RWA Boom Driven by Crypto Protocols, Not Institutional Investors

Article by: Vaidik Mandloi

Compiled by: Luffy, Foresight News

The tokenization of real-world assets (RWA) has grown by 179% this year. Trading volume for stocks and commodities on the Hyperliquid platform now exceeds that of crypto tokens. The prevailing market view is that traditional finance is finally coming on-chain.

However, if we trace the true buyers of these RWA products, the conclusion will be starkly different from public perception: this is not institutional capital entering the market. The vast majority of capital originates from within the crypto industry itself, with various protocols and DAO treasuries continuously increasing their holdings by converting their reserve assets into tokenized assets.

This article will analyze how the RWA boom is more akin to a process of "dollarization" within the crypto ecosystem, rather than traditional institutional capital entering the space. It will also explore what it means when native crypto protocols become the largest buyers of tokenized U.S. Treasuries.

Go back a few years. If you followed the decentralized finance (DeFi) market between 2020 and 2021, you would have witnessed extraordinarily high yields. Lending pools advertised annual percentage yields of 15%-20% for USD deposits, with some products reaching as high as 40%. Billions of dollars flowed in, yet few questioned the source of these returns.

These yields fundamentally stem from token inflation: the protocol mints governance tokens and distributes them to depositors as "rewards," classifying these subsidies as investment returns. This is the ultimate tactic to attract investors and boost total value locked (TVL), but the model relies on the continuous price appreciation of governance tokens. After subsequent market crashes, when governance token prices plummeted by 80%-90%, it became clear that the native, natural yield of DeFi was only 2%-3%.

This yield is not only lower than that of U.S. short-term Treasury bonds but also carries significantly higher risk. This reveals a harsh truth: the financial system built by the crypto industry over many years cannot generate competitive returns through its own economic activity. Past high yields were sustained by a constant influx of new capital buying governance tokens, not by profits generated from capital invested in real production. Once the flow of new capital slows, the entire model will revert to its true nature.

Numerous protocols hold hundreds of millions of dollars in treasury funds, valued in their own governance tokens, making it difficult to generate competitive yields within the crypto ecosystem. In 2023, multiple tokenized U.S. Treasuries and dollar-denominated credit products were陆续 launched on-chain. For the first time, DeFi protocols can allocate their reserves into assets that generate real dollar yields without leaving the crypto ecosystem.

Since then, this practice has become an industry standard. Arrakis recently conducted a survey of on-chain buyers, tracking $91.3 billion in deposits across more than 10 USD yield products. Of the $12.4 billion in funds with identifiable sources, two-thirds originated entirely from crypto protocols and DAO treasuries; the remaining funds are held by crypto-native investors, exchanges, and market makers.

Data source: Arrakis

In the $36.2 billion RWA sector, where the industry constantly promotes "institutional entry," traditional institutional funds such as pensions, asset management firms, and banks account for zero percent.

BlackRock launched the BUIDL fund with the intention of directing institutional capital into the Ethereum ecosystem. It is a fully regulated, tokenized Treasury product designed to provide risk-free yield, specifically making it easier for pension funds to invest without having to justify exposure to crypto assets to their boards. Yet today, 98% of the holders are still crypto-native participants. Ethena holds more than half of BUIDL’s assets through its USDte product; the remaining top ten holders are occupied by protocols such as Ondo and sub-DAOs of MakerDAO.

Data source: Arrakis

BUIDL is not an isolated case. Across the entire sector, the top five holders control over 90% of the circulating assets in nearly every tokenized RWA product.

MakerDAO is the best example of anticipating the industry's future direction. In 2021, the protocol held only about $17 million in real-world assets backing DAI; today, that scale has expanded to $4 billion, with over half of the collateral consisting of U.S. Treasuries rather than crypto assets. Maker’s original vision was to issue a stablecoin using crypto-native collateral, relying on over-collateralization to withstand Ethereum price volatility. But this model came at a high cost, requiring assets locked far exceeding the issued amount. At the time, the community generally accepted lower capital efficiency as an acceptable trade-off for achieving decentralization.

The reality, however, offers the opposite answer: at least on a large-scale implementation level, this path is not viable, and it ultimately still relies on the traditional financial system it sought to replace. Subsequently, MakerDAO completed its rebranding, restructured its governance framework, and established independent sub-DAOs to manage its treasury investment portfolio.

This phenomenon is not unique to Maker—it is playing out across the entire industry. No protocol can sustainably hold large amounts of its own governance token as reserves. Token price depends on the protocol’s development, which in turn is tied to the health of the treasury, while the treasury’s value is itself influenced by the token price.

The Uniswap DAO holds nearly $6 billion in treasury assets, almost entirely in UNI tokens. Last year, the community passed a governance proposal titled “Unlocking the Uniswap Treasury,” aiming to reduce holdings of the native token and convert them into stable assets. Voters have recognized that, unless the UNI price rises permanently, holding other assets would be a better choice. Holding the native token as a reserve is like an emerging market central bank treating its own government bonds as foreign exchange reserves—as long as no liquidation is needed, the balance sheet always appears solid.

In international economics, there is a concept that precisely describes this dilemma: "Original Sin." Only about five currencies worldwide can rely on their own currency for borrowing and reserve accumulation. All other countries, regardless of government intent, ultimately end up denominated in U.S. dollars. The root cause lies in the U.S. dollar’s absolute first-mover advantage as the global unit of account, with extremely high switching costs and highly concentrated liquidity.

