Lately I have been inundated with client requests for various industry-level reports on the tokenization space. One piece of data that stood out to me as I was going through my research process was composition of the No.1 tokenization vertical: tokenized USD cash.
There has been plenty of ink spent on the topic. You can read about its usage breakdown here. But they all tend to treat the category as if every product in the category is similar and homogenous in their makeup.
But that’s not quite correct if we look under the hood.
Below are the data for tokenized cash products with at least $500 million AUM.
There are quite a few different flavors of tokenized cash. Do you see them?
In this week’s newsletter, I will unpack these different flavours and the demand signal they are giving out.
Let’s dive in.
Category 1
We can broadly split the tokenized USD cash product list above into two categories.
One that features USDT and USDC and involves depositing USD cash in bank accounts and a private issuer sending customers tokenized USD in tokens. Let’s call this category 1. And those that do NOT fit the bill: DAI, USDe, USDD, BUIDL. Let’s call these category 2.
Category 1 encompasses the biggest products and commands most of the market share. This category is more commonly known as stablecoins and they are dominated by USDT and USDC. Stablecoins came into existence in the early days of digital assets as a solution for a lack of a stable store of value when it comes to trading and sending payments.
Over time, they have become ubiquitous throughout the digital asset ecosystem. For example, USDT is the single most used trading pair asset across payment transfers and both the spot and derivatives market in digital assets. You can read more about this here.
Using the latest data from CCData, the spot and derivatives markets add up to over $4 trillion in monthly trading volume.
In addition, the payment transfer numbers are ranging in $40-$50 billion a month according to Visa.
To serve these two particular markets, the tokenized USD product has to be everywhere and to have great liquidity. In other words, the scale and liquidity availability of these tokenized USD products matter a lot.
And that is an important reason why outside the two dominant products, USDT and USDC, there hasn’t been a successful challenger. Even PayPal USD, with its supposedly much larger distribution network outside of the crypto native world, hasn’t really made a dent in their dominance.
For category 1 products, the need for good liquidity and composability remains top priorities for any users looking for a tokenized USD solution in the digital asset ecosystem.
What about products in category 2?
Category 2
While we grouped DAI, USDe, USDD and BUIDL together as category 2 earlier, they are actually quite different from each other as well as category 1 products.
For example, both DAI and USDD are counted as a form of tokenized cash. But unlike the USD in bank accounts backing USDT and USDC, the backing for DAI and USDD come from crypto native assets, specifically ETH and TRX.
In other words, while DAI and USDD are overcollateralized, the collateral is more volatile and less illiquid than the USD bank deposits behind USDT and USDC.
So what purpose do DAI and USDD serve?
The answer lies in their holding data. Unlike USDT and USDC, DAI and USDD are much more of a yield play. See charts below.
Not only are yield opportunities on DAI and USDD average higher than USDC and USDT, more of their supply is held at venues offering yield and they also have a more concentrated supply distribution, suggesting less prevalent usage amongst payment users. See the table below using Defillama’s data.
From this data, we can see users of “tokenized cash” have objectives other than simply payment and store of value. Although payment and store of value remain the dominant goals for the category.
In addition to liquidity and utility, there is also a yield component to holding these cash-like assets. While USDD and DAI may have provided inkling of this, USDe and BUIDL data are the telltale signs that yield is as important as other demand drivers.
For context, BlackRock’s BUIDL was the first onchain native money market fund from the asset manager giant. It was launched in March 2024, within 4 months, the total AUM exceeded $500 million. This means $500 million was put into the fund in exchange for approx 5% annual yield backed by US TBills. As a way of comparison, it took USDT more than 2.5 years to reach this number after the launch.
However if you thought BUIDL’s numbers were impressive, then you would need to put USDe in a class of its own. Launched at the end of 2023, Ehena’s USDe went from 0 to $2 billion in 4 months. It has grown another 60% since then, sitting at $3.2 billion currently.
What’s the secret to their growth? Yield.
While DAI and USDD can offer 5%+ yield on paper, that number is 1) variable (depending on crypto market activities), 2) hackable (downside risk is 100%), 3) lacks any investor protection recourse when things go wrong.
BlackRock’s BUIDL in comparison offers a stable and a higher yield that has all the guardrails of the traditional fund offerings in terms of operational process and regulatory and legal compliance.
USDe? Well it doesn’t exactly have BlackRock’s safety mechanism but it does offer 11% for users who are willing to “stake” - a form of locking in USDe for a fixed amount of time.
Though one caveat to note is that USDe is NOT strictly speaking a tokenized cash product. It is a tokenized hedge fund basis trading strategy wrapped up in a structured yield product with a cash marketing component. You can read in-depth analyses of USDe here and here.
However, that is beside the point. Both BlackRock’s BUIDL and USDe AUM growth trajectories are the strongest signals yet from the market that while the store of value needs is currently being served by USDT and USDC, the race to meet market’s demand for attractive risk/reward yield products has barely begun.
While USDe is dominating in the tokenized basis trading space, BUIDL has serious competition from two other players. You can read more about who they are and how they compare vs each other here.
Conclusion
The stories being told by the data on tokenized cash usage can be summarized:
Store of value has been an important solution and it is first tokenization product to reach meaningful adoption stage with a market cap of $100 billion+
Yield generation and management is going to be the next big tokenizaiton adoption trend with a range of diverse products likely to be on the offer.
How will this tokenized yield trend shake out? Who will be the next to break out the market with risk opportunities other than US treasuries?
Stay tuned.
Disclaimer: This content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.
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