Tokenized US Treasurys Reach $7.4 Billion Market Cap, Fueling DeFi Risk Concerns

The growing use of yield-bearing tokenized US Treasury products as collateral for leveraged crypto trading is creating new pathways for risk transmission across markets, increasing the likelihood of cascading effects on decentralized finance (DeFi) protocols. Tokenization, the process of converting real-world assets into digital tokens on a blockchain, allows US Treasurys to represent onchain claims to government debt, offering an alternative comparable to money market fund shares. The current market capitalization of tokenized US Treasurys stands at nearly $7.4 billion.

According to a June report, although short-term liquidity funds are low-risk assets, they are not riskless. The report highlights additional risks stemming from the novel technology used in tokenized short-term liquidity funds. One such risk is tied to leveraged trading, which relies on loan-to-value (LTV) ratios. When the value of the posted collateral declines below a certain threshold, traders are either automatically liquidated or sent a warning message to add more collateral to maintain their leveraged position.

In June, crypto exchanges became early adopters of this trend by allowing users to post tokenized US Treasury funds as collateral for leveraged trades. Both platforms integrated a tokenized money market instrument issued via a digital asset platform. The fund holds nearly $2.9 billion in value locked, according to data.

The US Treasury noted that tokenization provides a bridge to asset volatility that “could spill over into the broader financial markets as the size of tokenized assets become more significant," warning that, "in times of stress, seamless ledgers can become a negative as deleveraging and fire sales can rapidly spread across assets.”

Tokenized treasuries are exposed to several additional risk vectors, including de-dollarization by foreign countries, fiscal spending policies, liquidity issues, interest rate decisions and geopolitical turmoil. Nick Jones, founder of a crypto-as-a-service platform, urged vigilance to protect against any structural shocks. The executive noted that robust risk management, the anticipated increased regulatory oversight, and transparency will all be key to mitigating such variables as traditional finance and decentralized finance continue to converge.

While tokenized Treasurys have become a key entry point for institutions into onchain finance, growing concerns over US fiscal stability and geopolitical tensions are prompting investors to explore a wider range of tokenized real-world assets, including gold and real estate, as alternative stores of value. Inflation, geopolitical tensions and growing concerns about the US government’s creditworthiness have increased demand for alternative and relatively stable tokenized real-world assets (RWA), including gold, real estate, and energy-backed commodities.

Tokenized commodities collectively have a market cap of over $1.5 billion and have grown rapidly since 2022. While tokenized treasuries offer institutions a way to park their capital in a low-risk, yield-bearing asset, this does not offer the investors in these funds enough. The next phase of the RWA-backed market will be the tokenization of hard assets such as gold and real estate, the latter of which provides cash flow income. Tokenized gold could also provide users with cash flow if the tokens are lent out for yield. Conversely, tokenized gold could be used as collateral to secure loan financing across the DeFi ecosystem.