Traditional assets are arriving on-chain, and the argument in a new TechFlowPost article is simple: they do not fit the infrastructure DeFi built for itself in its first phase.
Published on Oct. 8, the piece says the original DeFi stack emerged under a very specific set of constraints. Tradable assets were mostly crypto-native tokens with no cash flow, no legal entity behind them, and violent price swings. Market participants were largely anonymous wallets with no credit history and no practical enforcement path in the event of default. Ethereum itself could process only 7 to 8 transactions per second, with block intervals of roughly 13 to 15 seconds. In that market, automated market makers, overcollateralized lending, and perpetual futures were not ideal forms. They were workarounds.
The article was written by Vaidik Mandloi and translated by Chopper for Foresight News.
Why the first wave of fixed-rate DeFi did not last
The piece looks back to 2020 through 2022, when a group of DeFi protocols tried to build fixed-rate lending products on-chain and offer users returns that resembled government bond income. Element.fi raised $32 million from a16z crypto and Polychain Capital. Notional.finance raised $10 million in a round led by Pantera Capital. At least five other projects followed.
None of them survived, according to the article. The reason was not hard to locate: the yield packaged into those products was not backed by durable income. It came from token emissions and leverage loops. Once users rushed for the exit, the structure broke down.
The one protocol the article says made it through that washout is Pendle.finance. Its survival, in this telling, came from the arrival of tokenized Treasury exposure on-chain through assets tracked by RWA.xyz. Real cash flow finally appeared, and developers could build around actual yield instead of synthetic incentives. The author argues that the same shift is now set to hit the rest of DeFi’s core components.
How early market conditions shaped DeFi design
The article’s broader point is that DeFi’s original architecture made sense for the market of 2018 and 2019. On-chain finance at the time revolved around crypto-native tokens. They had no cash flow and no legal issuer that could anchor claims. Price behavior was extreme, with assets capable of losing 90% of their value within an afternoon.
The people using these markets were mostly retail speculators and a smaller set of crypto-native funds willing to take outsized risk in pursuit of high returns. Borrowers were anonymous addresses, not identified individuals or institutions. There was no credit file, no legal identity, and no straightforward route to recovery after default.
That meant the basic conditions required for mature finance were missing. Market makers in traditional venues quote both sides because they can hedge assets whose behavior is at least somewhat predictable. Lenders can price credit because they know who the borrower is and can assess repayment capacity. Early DeFi had neither of those things.
That environment forced developers to patch around the gaps. In the article’s framing, DeFi’s first generation was a collection of constrained solutions to a market that lacked the ingredients of normal finance.
AMMs were a practical substitute, not a superior market design
Uniswap is the article’s main example. It argues that automated market makers did not emerge because they were a better way to trade. They emerged because almost nobody wanted to make two-sided markets in tokens that could collapse 90% in minutes. So price formation moved into smart contracts. Anyone could deposit capital into a pool, and the constant-product formula would handle price discovery as token balances shifted.
The author stresses that this is fundamentally different from traditional market making. A traditional market maker earns the spread. An AMM liquidity provider does something else. When arbitrageurs spot a difference between the pool and the external market and trade that gap away, the LP is effectively paying the arbitrageur while the portfolio is rebalanced.
The article gives a simple example. A user deposits equal value in ETH and USDC into a Uniswap pool. If ETH rises 20% on Binance before the pool reflects that move, arbitrageurs buy the underpriced ETH from the pool and sell it on Binance. The result is more USDC and less ETH in the pool. Economically, the LP has sold ETH into the rally.
If ETH falls, the reverse happens. Arbitrageurs sell ETH into the pool and remove USDC. Trade after trade, the LP position drifts back toward a 50/50 mix while the arbitrageur captures the price difference. The article adds that, under an extreme assumption where every trade is pure arbitrage and there is no retail flow, LPs can still end up with positive returns after collecting small fees on each trade.
Lending and derivatives were shaped by the same limits
The same logic, the article says, explains why Aave and Compound adopted overcollateralized lending. Banks in conventional finance lean on credit scores and income records to judge whether a borrower can repay. Anonymous on-chain wallets offer none of that. Overcollateralization was the available answer.
Perpetual futures fit the same pattern. Standard dated futures require counterparties to perform at a fixed settlement date. In crypto markets, where anonymous capital chases the highest yield across protocols, reliable long-dated commitments are difficult to maintain. Perpetuals solved for that condition.
These designs worked well enough to produce functioning products. Still, the article argues that the overall system shared a structural weakness: the collateral beneath it did not generate income.
A Minsky-style test for DeFi collateral
To make the point, the article borrows from Hyman Minsky and asks a basic question of any financial arrangement: does the income from the underlying asset cover the debt attached to it?
