The Tokenized Carry Trade

Executive Summary

The tokenized carry trade has become a major demand driver for tokenized assets. Applying a strategy familiar to traditional markets, investors pledge yield-bearing tokens as collateral, borrow stablecoins, and reinvest the proceeds to earn a spread over financing costs. Repeated borrowing and reinvestment can expand their positions and amplify returns, while also increasing demand for the underlying assets.

In this report, we trace the evolution of onchain carry, explain the economics for borrowers, lenders, and curators, and assess what turns a tokenized asset into attractive collateral.

• Carry is expanding beyond crypto-native sources. The lending infrastructure developed during early decentralized finance (“DeFi”) cycles enabled carry trades built around staking rewards and funding payments. Tokenization now extends those mechanics to a broader range of strategies and sources of return.
• Attractive collateral must satisfy borrower and lender needs. Borrowers need asset returns that exceed financing costs. Lenders need sufficient collateral protection and exit liquidity to recover their capital under stress. Collateral selection and financing terms must satisfy both needs.
• Financing suitability goes beyond headline yield. Our framework assesses seven attributes across return, valuation, liquidity, and scale to identify what makes an asset attractive collateral. They include persistent returns above financing costs, reliable valuations, ample exit liquidity, and capacity to grow with demand.
• Existing products can guide future development. We examine selected assets across asset-backed lending, digital credit, reinsurance, and active strategies to demonstrate how returns are generated and which features support or constrain financing. They provide reference points for creating new products and evaluating investment opportunities.

For traditional institutions, this report connects the mechanics of DeFi lending with the product characteristics that can attract onchain capital. For onchain investors and curators, it provides a framework for evaluating a broader range of tokenized strategies. Our goal is to give both sides a common basis for developing products that meet investor demand, support sustainable financing, and expand the opportunities available in onchain capital markets.

The Evolution of Onchain Carry Trades

The carry trade rests on one of the oldest ideas in finance: borrow at a low rate to finance a higher-yielding asset. The difference between the yield and financing cost is the “carry,” which can be amplified with leverage. Sustaining the trade requires both a positive spread and enough collateral to withstand adverse market movements without forced liquidation.

Onchain investors apply the same principle in DeFi by pledging assets as collateral, borrowing stablecoins, and reinvesting the proceeds to increase their exposure. Repeating this process, known as “looping,” increases both returns and risks. Onchain infrastructure makes these trades easier to execute, with stablecoins and collaterals moving, while smart contracts automate borrowing terms and collateral requirements.

The onchain carry trade has evolved through four stages, progressively expanding the range of assets and strategies from which investors can earn yield.

Incentive-subsidized borrowing

Early lending protocols such as MakerDAO, Compound, and Aave enabled investors to pledge crypto assets and borrow stablecoins to buy more crypto, much like buying securities on margin. Compound’s COMP token rewards, introduced in June 2020, created another reason to borrow. Rewards were allocated in proportion to interest paid, so the more a borrower paid, the more COMP they received. As COMP’s price rose, those rewards at times exceeded the interest itself, making financing free or even profitable.

Investors repeatedly deposited and borrowed the same asset to multiply these rewards, making "yield farming" a defining strategy of DeFi Summer in 2020. This popularized the looping mechanics that would underpin onchain carry. The return, however, came from protocol incentives rather than the asset, which distinguishes this stage from the carry trades that followed.

Liquid staking carry

Liquid staking turned those leverage mechanics into a carry trade built around a yield-bearing asset. Ethereum introduced staking in December 2020, but running a validator required 32 ETH, and withdrawals remained unavailable until April 2023. Lido lowered these barriers by pooling investors' ETH and issuing stETH, a liquid token representing their stake and accumulated rewards. This liquid staking token ("LST") made an otherwise locked position available for trading and use as collateral across DeFi.

When Aave accepted stETH as collateral in February 2022, investors could borrow ETH against it, stake the proceeds, and repeat, leveraging the spread between staking rewards and borrowing costs, much like financing a yield-bearing bond through a repurchase agreement (“repo”). Matching ETH-linked collateral with ETH debt removed the currency mismatch, although a decline in stETH's value relative to ETH could still trigger liquidation. Aave further supported the trade with a dedicated Lido lending market in July 2024, enabling loan-to-value ratios ("LTV") of 90% and later up to 95%. The opportunity, however, remained concentrated in ETH staking and sensitive to a narrow, variable financing spread.

Funding-rate carry

Funding-rate carry expanded the opportunity beyond staking rewards to crypto derivative markets. It applies the familiar cash-and-carry structure, where investors buy an asset and short an equivalent futures position, largely offsetting directional price exposure. Perpetual futures have no expiry date and instead use periodic funding payments between longs and shorts to help align their prices with the underlying asset. When funding is positive, longs pay shorts, allowing the hedged investor to collect the payments. Unlike the basis captured through an expiring futures contract, this income remains variable and can turn negative.

