Below we explore how RWAs are being integrated into DeFi, the benefits driving their adoption, key considerations for institutions evaluating RWA-backed protocols, and the associated risks such as regulatory uncertainty, liquidity constraints, and default risks.

Integrating Real-World Assets into DeFi: Benefits & Use Cases

Bringing off-chain assets on-chain can stabilize and diversify DeFi yields. Unlike purely crypto-native assets (which often have volatile demand and cyclically high yields during bull markets), RWAs like bonds or real estate loans provide steady cash flows less correlated with crypto market swings. For example, by including yields from U.S. Treasury bills and real-world loans, protocols can dampen the cyclicality of on-chain interest rates. During 2021, DeFi stablecoin lending rates soared into double-digits while U.S. Treasury yields were near zero; in 2023, as Treasuries rose above 5%, on-chain yields dropped, illustrating how RWA yields can complement crypto cycles. This inverse relationship means RWAs can serve as a balancing force, maintaining more consistent returns for DeFi users across market conditions.

RWA TVL Growth — IntoTheBlock Perspectives

Leading DeFi platforms have begun integrating RWAs to enhance stability and revenue. Sky (previously MakerDAO) — a pioneer in this space — accepts RWA collateral (such as real-world loans and bonds) to back its DAI and USDS stablecoins. This move has significantly bolstered its revenue and the stbalecoins’ stability. In 2023, MakerDAO raised the DAI Savings Rate to 8%, attracting nearly $1 billion in new deposits within a week, largely thanks to RWA yield backing Remarkably, over 80% of MakerDAO’s revenue in 2023 came from RWAs, and by July 2023 its RWA portfolio reached ~$2.5 billion (including $1 billion+ in U.S. Treasuries).

Frax Finance similarly uses RWAs (e.g. interest-bearing bonds) to partially collateralize its FRAX stablecoin and offer yield-bearing Frax Bonds. Aave, a major lending protocol, deployed part of its treasury into RWAs via partnerships (e.g. with Centrifuge) to earn yield on idle crypto assets. These case studies show that RWAs are being used in DeFi in three main ways: as new yield-generating products for users, as collateral to back stablecoins, and as treasury investments to generate protocol revenue.

Institutions are also directly entering the RWA-on-chain space. In March 2023, asset manager BlackRock launched $BUIDL, a tokenized money market fund of U.S. Treasuries, on public blockchains — a milestone in bridging traditional finance and DeFi. Other examples include Centrifuge, which tokenizes real-world invoices and loans for on-chain lending markets, and Maple Finance, facilitating institutional lending via on-chain loan pools. These innovations hint at a future where DeFi markets and real-world credit markets intertwine, offering institutional investors familiar asset exposures through decentralized platforms.

Blackrock’s BUIDL fund has consistently shown growth in the number of holders

Institutional Considerations for RWA-Backed Protocols

For institutional investors evaluating RWA-focused DeFi protocols, due diligence is paramount. Unlike purely on-chain assets, RWAs introduce legal and operational dependencies that institutions must scrutinize:

Regulatory Compliance & Legal Structure

Institutions should assess how the RWA is brought on-chain — typically via special purpose vehicles (SPVs), trusts, or regulated custodians. The protocol’s legal framework must ensure the on-chain token is legally entitled to the off-chain asset or cash flows. Compliance with securities laws and investor qualification (e.g. many RWA offerings require investors to be accredited or whitelisted) is a key consideration. Regulatory uncertainty persists, as different jurisdictions may treat tokenized real assets as securities or require specific licenses. Institutions will favor protocols that work within clear regulatory guardrails (or sandbox programs) to mitigate legal risk.

Transparency & Reporting

Quality of reporting and audits is crucial. Institutions should look for regular attestations of the off-chain assets backing the tokens (e.g. verifying that a claimed $100 million in T-bills are indeed held by the custodian). Robust oracle systems or API feeds are needed to reflect off-chain asset values on-chain in real time. Protocols that provide granular disclosures (e.g. MakerDAO’s detailed RWA reports, or public registries like RWA.xyz showing asset values) give institutions confidence that the on-chain token truly represents the underlying asset.

Yield and Fee Structure

Institutions will evaluate the yield offered by RWA protocols relative to traditional markets, net of any protocol fees. Many RWA DeFi products offer yields comparable to traditional bond markets (for instance, tokenized Treasury funds yielding ~4–5% APY). The benefit is the ease of on-chain access and potential liquidity, but institutions must ensure the yields aren’t being eroded by excessive fees, token incentives, or intermediaries. Sustainable yield should stem from the underlying asset’s income (interest, rent, etc.), not from inflationary token emissions.

From an operational perspective, institutions need to consider how they will custody the on-chain assets (using institutional-grade wallets or custodians that support those tokens). The smart contract risk (potential bugs in token contracts or DeFi integrations) and economic risks (i.e. market liquidity) are other important factors. Protocols with a risk-conscious approach, for example by auditing contracts, developing insight into economic risks and providing insurance mechanisms, will be more attractive.