- Hedge finance: cash flow covers both interest and principal.
- Speculative finance: cash flow covers interest, but principal must be rolled over through refinancing.
- Ponzi finance: cash flow covers neither interest nor principal, so the structure depends on rising asset prices.
The article then places a typical Aave position into that framework. A borrower deposits $10,000 worth of ETH and borrows $6,000 in USDC. The ETH in the vault does not generate income that can service the debt. The loan remains viable only as long as the market price of ETH stays above the liquidation threshold. If the price drops far enough, the protocol liquidates the collateral and closes the position.
In other words, the safety of the position depends on the asset price holding up until the borrower exits. The piece says that most overcollateralized DeFi lending backed by crypto-native collateral falls into this category.
What changes when the collateral is a tokenized Treasury
The picture looks different if the collateral is swapped for tokenized U.S. Treasuries. The protocol and the borrower stay the same, but the borrower now posts $10,000 worth of tokenized Treasuries yielding 4.5% annually and borrows stablecoins at a 3% cost.
That collateral produces $450 a year, while the funding cost is only $300. Cash flow from the collateral covers the cost of the debt. The article emphasizes that this income comes from U.S. government bond coupons rather than crypto market cycles. Whether Bitcoin trades at $100,000 or $30,000, the cash flow continues. Each additional day the position stays open, the borrower’s footing grows firmer rather than weaker.
That is a sharp contrast with ETH-backed borrowing, where every downturn pushes the borrower closer to liquidation because the collateral itself produces nothing.
The article argues that when most DeFi collateral is non-yielding and relies on price appreciation, the entire system is exposed to the same one-way risk. A drop in one asset class triggers liquidations. Forced selling pushes prices lower. That leads to more liquidations and a cascading unwind. The author says this pattern has been visible in nearly every crypto downturn since 2020. Many people treat it as a black swan, but the article says the outcome is unsurprising when collateral has no cash flow.
Once a meaningful share of collateral is made up of income-producing assets such as U.S. Treasuries, the position can remain more stable even during a crypto selloff because its cash flow is independent of crypto prices. That, in the article’s view, gives on-chain lending a safety floor that does not rely on a bull market for the first time.
The article cites one data point to illustrate the shift: tokenized money market fund shares grew from $770 million at the end of 2023 to $14.82 billion on Oct. 5, 2026, a roughly 19-fold increase in less than three years.
The article compares stablecoins to this generation’s eurodollars
To show that parallel markets can become foundational, the article turns to a historical analogy. In 1955, Midland Bank in London began taking U.S. dollar deposits. At the time, Regulation Q in the United States capped the interest rates banks could pay on deposits, while British banks faced no such ceiling. Dollar capital moved offshore in search of better returns, creating a parallel dollar system that grew to roughly $4.7 trillion by the early 1980s.
The Federal Reserve did not crush the eurodollar market, the article notes. It adapted to it. A parallel market created by the limits of the incumbent system tends to expand until those limits are removed. Regulation Q was gradually repealed, money market funds emerged in the U.S. as a domestic alternative, and the parallel dollar structure was eventually folded into the mainstream.
That is the backdrop for the article’s comparison: stablecoins are this generation’s eurodollars, and tokenized Treasuries are this generation’s money market funds.
Why Pendle endured
The article returns to the protocols that tried to build rate markets before real on-chain rates existed. Those projects, it says, depended on token issuance and leverage loops as substitutes for genuine yield. A full yield curve cannot be built on income streams that can be switched off by protocol governance.
Pendle survived because tokenized Treasuries and yield-bearing stablecoins finally gave the market government-backed cash flow to anchor products. The article says Pendle’s Boros is now the first interest-rate-swap-like product on-chain that can function normally.
Trading infrastructure for tokenized traditional assets may look more like traditional finance
The same reasoning extends to market structure. According to the article, LPs in liquid AMM trading pairs lose around 11% of capital per year to arbitrage. For tokens that were not listed on centralized exchanges, paying that arbitrage cost may once have been the only workable option. But for assets such as Treasuries, equities, and bonds, all of which already trade in deep global markets, that model makes far less sense.
Those assets need on-chain order books with performance close to centralized exchanges, the article argues. It says many blockchain teams spent years claiming this was not technically feasible, but Hyperliquid proved otherwise. At one point in early 2025, it handled about 60% of on-chain perpetual futures volume.
The article ends with a broader conclusion. DeFi’s first infrastructure layer was designed for anonymous wallets holding volatile, non-yielding tokens. Now that the underlying assets are changing, the stopgap structures of that period are likely to fade. What replaces them may look much closer to the architecture of traditional electronic markets that have processed trillions of dollars a day for decades.