Ethena made this largely exchange-based strategy accessible onchain with the launch of USDe in February 2024. Its structure paired crypto holdings with offsetting short futures positions, and its staked form, sUSDe, accrued funding payments and staking rewards. Lending integrations in 2024 allowed investors to pledge sUSDe, borrow stablecoins, and reinvest, extending the LST playbook to a dollar-denominated asset backed by a broader source of carry. Despite the price hedge, funding income remained dependent on crypto leverage demand and could fall or turn negative as demand weakened.

Tokenized yield carry

Tokenization expanded the opportunity beyond crypto-native returns by bringing traditional financial assets onchain. Tokenized Treasury funds first gained traction as relative yields shifted. By July 2023, the Federal Reserve had raised its policy rate above 5%, while the crypto downturn had depressed stablecoin lending rates. These funds gave onchain investors access to Treasury yields and established infrastructure for a wider range of investment products. Tokenized U.S. Treasury funds now total $14.4 billion.

That infrastructure now supports higher-yielding exposures such as credit and active strategies. Aave launched Horizon in August 2025, and many other lending markets, including Morpho and Kamino, also support borrowing against tokenized assets. Investors can apply the mechanics developed around LSTs and sUSDe to a broader pool of assets to amplify their returns. Tokenized credit and active strategies now total $8.1 billion and $4.3 billion, respectively.

How Onchain Carry Trades Work

In traditional securities markets, investors often finance carry trades through repo. An investor sells a security and agrees to repurchase it later at an agreed price, with the difference representing the financing cost. Onchain markets follow a similar principle. Investors pledge assets as collateral and borrow stablecoins against them, while smart contracts govern borrowing limits, interest accrual, and liquidation.

The key differences are speed and continuous access. Once investor onboarding is complete, a position can be financed within minutes without establishing a prime brokerage relationship, and capital can move between lending markets around the clock. That convenience also demands continuous risk management. If a position breaches its collateral threshold, it can be liquidated at any hour, with no guaranteed opportunity to add collateral or repay debt.

To illustrate how this works onchain, consider a carry trader who finances a tokenized credit product with stablecoins borrowed from a lending market. The stablecoins are supplied by lenders through a curator-managed vault, a mechanism we described in our earlier writing.

Borrower

A trader invests $1 million in a tokenized credit product yielding 9%. A lending market accepts the product as collateral, permits borrowing up to 75% LTV, and sets an 80% liquidation threshold. The trader posts the product as collateral, borrows stablecoins such as USDC against it, buys more of the product, and posts that too, repeating the cycle. Each round adds less than the last, since only 75% of each new post can be borrowed, and the position cannot exceed 4x leverage at this LTV. Choosing to stop below the limit, the trader builds a $3 million position financed with $1 million of equity and $2 million of borrowed stablecoins, representing 3x leverage and 66.7% LTV.

• Return: The assets earn $270,000 annually, while borrowing $2 million at 5% costs $100,000. The remaining $170,000 represents a 17% return on equity, before other fees and losses.
• Rate sensitivity: If borrowing costs rise to 8%, the return falls to 11%. At 10%, it falls to 7%, below the product's unlevered 9% yield. Leverage amplifies returns only while the asset earns more than its financing cost.
• Liquidation risk: With debt unchanged, a 16.7% decline in collateral value, from $3 million to $2.5 million, brings LTV to 80%. The position reaches the liquidation threshold, and the collateral is automatically sold to repay the debt. The decline erases half the trader's original equity, before liquidation costs.

Lenders and Curators

The $2 million the trader borrows is supplied by stablecoin lenders. They can supply individual markets directly or deposit into vaults overseen by curators, who select eligible markets and set allocation and risk limits. Suppose a curator vault holds $10 million from lenders. The curator keeps $1 million liquid for withdrawals, supplies $3 million to the market that accepts the tokenized credit product as collateral, and allocates the remaining $6 million across other lending markets. The carry trader borrows $2 million of the $3 million, leaving the market two-thirds utilized.

• Return: The trader's $2 million at 5% pays the vault $100,000 a year. If the other $6 million is fully borrowed at 5%, the vault earns $400,000 in total. After an assumed curator fee of 10% of interest income, depositors receive $360,000, a 3.6% return on their $10 million, ignoring compounding and other fees.
• Rate sensitivity: Borrowing rates generally rise as market utilization, the share of supplied liquidity currently borrowed, increases. Attractive carry draws borrowers, pushing rates higher and narrowing borrowers' spread. Additional lender deposits relieve that pressure, while withdrawals increase it.
• Bad debt: Overcollateralization provides a buffer against losses. If the trader's $3 million of collateral cannot cover the $2 million debt and liquidation costs, the unrecovered balance becomes bad debt that reduces lenders' principal.
• Risk management: Curators assess collateral quality, valuation reliability, and exit liquidity, while managing concentration and withdrawal capacity. They determine whether the yield adequately compensates depositors for the risks.
  

What Makes Attractive Onchain Collateral?

In traditional repo markets, lenders specify which securities they accept as collateral and how much they will lend against each. A haircut, the portion of the collateral’s value that is not financed, provides a buffer against losses. Key considerations are (i) how far the asset’s value could fall and (ii) how quickly it could be sold under stress. More volatile or less liquid assets generally require larger haircuts, reducing the leverage available to borrowers.