All protocols holding large treasury reserves eventually reach the same conclusion: during market downturns, governance tokens struggle to maintain value, and the crypto ecosystem cannot consistently generate sufficient returns over the long term. The only rational choice is to convert into USD-denominated assets. It is this network effect that has made the dollar dominant in global finance and enabled stablecoins to rule the DeFi market. Large-scale allocation to tokenized U.S. Treasuries is essentially the final step in the dollarization of crypto.

Economic theories on dollarization clearly divide the entire process into two stages, which the crypto industry has fully completed.

Phase one: Asset substitution. Once citizens in emerging markets lose confidence in the purchasing power of their local currency, their savings shift toward the U.S. dollar. Although salaries are still paid and prices marked in the local currency, savings flow into dollar-denominated accounts to preserve purchasing power.

Phase two: currency substitution. When a sufficient amount of savings shifts to the U.S. dollar and lending activities also begin settling in dollars, everyone holds the same currency, making commercial transactions more convenient. The two phases reinforce each other. In traditional emerging markets, the full process often takes years or even decades.

Interestingly, the crypto industry completed this entire process in just three years. Asset substitution occurred during the previous bear market: major protocol treasuries shifted their non-governance token dollar reserves—such as fee income—toward stable assets, ceasing reinvestment into the DeFi market. Governance tokens remain on the balance sheet, but working capital has been fully converted to dollars.

After the treasury began holding USDC and USDT, the currency substitution phase kicked in almost immediately. Lending markets adopted stablecoins for pricing across the board; yield products uniformly listed returns in USD; trading pairs originally denominated in ETH gradually shifted to stablecoin pairs. Today, with the growing adoption of tokenized U.S. Treasuries, dollar-denominated assets have advanced further: from synthetic USD stablecoins to on-chain U.S. official dollar assets that generate risk-free yields.

The transformation that countries like Turkey took decades of political turmoil and currency collapse to achieve, the crypto industry accomplished in just a few quarters. A report by Oliver Wyman earlier this year proposed that stablecoins have compressed decades of dollarization in traditional markets into just a few months. Although originally aimed at emerging markets, this theory applies even more fittingly to the crypto industry. In crypto, there are no central banks using capital controls or compliance barriers to slow dollarization, and the cost of converting funds is nearly zero.

But this is the inherent paradox trap of dollarization: reversing this process involves conversion costs that are almost unimaginable. Economists refer to this as the "lag effect." Once dollarization takes root in an economy, it is nearly impossible to fully reverse it, even if the external conditions that originally drove dollarization improve.

There is no analogous opportunity in the crypto space for a commodity supercycle that would make governance tokens more attractive than dollar-denominated yield assets. Protocols also cannot implement capital controls or reserve requirements on stablecoin deposits. Moreover, unlike sovereign nations, the crypto industry lacks any institutional memory of a “pre-dollarization” era; for the vast majority of DeFi protocols, stablecoins have been the default unit of account since their inception.

This is a one-way channel with a heavy cost: whenever DeFi’s internal economic activity is denominated in USDC or USDT, the seigniorage profits from money issuance flow entirely to Circle and Tether, not to the various protocols generating the transactions. Last year, Tether generated nearly $10 billion in profit with just around 100 employees; Circle completed its IPO, and Coinbase, merely responsible for USDC distribution, receives half of the net interest income.

After Ecuador and El Salvador adopted dollarization, the seigniorage revenue previously belonging to their central banks shifted to the Federal Reserve. Similarly, when DeFi operates through stablecoins, all seigniorage revenue is captured by Tether and Circle.

By using another party’s currency protocol, one also completely loses the ability to regulate their own ecosystem’s economy. Unable to adjust the supply of the native token to respond to cyclical fluctuations in the ecosystem, core economic activities no longer price transactions in the native token. The situation is equivalent to that of a fully dollarized country, unable to rely on currency depreciation to hedge against downturns. The only remaining option is to cut spending. Over the past two years, the entire DeFi sector has operated exactly this way: widespread governance votes have slashed grant budgets, layoffs have occurred, and protocol development has slowed—leaving protocols with no other monetary tools at their disposal.

Former MakerDAO and Circle executive teams are building the project M⁰, positioned as the "manager of the Eurodollar system." The team is developing infrastructure to support multiple parties issuing stablecoins collateralized by U.S. Treasuries, targeting the $20 trillion offshore dollar market. The project does not aim to replace the dollar, but to create a more efficient channel for dollar circulation.

I believe this is the ultimate form of crypto dollarization: infrastructure is restructured to meet the demands of mainstream currencies, and various native tokens become secondary.

Some may ask, what about the original narrative of "Bitcoinization"? Even the most ardent Bitcoin supporters acknowledge that it would take decades to materialize, and only after the stability of the dollar system itself begins to waver. Yet the ironic reality is that the crypto industry has built the most efficient dollar circulation network in history. Instead of pushing its own monetary logic onto the world, the crypto industry has been reshaped by the existing global monetary rules.

The entire industry is racing to frame the RWA boom as Wall Street’s discovery of blockchain efficiency. Of course, the earliest buyers were crypto-native users, but two-thirds of identifiable capital has flowed into tokenized Treasuries—the safest and most fundamental financial product available, now wrapped in smart contracts.