For years, tokenization has been touted as a bridge between crypto and Wall Street. Put treasuries on chain. Issue tokenized money market funds. Represent actions numerically. The assumption was simple: if assets move on-chain, institutions will follow.
But tokenization alone has never been the end game. As we have recently argued in our institutional perspective, the real institutional unlocking lies not in the digitalization of assets, but in the financialization of yield.
Following regulatory clarity emerging in 2025, institutional interest in digital assets has shifted from exploratory exposure to infrastructure-level participation. Surveys increasingly suggest that institutional commitment to DeFi could rise sharply over the next two years, while a significant share of allocators explore tokenized assets. Yet large allocators are not using crypto just to hold tokenized wrappers. They enter for yield, capital efficiency and programmable guarantees. This requires a different type of DeFi than that built at retail in 2021.
In traditional finance, fixed income instruments are rarely held in isolation. They are repo, pledged, rehypothecated, detached, hedged and integrated into structured products. The return is negotiated independently of the principal and the guarantees circulate fluidly on the markets. The plumbing is as important as the product.
DeFi is now starting to replicate these core functions.
Tokenized Treasury or shares are only marginally useful if they behave like a static certificate. Institutions want tokenized assets to become functional financial instruments: collateral that can be deployed, funded and managed with risk; a return that can be isolated, evaluated and negotiated; and positions that can be integrated into broader strategies without breaking compliance constraints.
This is the shift from first-order tokenization to second-order yield markets.
The first design models are already moving in this direction. Hybrid market structures are emerging in which permissioned and regulated assets can be used as collateral while borrowing is facilitated through the use of permissionless stablecoins. At the same time, yield trading architectures expand the range of activities investors can undertake with tokenized assets by separating primary exposure from the yield stream. Once the yield component of an on-chain asset can be valued, traded and compounded, tokenized instruments become usable in strategies much closer to those that allocators already use in traditional markets.
For institutions, this is important because it transforms real world assets (RWA) from passive exposure to active portfolio tools. If yield can be traded independently, then hedging and duration management become more feasible, and structured exposures become possible without rebuilding the entire stack off-chain. Tokenization stops being a narrative and starts becoming market infrastructure.
However, performance infrastructures will not be enough to provide an institutional dimension. The institutional constraints that shaped traditional markets have not disappeared; they are translated into code.
One of the most important constraints is confidentiality. Public blockchains expose balances, positions, and transaction flows in ways that conflict with the operation of professional capital. Visible liquidation levels invite predatory strategies, public trading history reveals positioning, and cash management becomes transparent to competitors. For institutions accustomed to controlled disclosure and information asymmetry, these are not philosophical objections, but operational risks.
Historically, privacy in crypto has been treated as a regulatory responsibility. What emerges instead is privacy as an infrastructure that enables compliance.
Zero-knowledge systems can prove the validity of transactions without revealing sensitive details. Selective disclosure mechanisms can allow institutions to share limited visibility with auditors, regulators or tax authorities without disclosing the entire balance sheet. Proof systems can demonstrate that funds are not linked to sanctioned or illicit sources without disclosing a broader transaction history. Even approaches such as fully homomorphic encryption portend a future in which certain types of calculations can take place on encrypted data, expanding the set of financial actions that can be performed privately while retaining verifiability where necessary.
This is not about “privacy as opacity”. This is programmable privacy, and it more closely resembles established market structures, such as confidential brokerage workflows or regulated dark pools, than anonymous shadow finance. For institutions, this distinction makes the difference between an unusable system and one that can be deployed at scale.
A second constraint is compliance. Regulatory clarity has reduced existential uncertainty, but it has also increased expectations. Institutional capital requires eligibility checks, identity verification, sanctions screening, auditability and clear operational regimes. If the next phase of DeFi aims to achieve real-world midstream value at scale, compliance cannot remain an afterthought on a permissionless system. This must be integrated into the market design.
This is why one of the most important models emerging in institutional DeFi is a hybrid architecture combining permissioned collateral and permissionless liquidity. Tokenized RWAs can be restricted at the smart contract level to approved participants, while borrowing can take place via widely used stablecoins and open liquidity pools. Identity and eligibility checks can be automated. Constraints on provenance and valuation of assets can be applied. Audit trails can be produced without every operational detail being made public.
This approach resolves a long-standing tension. Institutions can deploy regulated assets in DeFi without compromising core requirements for custody, investor protection, and sanctions compliance, while benefiting from the liquidity and composability that made DeFi powerful in the first place.
Taken together, these changes point to a broader reality in which DeFi is not simply attracting institutional capital; it is in fact reshaped by institutional constraints. The dominant crypto narrative is still focused on retail cycles and token volatility, but beneath that surface, protocol design is evolving toward a more familiar destination: a fixed-income stack where collateral movements, yield trading, and compliance are operationalized.
Tokenization was the first phase because it proved that assets could live on-chain. The second phase consists of ensuring that these assets behave like real financial instruments, with return markets and risk controls recognized by institutions. When this transition matures, the conversation shifts from crypto adoption to capital markets migration.
This change is already underway.
