The growing importance of on-chain yields is one of the most defining features in the development of the crypto/digital asset ecosystem. As blockchain technology goes from being predominantly viewed as a medium for speculative and trading activities to one that focuses on creating, preserving, and distributing value on a decentralized basis, on-chain yield is becoming the focal point of this new paradigm. The way on-chain yields are created is through a combination of smart contracts and decentralized infrastructure. In contrast to traditional forms of yield, on-chain yield generates returns through direct transactions on a blockchain using transparent, automated and programmable processes.
Tokenization is an important enabler of on-chain yield as it allows the creation, tracking and distribution of these yields through tokenized assets without the need for manual processing. The emergence of tokenized assets and the concept of on-chain yield is fundamentally changing how income is generated in the digital economy.
This article explores a comprehensive overview about on-chain yield; give an understanding of how these yields are created by tokenized assets; describe the mechanism that produces these on-chain yields; identify the decentralized infrastructure required for generating these yields; explain the risks associated with this emerging model; and help the reader compare this emerging model with existing financial systems.
What is on-chain yield?
On-chain yield is one form of yield that uses blockchain technology. It is generated, calculated, and distributed by a smart contract and recorded in public ledgers, which enables participants to independently verify how yield is created and allocated.
In practical terms, on-chain yield represents the income generated by a user putting his digital or tokenised assets to productive use within a decentralised protocol. This productivity originates from staking, providing liquidity, lending, sharing revenue, or utilizing revenues generated through asset-backed cash flow.
Characteristic Features of On-Chain Yield
An on-chain yield is generated via smart contracts and does not require any type of institutional participation
An on-chain yield is transparent and verifiable on public blockchains
An on-chain yield can often be distributed automatically and continuously.
An on-chain yield can be accessed and utilized anywhere on the globe with minimal entry barriers
An on-chain yield can be programmed and combined across multiple protocols.
The features listed above differentiate on-chain yield from traditional income-generating investment products and are the foundation of decentralised finance.
What Are Tokenized Assets?
Tokenized assets refer to identity representations of ownership, economic rights or claims to a particular asset that are created on a blockchain platform. Tokenization allows assets to continue to have the same financial features that the asset has when viewed in their original form, which is in the form of digital currency.
Types of Tokenized Assets
Crypto-Native Tokenized Assets are assets that were created solely within a cryptocurrency ecosystem and are as follows:
Governance Tokens
Protocol Utility Tokens
Staking Derivatives
Real-World Tokenized Assets (RWAs): RWAs are assets that are traditional financial or physical assets that have been put on-chain. Examples of tradable assets include:
Government and Corporate Bonds
Real Estate and Rental Properties
Commodities such as Gold and Oil
Invoices, Receivables and Trade Finance Instruments
Tokenization makes these assets divisible, programmable and transferable; further, these assets may generate yields in decentralized systems.
How Tokenised Assets Generate Yield on the Blockchain
Tokenised assets generate on-chain yield through a variety of mechanisms that transform passive digital holdings into productive capital. These mechanisms are embedded directly into decentralized protocols using smart contracts, allowing yield to be calculated, adjusted, and distributed automatically. Depending on the design of the protocol, yield may be fixed, variable, demand-driven, or dynamically adjusted using algorithmic rules such as rebasing mechanisms.
Each yield model reflects a different economic function—credit provision, network security, liquidity provisioning, revenue participation, or real-world cash flow replication. Together, these models form the foundation of decentralized income generation.
1. Lending/borrowing based yields
Decentralised lending is one of the most widely adopted forms of on-chain yields and is considered one of the earliest forms of lending. The decentralised model enables users to convert their tokenised assets into capital, that yields interest, without relying on a centralised lender.
How it works:
Deposit of tokenised assets into a shared lending pool
Borrowers receive liquidity for providing over-collateralised positions
Interest payments made by borrowers are distributed proportionally to lenders
Rates adjust automatically based on utilization and demand
Some lending protocols incorporate rebasing mechanisms to reflect yield accrual. Instead of distributing interest through periodic transfers, a rebasing token adjusts the user’s balance algorithmically. As interest accrues, the number of tokens held increases (positive rebase), while maintaining the same proportional ownership within the system. This approach allows yield to compound automatically without manual reinvestment.
