Two tokens can sit side by side, both claiming to be backed by short-term US treasuries, both quoting a yield that tracks the same underlying, and both using almost identical marketing copy. One of them, if the sponsor vanishes tomorrow, gives you a legal claim on a segregated pool of real securities that a court can point to and unwind. The other gives you a claim on a company that owes you money, which is a very different thing when that company is the one holding the assets. Nothing on the token page tells you which is which. That is the whole problem with real-world-asset diligence, and it is why I stopped trusting the phrase backed by a long time ago.
The word that actually matters is redeemable. Backed by describes what the sponsor says is somewhere behind the token. Redeemable for describes what you, specifically, can turn the token into, on what timeline, through what process, and whether the door is open to someone holding your size. Those two ideas get blended together on purpose, because the honest version of the second one is usually less flattering than the first.
Start with the legal claim, not the yield
Before you look at the return, figure out what the token legally is. This sounds academic until the first time a wrapper de-pegs and you realize you were never entitled to the thing you thought you owned. Broadly the claim falls into one of a few buckets, and they are not equally good.
The strongest structure is where the token represents a direct ownership interest in a fund or a share class, and the assets sit in a bankruptcy-remote vehicle with a named custodian and a transfer agent. If the sponsor blows up, the assets are legally separated from the sponsor's own balance sheet, and there is a defined process to get them back to holders. The weakest structure that still gets to say backed by is where the token is a debt claim against an operating company. You are an unsecured creditor. The company might be holding beautiful, pristine treasuries, but if it also has other liabilities, you are standing in line with everyone else when things go wrong. Same underlying asset, completely different risk.
In the middle you get wrappers of wrappers. A token that is redeemable for another token that is redeemable for a fund share. Every layer is another counterparty, another entity that has to stay solvent and cooperative, and another place where redemption can quietly get gated. I treat each layer as a multiplier on how much can go wrong, not an inconvenience to skim past.
Then trace the custody and the redemption path
Once you know what the claim is, the next job is to follow the asset and follow the exit. These are separate questions and both matter.
On custody, you want a name. Not "assets are held with a leading regulated custodian," an actual named institution you could look up, ideally with third-party attestations that are recent and specific about what they cover. An attestation that confirms a dollar balance existed on one day tells you less than an audit that speaks to whether the assets are unencumbered, meaning nobody has pledged them somewhere else as collateral. Rehypothecated collateral is the classic way a pool that looks fully backed turns out to be spoken for twice.
On redemption, the questions that separate a real product from a nice-looking one are boring and specific:
- Who is actually allowed to redeem directly? On a lot of tokenized funds, only whitelisted or accredited entities can hit the redemption window at par. Everyone else exits by selling on a secondary market at whatever price a thin order book gives them, which is not the same as redeeming.
- What is the minimum? If direct redemption requires a size you will never hold, then for you the token is only ever worth what someone else will pay for it.
- What is the timeline and the cutoff? Same-day, T+1, or a weekly window with a notice period. During calm markets nobody notices. During stress, the gap between "redeemable" and "redeemable next Thursday if you filed by Tuesday" is where people get hurt.
- Can redemption be suspended, and who decides? Almost every honest structure has a gate clause. That is fine. What you want to know is who pulls it and under what conditions, because a gate that can be pulled at the sponsor's sole discretion is a different instrument from one bound by defined rules.
If you cannot answer these four from the documentation, that is your answer. A product that wants retail money and cannot plainly state who can redeem and how fast has usually made a decision about how much it wants you to know.
Reconcile the on-chain yield against the off-chain asset
Now the part people actually care about, the return. The test I use is simple to state and annoying to fake. The yield the token pays you should be explainable as the yield of the underlying asset, minus the fees, minus a haircut for whatever the wrapper adds. If a token backed by short-term government paper is paying you more than short-term government paper yields, that extra return is coming from somewhere, and you need to find the somewhere before you take the money.
Usually the somewhere is one of a few things. The sponsor is subsidizing the yield to bootstrap the product, which is fine until it stops. Or there is leverage in the structure you did not price. Or the "treasury" exposure is actually a basket that includes riskier paper the marketing rounds off to "cash equivalents." Or the yield is real but the fees quietly eat a chunk of it in ways the headline number does not show. Management fee, minting and redemption fees, a spread baked into the oracle price, gas and bridge costs if you have to move across chains to redeem. Net of all that, the number can look very different from the banner.
A quick sanity workflow I run before touching any RWA token:
- Name the underlying asset precisely, and find its plain benchmark yield.
- Name the legal claim. Ownership interest, fund share, or debt against an entity.
- Name the custodian and find the most recent attestation, checking whether it speaks to encumbrance.
- Write down who can redeem, the minimum, the timeline, and the suspension rules.
- Add up every fee and spread between you and the underlying, then subtract from the quoted yield.
- If the net still beats the benchmark, write one sentence explaining exactly why. If you cannot, assume the gap is risk you have not identified yet.
The tokenized treasury fund that survives this is boring. Named custodian, clear fund structure, redemption open to a class you can join, yield that lands slightly below the benchmark once fees come out, and documentation that says all of this without you having to interrogate a support agent. The weaker wrapper using the same words tends to fail at step two or step four, and it almost always fails at step six, where the extra yield refuses to explain itself.
None of this requires you to be a lawyer or read every line of a prospectus. It requires you to hold two phrases apart in your head and refuse to let a marketing page merge them. Backed by is a story about the sponsor. Redeemable for is a promise to you. When they match, you probably have a real product. When the first one is loud and the second one is vague, you have found the gap, and the gap is the whole risk.