially led to dollarization have improved, it is almost impossible to completely reverse it.
Because there is no such thing as a “commodity supercycle” in the crypto world, it can suddenly make governance tokens more attractive than dollar earnings. Moreover, the agreement will never impose capital controls or reserve requirements on stablecoin deposits. Unlike countries, the crypto world has no “historical memory” from before dollarization to return, because for the vast majority of DeFi, stablecoins were the default unit of measure from the beginning.
It's a one-way door, and it's extremely expensive to walk through it. Whenever economic activity within DeFi is denominated in USDC or USDT, the seigniorage (seigniorage) or profit generated as a currency issuer goes to Circle and Tether rather than the agreement itself where the actual economic activity takes place. Tether made about $100 billion in profit last year with around 100 employees; Circle completed its IPO, and Coinbase split half of its net interest revenue simply by distributing USDC.
When Ecuador or El Salvador was denominated in dollars, the minting tax that would have funded its central bank was transferred to the Federal Reserve. And when DeFi is denominated in stablecoins, this portion of the proceeds is handed over to Tether and Circle.
An agreement denominated in someone else's currency will also lose the ability to manage its own economy — because it can't adjust the supply of local tokens to cope with conditions within its ecosystem, and because core economic activity is no longer priced in that token. This is the same as a country that is completely dollarized and unable to survive the economic downturn by devaluing its currency. In this case, the only tool left in your hands is to cut spending, which is what we've seen all too often in the DeFi sector over the past two years: governance votes have decided to reduce grant funding, thereby cutting contributors and slowing down protocol development because the agreement has no other currency leverage to pull out.
There is an agreement called M^0 (founded by former MakerDAO and Circle executives), which is positioned as the “Governor of the Eurodollar System” (Governor of the Eurodollar System). They are building infrastructure to enable multiple issuers to mint stablecoins backed by treasury bonds and are targeting the $20 trillion offshore dollar market. They do not intend to replace the US dollar, but rather to build a better “track” for the circulation of the dollar. In my opinion, this is the end form of cryptodollarization: infrastructure reorganizes itself to serve the demand for dominant currencies, and local tokens become optional accessories.
Isn't the original grand vision “Bitcoinisation” (Bitcoinisation)? Even the most determined Bitcoin maximalists will tell you that it's a long story that spans several rounds, and that it can only be realized when the dollar itself loses stability. What's interesting, though, is that the crypto world has also created the most efficient dollar distribution network ever. It didn't impose its own monetary logic on the world; instead, the world eventually imposed its monetary logic on cryptocurrencies.
The entire industry is scrambling to package the RWA boom into a story like “Wall Street Discovers Blockchain's Efficiency.” Admittedly, the first buyers were local crypto players, but up to two-thirds of the identifiable funds only went to tokenized US Treasury bonds — the safest and oldest financial product in the world, wrapped in smart contracts.
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