The Ceiling on DeFi Yield Without Offchain Cashflows

In a closed onchain system, DeFi can redistribute cashflows very efficiently. It cannot manufacture net cashflows.

If you try to read “DeFi yield” as one cohesive market without offchain assets, you end up with a confusing story. Yields look high in bull phases, collapse in stress, and keep reappearing under new wrappers.

A cleaner way to read the constraint is to separate two things:

• Yield that is funded inside crypto (fees, leverage demand, incentives)

• Yield that is imported from outside crypto (T-bills, repo, money-market funds, credit)

In a closed onchain system, DeFi can redistribute cashflows very efficiently. It cannot manufacture net cashflows.

Why the ceiling shows up faster as stablecoins scale

Stablecoins are the largest “dollar demand surface” in crypto. RWA.xyz shows total stablecoin value at $297.28B with 220.82M stablecoin holders (as of 01/13/2026 on their dashboard).

Now compare that to the portion of RWAs that are actually distributed to wallets and transferable on public rails:

• Distributed asset value: $20.95B (same RWA.xyz dashboard snapshot)

• Tokenized treasuries total value: $8.86B (as of 01/06/2026 on RWA.xyz’s “Tokenized Treasuries” page)

Those ratios matter because stablecoin holders keep expressing the same product intent: stable value plus a credible yield leg. Our “2025 State of RWA Tokenization” framed 2025 as a year where stablecoins won distribution and yield won mindshare, and highlighted “under-the-hood baskets” as the 2026 direction.

A quick back-of-the-envelope makes the funding need visible:

• If $297.28B of stable balances earn 3% a year, that is about $8.9B per year of stable-denominated cashflow.

• In a purely onchain system, that cashflow has to be paid by other crypto participants through borrowing costs, trading fees, liquidation penalties, or token incentives.

That is the ceiling. As soon as you want money-market-like yield at stablecoin scale, you end up needing external cashflows.

What onchain yield actually is without offchain assets

Without RWAs, most “real” yield in DeFi comes from three buckets.

1) Trading fees and market making

LPs earn fees because traders pay them. The returns are tied to volume, volatility, and adverse selection.

Academic work on Uniswap v3 shows liquidity provision is decision-heavy, outcomes vary widely, and higher returns generally require taking more risk and active management.

Work on yield farming for liquidity provision also emphasizes that returns need to be evaluated net of risks and transaction costs, using onchain data from major DEXs.

Scaling limit: fee yield is bounded by volume and competition, and it is not stable across regimes.

2) Lending yield funded by crypto leverage demand

In today’s dominant DeFi model, borrowing demand is largely tied to trading, leverage, and crypto-native positioning.

BIS Bulletin 57 describes DeFi lending as intermediation without the information layer banks use, relying heavily on collateral and automatic liquidation rules.

Scaling limit: if leverage demand declines, lending yield compresses. If leverage demand spikes, you get procyclical risk.

3) Incentives and emissions

Incentives can bootstrap liquidity quickly, but they are a distribution mechanism. They do not solve stable, scalable cashflow funding. When incentives fade, yields tend to converge toward the organic fee and borrow demand.

Scaling limit: incentives are budgeted and cyclical by design.

Why this generates demand for offchain assets

The system keeps recreating the need because stablecoins are now the default unit of account for large parts of crypto, and stablecoin holders want a yield leg that does not require reflexive leverage.

This is why the market repeatedly converges on short-duration government yield as the anchor leg. Tokenized treasuries are one of the few offchain cashflow sources that can scale without depending on crypto risk appetite.

RWA.xyz’s framework helps here: some tokenization is genuinely distributed on public rails, while a lot is better understood as represented structures that mirror traditional market plumbing.

That distinction matters because the more “real” and regulated the yield leg is, the more product design is shaped by transfer controls, eligibility, and redemption mechanics.

How the market is trying to solve the yield funding problem

1) Directly bringing offchain yield onchain

This lane is the pass-through model: a token represents a claim on an offchain yield-bearing instrument (T-bills, repo, MMFs, cash management funds), and the yield accrues via NAV movement, distributions, or rebasing.

RWA.xyz’s asset screener shows how different the constraints look across products:

• Circle USYC: 30D APY shown on the screener, redemption tied to U.S. banking days, minimum investment 100,000 USDC, and eligibility shown as “Non-U.S. Investor.”

• BlackRock USD Institutional Digital Liquidity Fund (BUIDL): minimum investment 5,000,000 USD, management fee 0.50%, eligibility shown as “U.S. Qualified Purchaser.”

• Franklin OnChain U.S. Government Money Fund (BENJI): 30D APY shown, daily redemption, minimum investment 20 USD, eligibility shown as “U.S. Retail and Institutional Investor.”

What this lane delivers

• A credible external base rate that is not funded by crypto leverage demand.

• A stable collateral leg that can support more conservative onchain financing.

What caps it

• Eligibility and transfer constraints (investor class, jurisdiction, compliance gating).

• Liquidity and settlement reality (banking-day redemption, offchain operational cutoffs even if the token moves 24/7).

• Fee drag (especially when competing against a benchmark that people view as risk-free).

2) Stablecoin yield under the hood via RWAs

This lane exists because regulators increasingly treat payment stablecoins as money-like instruments, and money-like instruments are being pushed away from paying explicit yield at the token level.

