How Tokenized Treasuries Work: A Complete Guide

Tokenized US Treasuries are the dominant category in the RWA market, representing approximately $14-16 billion of the $33 billion total on-chain RWA value as of mid-2026. They solve a specific problem: how can a holder of on-chain capital earn the risk-free rate of return without moving funds back into traditional banking infrastructure? The answer is a token that holds actual US government debt, distributes the yield on-chain, and can be held, transferred, or used as collateral within the DeFi ecosystem. This guide explains the complete mechanics from Treasury purchase to on-chain yield distribution.

Step 1: The Traditional Asset Layer

A tokenized Treasury product starts with a legal entity (a fund, an SPV, or a trust) purchasing actual US government securities: Treasury bills (duration under 1 year), Treasury notes (1-10 years), or money market funds that hold only government securities. The specific instruments depend on the product’s strategy. BlackRock BUIDL holds: US dollar cash, US Treasury bills, US government money market fund shares, and repurchase agreements collateralized by US government securities. Franklin Templeton BENJI holds shares of the First US Government Money Market Fund (FOBXX), a ’40 Act registered money market fund investing in US government securities. Ondo OUSG holds BUIDL shares (approximately 100% as of early 2026), making it a tokenized layer on top of BUIDL rather than a direct Treasury holder. These underlying assets generate yield continuously through coupon payments and repurchase agreement income.

Step 2: The Legal Wrapper

The entity holding the Treasuries must have a legal structure that gives token holders an enforceable claim on those assets. BlackRock BUIDL: structured as a Cayman Islands registered fund. Token holders are registered shareholders of the fund. Securitize acts as transfer agent, maintaining the authoritative ownership record both on-chain and in a regulated registry. Franklin Templeton BENJI: structured as shares of FOBXX, a US-registered ’40 Act investment company. This gives US retail investors the strongest regulatory protections available in any tokenized fund structure. Ondo OUSG: Cayman SPV that holds BUIDL shares. OUSG holders own SPV interests that have economic exposure to BUIDL’s Treasury portfolio through the SPV’s BUIDL holding.

Step 3: Minting and Investor Access

To invest, a qualified investor completes KYC/AML verification through the protocol’s onboarding process (typically through Securitize, Ondo’s portal, or the Franklin Templeton app). Once verified, the investor sends USD or stablecoins to the protocol. The protocol uses these funds to purchase additional Treasuries in the portfolio and mints new tokens representing the investor’s proportional ownership. Most tokenized Treasury products maintain a $1.00 NAV per token. Yield either accumulates in the NAV (the token price gradually rises above $1.00 as interest accrues) or is distributed as additional tokens to maintain the $1.00 price per token (rebasing).

Step 4: Daily Yield Distribution

The Treasury securities in the portfolio generate interest income continuously. Most tokenized Treasury protocols distribute this income daily or monthly. Distribution mechanics vary: NAV accumulation: the token’s value rises slightly above $1.00 daily as interest accrues; when the investor redeems, they receive $1.00 of original principal plus the accumulated interest in additional tokens. Daily rebasing: additional tokens are minted each day representing the day’s interest and distributed to all token holders. Daily cash distribution: some products distribute yield as separate stablecoin transfers to investor wallets. Current yield context: US T-bill yield of approximately 4.5-5% annually equals approximately 0.012-0.014% per day, or approximately 0.08-0.10% per week.

Step 5: DeFi Integration (The Differentiating Feature)

What distinguishes tokenized Treasuries from simply holding a money market fund in a traditional brokerage account is DeFi composability. Tokenized Treasury tokens accepted as DeFi collateral: Aave Arc and Morpho both accept BUIDL and OUSG as collateral, allowing the depositor to borrow stablecoins against the Treasury position. This enables the “yield on collateral” strategy where an institution earns Treasury yield on the collateral while borrowing additional capital. Tokenized Treasuries in DEX liquidity pools: USDY and OUSG have liquidity pools on Uniswap and Curve, enabling secondary market price discovery and instant exit for pool participants. Tokenized Treasuries in yield optimization: Pendle Finance allows splitting USDY or OUSG into principal and yield tokens, enabling fixed-rate Treasury exposure or leveraged yield strategies.

Comparison: BUIDL vs OUSG vs BENJI vs USDY

Redemption: How to Exit

Primary redemption through the issuer: the investor burns tokens and receives cash (USD or stablecoins) at NAV. Redemption periods vary from same-day (USDY) to T+1 to T+5 business days (BUIDL). Secondary market exit: tokens with DEX liquidity pools (USDY on Uniswap, OUSG on Curve) can be sold directly on-chain without waiting for issuer redemption. The DEX price may differ slightly from NAV depending on pool depth and current demand. BUIDL, with its $5M minimum, has very limited secondary market options due to the small universe of eligible buyers.