Analysis of how onchain lending and tokenized carry trades are increasing demand for tokenized assets.
DeFi & Yields ·
Onchain lending markets are experiencing heightened demand for tokenized assets through a practice known as the tokenized carry trade, in which participants collateralize yield-bearing tokens, borrow stablecoins, and redeploy capital to capture spreads between yields and borrowing costs. This strategy, often repeated across multiple cycles to amplify returns, has emerged as a primary growth engine across several asset classes and market structures.
The mechanics of onchain carry have evolved through distinct phases. Early incentive-driven borrowing on protocols like Compound, Aave, and MakerDAO used protocol token rewards to subsidize financing costs during 2020. Liquid staking carry later emerged when Ethereum staking became accessible through derivatives like Lido's stETH, enabling borrowing against staked collateral to re-stake and capture additional yield spreads. Funding-rate carry extended the model to derivative markets via instruments like Ethena's sUSDe, which accrued both staking rewards and perpetual futures funding payments. Most recently, tokenized yield carry has brought traditional assets—particularly U.S. Treasuries and tokenized credit products—onchain, with Treasury tokens now totaling $14.4 billion and credit tokens $8.1 billion across protocols including Aave's Horizon, Morpho, and Kamino.
The strategy's profitability hinges on borrowing costs remaining below underlying yields. A $1 million position in a 9% tokenized credit product, looped to $3 million through collateralized borrowing at typical terms, generates approximately $270,000 annually in gross returns and costs $100,000 in financing at 5% rates, yielding 17% return on equity before fees. However, rising rates compress returns sharply—at 8% borrowing costs, net returns fall to 11%—while liquidation risk emerges if collateral values decline meaningfully, creating potential losses that exceed initial equity.