Two texts are clear on the direction:

• The GENIUS Act includes a “Prohibition on interest” clause stating that permitted (and foreign) payment stablecoin issuers may not pay “any form of interest or yield” to holders solely in connection with holding, using, or retaining the stablecoin.

• MiCA includes Article 50, “Prohibition of granting interest,” applying to issuers of e-money tokens and crypto-asset service providers providing services related to those tokens, and it defines interest broadly to include remuneration tied to holding time.

So the design pressure is straightforward: yield migrates into wrappers and adjacent products.

Common patterns:

• Payment stablecoin for settlement (no yield)

• A separate yield sleeve (vault share, fund token, savings wrapper) that holds tokenized T-bills or cash-equivalents and passes through some portion of the carry

• A portfolio product where yield is allocated between user rewards, issuer revenue, distribution incentives, and risk buffers

CoinGecko’s 2025 RWA report explicitly notes tokenized treasuries as a way for stablecoin issuers to meet reserve requirements while providing onchain transparency rather than relying only on offline attestations.

What caps it

• You are building an investment product alongside a payment rail, and the classification boundary matters.

• The more the yield sleeve looks like a regulated savings product, the more likely it is to carry transfer restrictions and reduced composability.

3) Lending

If lending cannot connect to offchain borrowers or offchain yield collateral, then lending yield is mostly a function of crypto-native borrowing demand.

BIS Bulletin 57 frames the underlying reason: DeFi lending operates without the traditional information layer, leaning on collateral and automated rules.

BIS Working Paper 1171 measures DeFi leverage at the wallet level and analyzes how leverage behavior interacts with collateral requirements and market conditions.

If you want lending to fund stable yields at scale, you end up pushing into at least one of these directions:

• Repo-like lending against tokenized T-bills and cash-equivalents (closer to money markets, anchored to an external base rate). RWA.xyz’s tokenized treasury dashboards show this segment’s scale and the platforms involved.

• Credit intermediation to real borrowers (private credit, receivables, trade finance), which requires underwriting, servicing, and legal enforceability.

FSB’s DeFi risk report is useful here because it lists vulnerabilities that reappear as linkages grow: operational fragilities, liquidity and maturity mismatches, leverage, and interconnectedness, and it explicitly notes spillover potential increases if DeFi becomes more connected to TradFi and the real economy.

What caps it

• Moving beyond overcollateralized crypto lending requires underwriting and enforcement, which introduces centralized components.

• Liquidity management becomes a product feature, not a footnote.

Conclusion: why offchain cashflows keep showing up in onchain yield design

The recap is simple:

• Stablecoins are the distribution layer. They win because they settle cheaply, move across venues, and support the largest set of users.

• Yield is a separate product surface. When users ask for “stable + yield,” the durable implementations split the payment rail from the investment leg, with explicit collateral, redemption rules, and disclosures.

• Purely onchain yield has a regime problem. Fees and lending rates can be attractive, but they are tied to crypto leverage demand and trading activity, so they compress when risk appetite fades.

That decomposition naturally leads to the question that matters for scale: where does the cashflow come from?

If the objective is stable-denominated yield that does not depend on crypto-native leverage, the cleanest funding source is real-economy cashflows that exist regardless of onchain volumes.

This is the part of the taxonomy that tends to survive cycle-to-cycle: tokens representing income rights to an asset that produces revenue offchain, with distribution handled transparently onchain.

Read through that lens, the “why” is straightforward: offchain cashflows give yield a payer. Tokenization becomes the transport layer that brings those cashflows onchain and turns them into a yield instrument that can be held, transferred, and integrated into onchain workflows, without requiring the system to manufacture yield internally.

Bibliography

1. Fractalized Labs, “2025 State of RWA Tokenization” (Dec 30, 2025).

2. RWA.xyz, “A New Framework for Tokenized Assets: Distributed & Represented” (blog).

3. RWA.xyz, “Analytics on Tokenized Real-World Assets” (dashboard snapshot showing stablecoin value, holders, distributed and represented values; as of 01/13/2026 in the page).

4. RWA.xyz, “Tokenized Treasuries” (metrics and totals; as of 01/06/2026 shown on page).

5. RWA.xyz, “Asset Screener” (product entries for Circle USYC, BlackRock BUIDL, Franklin BENJI, and others).

6. Bank for International Settlements, BIS Bulletin No. 57, “DeFi lending: intermediation without information?” (June 14, 2022).

7. Bank for International Settlements, BIS Working Papers No. 1171, “DeFi leverage” (March 2024).

8. Financial Stability Board, “The Financial Stability Risks of Decentralised Finance” (Feb 16, 2023).

9. Regulation (EU) 2023/1114 (MiCA), Article 50 “Prohibition of granting interest” (EUR-Lex).

10. U.S. Congress, S.1582 (119th Congress), GENIUS Act text, “Prohibition on interest” clause.

11. CoinGecko, “CoinGecko 2025 RWA Report” (PDF).

12. Heimbach, Schertenleib, Wattenhofer, “Risks and Returns of Uniswap V3 Liquidity Providers” (2022).

13. Li, Naik, Papanicolaou, Schönleber, “Yield Farming for Liquidity Provision” (PDF).