Risks Involved with RWA Integration: Defaults, Liquidity, and Regulation

While RWAs can bring stability, they also introduce unique risks to DeFi that must be managed:

Regulatory Uncertainty

Because RWAs straddle traditional finance and crypto, they are subject to regulatory changes in both domains. A change in securities law or a new regulation could directly impact a DeFi protocol’s ability to offer certain RWA products. For example, if regulators categorize tokenized real estate or bonds as securities, protocols might be forced to restrict access or perform KYC on users, altering the open nature of DeFi. Institutions must stay vigilant about the evolving legal landscape and consider jurisdictional risk — e.g. a protocol operating legally in one country might be off-limits in another.

Default Risk of Underlying Assets

Credit risk from the real world is now reflected on-chain. If a borrower of a tokenized loan defaults or a bond issuer fails to pay, the DeFi protocol and its investors are exposed. This is not a hypothetical scenario: in August 2023, a loan in MakerDAO’s RWA portfolio went into default when the borrowers (affiliates of a New Zealand solar firm) were ordered by a court to cease operations, causing the loan to stop payments. While tokenization doesn’t eliminate the risk of default, protocols can mitigate it by over-collateralization, insurance, or diversification of RWA exposures. Institutions should examine the credit quality and diversification of a protocol’s RWA holdings — e.g. U.S. Treasuries carry essentially zero default risk, whereas private loans or receivables have higher risk (and thus should offer higher yields to compensate).

Liquidity Constraints

One hallmark of DeFi is 24/7 liquidity, but many RWAs aren’t naturally liquid. Selling a real-world asset (like a house or a loan) can take days or months, which clashes with the instantaneous settlement of blockchain transactions. Some RWA tokens only allow redemptions or trade on specific venues with limited liquidity. Even tokenized Treasuries, while high quality, may involve waiting until bond maturity or finding a buyer off-chain to redeem at full value. Thus, RWA-backed tokens can suffer from low on-chain liquidity or delayed redemption, meaning investors cannot always exit positions on-demand. Institutions must be aware of any lock-up periods or notice times for redemptions. Protocols like Maker mitigate this by also holding stablecoin reserves and using short-term assets so they can meet on-chain redemption needs, but the liquidity risk can never be fully eliminated. It’s prudent to size RWA positions according to worst-case liquidity scenarios (e.g. assume a rapid exit might incur a discount).

De-Peg Risk

In some cases, for example with yield-bearing stablecoins, monitoring asset pegs is crucial. These stablecoins can potentially lose their peg under severe market stress or if their underlying collateral becomes volatile or insufficient. A depeg event can ripple through the entire ecosystem, affecting liquidity pools and other interconnected DeFi markets. Institutions must closely monitor stablecoin pegs, market liquidity, and collateral models, while also establishing contingency plans to manage sudden or prolonged deviations from the peg.

IntoTheBlock’s USDM peg monitor

Counterparty and Custodial Risk

Unlike trustless crypto assets, RWAs require off-chain intermediaries — custodians, trustees, banks — to hold and manage the assets. This introduces counterparty risk: the DeFi protocol and its investors must trust these entities to do their job honestly and competently. If an off-chain custodian holding tokenized assets mismanages funds, becomes insolvent, or refuses to honor redemption, on-chain token holders could incur losses. There is also operational risk in coordinating with third parties (delays, reporting errors, etc. ). To mitigate this, some protocols set up dedicated legal entities (for instance, Frax uses a special purpose Delaware LLC, FinresPBC, solely to act as its RWA conduit). Institutions should favor RWA protocols that use reputable, regulated custodians and have contingency plans (insurance or back-up servicers) if those counterparties fail.

Technical and Oracle Risks

Bridging real-world data to DeFi relies on oracle feeds and APIs. A failure or manipulation of these data feeds could lead to misvaluation of RWA tokens. For example, if an oracle erroneously reports the price of a bond, it might cause improper liquidations or arbitrage. Additionally, RWAs often operate on business hours (trading 5 days a week), so valuation gaps can occur during off-hours. DeFi protocols need robust oracle infrastructure and perhaps human-in-the-loop oversight for off-chain events (like corporate actions on a bond). Institutions should examine how the protocol monitors and audits its off-chain assets to ensure nothing “falls through the cracks” between the real world and the blockchain.

Despite these risks, the trend of tokenizing real-world assets is accelerating. RWAs offer a compelling value proposition: they marry the transparency and efficiency of blockchain with the stability and familiarity of traditional assets. For institutional investors, protocols like Sky have demonstrated that with proper risk frameworks, RWAs can significantly enhance a DeFi platform’s financial health.The key is rigorous risk management — performing strong due diligence, analyzing and understanding DeFi-native risks, maintaining legal enforceability of assets, and ensuring on-chain mechanisms account for off-chain realities. As regulators clarify rules and successful case studies accumulate, we can expect even greater institutional adoption of RWAs, unlocking new liquidity for both DeFi and traditional finance.

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