Yield Drivers:
Interest rate levels are subject to continual adjustment based on the demand and use of the assets being loaned.
Penalties can be imposed for the liquidation of collateral if thresholds are exceeded.
Protocol-level fees and incentive mechanisms
Tokenised Stablecoins, Tokenised Treasuries and some RWAs are typically used as collateral in the lending arena as they have relatively stable values and can therefore produce consistently predictable yields.
2. Network Security Yield and Staking Yield
Staking yield is generated by providing tokenized assets to facilitate the operation and security of blockchain networks and decentralized protocols.
How Yields are Generated:
Validators receive a portion of the block rewards and fees earned by successfully validating transactions for maintaining the integrity of the network
Reward distribution for stakers is determined by the amount contributed (stake size) and their level of participation as validators
Smart contracts are used to automate the calculation and distribution of rewards
Tokenized staking derivatives enable users to convert their staked assets into liquid or usable formats for other applications; thereby improving the capital efficiency of their staked assets while still receiving staking rewards.
3. Liquidity Providers and Market-Making Yield
Decentralized Exchange platforms traditionally rely on Liquidity Providers (LPs) to support the exchange of assets and the discovery of pricing for those assets.
Yield is produced through the following methods:
Trading Revenues collected from Swaps occurring inside Liquidity Pools
Incentivized Rewards assigned to attract LPs and maintain their liquidity
The continuous accumulation of Fees via Automatic Compounding Methods
LP Tokens are fractional ownership representations of a given Liquidity Pool, where LP Tokens are minted directly on-chain according to the Trading Volume, along with all associated Incentive Models.
4. Revenue Distribution and Cash Flow Tokens
There are certain tokenized assets that distribute a portion of the Protocol/business's Revenues to all Token Holders. The following represent Revenue Streams:
Transaction Fees and platform Fee Revenue
Subscriptions and/or Service-based Revenue
Licensing Fees, Data Access Fees, or Intellectual Property Fees
Predefined Revenue Share Agreements are created using Smart Contracts. Hence, any revenue shared via a Smart Contract is automatically allocated, resulting in a transparent and uniformly governed allocation of revenues.
5. Tokenized Real-World Asset (RWA) Yield Models
Tokenized real-world assets extend traditional income-generating assets into decentralized systems. These include bonds, real estate, trade finance instruments, and commodity-backed structures.
Examples of RWA-Based Yield:
Rental income from property portfolios
Interest payments from government or corporate bonds
Repayment flows from invoices and receivables
Leasing income from equipment or commodities
Off-chain cash flows are captured through custodians, legal agreements, and oracle systems, then reflected on-chain. In some advanced models, rebasing tokens are used to mirror periodic income accrual, adjusting balances automatically to reflect earned yield.
This approach allows traditional cash flow instruments to behave like programmable financial assets within decentralized ecosystems.
Why Rebasing Mechanisms Matter in On-Chain Yield
Rebasing mechanisms play a critical role in modern yield design by:
Automating compounding without manual reinvestment
Reducing transaction overhead for yield distribution
Maintaining proportional ownership across participants
Enabling real-time or high-frequency yield adjustments
Rather than treating yield as an external payout, rebasing integrates income directly into token economics, aligning incentives and improving capital efficiency.
Tokenized Real-World Asset Yields
Tokenized Real-World Assets (RWAs) expand the yield of Traditional Income Generating Assets (TIGAs) by creating digital representations on public blockchains.
Examples of Common Yields:
Rental Income from Residential and Commercial Properties
Interest Incomes from Bonds Issued by Governments or Corporates
Repayments of Trade Finance Related Invoices and Receivables
Leases on Equipment or Commodities
Through Custodians, Legal Contracts and Oracle Systems, Offchain cash flows are converted to On-chain Yield Generation, providing accurate monthly/annual data for all Token Holders.
The Role of Smart Contracts in Yield Generation
Smart contracts act as the operational backbone of on-chain yield, governing how returns are calculated, allocated, and distributed.
Key Functions of Smart Contracts
Automate yield calculations based on predefined rules
Enforce protocol logic without discretionary intervention
Minimize counterparty, settlement, and operational risk
Enable interoperability and composability across protocols
Once deployed, smart contracts operate continuously and transparently, providing predictable and verifiable yield flows that form the foundation of decentralized yield systems.