Onchain curators face the same collateral questions but must also consider the borrower’s economics. Lenders need confidence that collateral can cover the debt in an unwind; borrowers need an asset whose return persistently exceeds financing costs. The underlying strategy must also offer sufficient investment capacity to accommodate demand. A viable market requires these conditions to work together.

Headline yield is therefore only one part of the consideration. To function as an attractive collateral, a tokenized product must combine attractive carry economics with credible valuation, sufficient liquidity, and capacity to scale. Our framework identifies seven attributes across four categories to assess these requirements.

Return

Determines whether a positive financing spread exists and how reliably it can persist.

• Yield spread: Measures the collateral’s return above borrowing costs. The margin must provide room for financing rates to rise without eliminating positive carry.
• Yield stability: Measures how reliably the asset can sustain its return over the financing period. Contractual income can improve predictability, while losses and changing market conditions can reduce realized returns.

Valuation

Determines the collateral buffer lenders need and whether the price used to monitor the loan provides a reliable basis for liquidation.

• Price stability: How far and fast collateral value can fall over the time needed to liquidate. Larger potential drops mean lower liquidation thresholds.
• Price quality: How closely and promptly the monitored price tracks recoverable value. Issuer NAVs can lag and hide losses, while thin secondary prices can swing and trigger liquidations the underlying value does not justify.

Liquidity

Determines how quickly collateral can be converted into stablecoins, in what size, and at what discount under stress.

• Issuer redemption: Measures when eligible holders can redeem and receive cash. Key considerations are notice periods, settlement times, fees, and any gates or withdrawal limits.
• Secondary liquidity: Measures the buying capacity available through exchanges, market makers, or liquidity facilities. Key considerations are how much collateral can be sold under stress, how quickly, and at what discount.

Scale

Determines whether the strategy can accommodate financing demand at a scale that justifies curator diligence and integration costs.

• Investment capacity: Measures how much additional capital can be deployed without materially reducing returns or weakening underwriting and liquidity. A repeatable origination strategy may offer more capacity than a finite asset pool.

Sources of Yield for Tokenized Carry Trades

The framework favors products with (i) net returns that can persist above financing costs, (ii) potential drawdowns that can be accommodated by buffers, and (iii) capital that can be recovered within a manageable period. In credit markets, these criteria point toward short-dated exposures, contractual income, and scalable origination volume. Trading strategies can also support carry, provided they can meet the same requirements.

Tokenized products that meet these criteria currently fall into four categories: asset-backed lending, digital credit, reinsurance, and active strategies. The examples below include products already accepted as collateral in onchain lending markets and products that could be considered for future integration.

Asset-backed lending

Asset-backed lending generates interest by financing loans, receivables, or their originators. Returns depend on borrower payments and the contractual protections supporting the investor's claim. Short repayment cycles and repeatable origination support liquidity and capacity, while defaults, weaker underwriting, or disappointing recoveries can reduce returns and collateral value.

Digital credit

Digital credit generates interest by lending to digital-asset businesses and their clients. Returns depend on borrower repayment and the collateral or structural protections behind each facility, which range from single-borrower vehicles to diversified portfolios. Short loan terms and frequent rate resets support liquidity, while borrower defaults, collateral losses, or a drop in crypto financing demand can impair capital and reduce reinvestment opportunities.

Reinsurance

Reinsurance generates returns from premiums earned for assuming insurance risk, together with income on the assets held against potential claims. Returns depend on claims experience and on where the investor sits in the loss waterfall, whether in a pooled vehicle or a senior or junior tranche. Collateral buffers and liquidity sleeves support redemptions between contract periods, while a large claims event can reduce value suddenly, and premiums alone do not establish the stability of realized returns.

Active strategies

Active strategies generate returns by capturing trading spreads, volatility premia, or other market opportunities. Returns depend on the manager's execution and on market conditions rather than on contractual cash flows. Frequent valuation and positions that can be unwound quickly support liquidity, while stressed markets, crowded trades, or a fall in crypto leverage demand can reduce returns and make exits slower or costlier.

Conclusion

For issuers and asset managers, the growing role of carry trades implies that financing potential should drive product design and distribution from the outset. Early engagement with curators, lending platforms, and liquidity providers can help align investment terms with borrower economics and lender requirements.

Today, the range of tokenized assets that make attractive collateral for carry trades remains narrow. Broadening that range can introduce new sources of return, attract more capital, and support the next phase of market growth. Realizing this opportunity will require collaboration between the institutions creating investment products and the participants financing them onchain. RWA.xyz is committed to supporting that work through data, analytics, and research.

If you are considering tokenizing a new asset, bringing an existing strategy into onchain lending markets, or allocating capital to tokenized yield opportunities, we would like to hear from you. We welcome the questions, ideas, and partnerships that will help grow this market and advance our shared vision of a more open and interoperable financial system.

Disclaimer

This report is prepared by RWA.xyz for educational and informational purposes only. It does not constitute financial, legal, or investment advice. The information herein is based on publicly available materials as of October 2026. Product structures, parameters, and performance may have changed. Readers should conduct their own due diligence and consult qualified advisors before making investment decisions.