Venture Capital is Overfunding RWA Infrastructure, Undercapitalizing Use Cases

Infrastructure is overfunded. VCs have allocated billions to tokenization rails like Centrifuge, Ondo Finance, and Maple, betting on a 'build it and they will come' thesis. This capital targets middleware—the plumbing for compliance, custody, and settlement—before proving end-user demand exists at scale.

Use cases are undercapitalized. The capital deficit exists at the application layer where real economic activity is generated. Protocols that create tangible utility—like trade finance on Provenance or carbon credit markets like Toucan—require deep liquidity and integration capital that infrastructure-focused funds ignore.

The incentive mismatch is structural. Infrastructure investments offer clearer venture-style returns and defensible IP, while funding applications is akin to high-risk growth equity. This creates a capital desert for RWA dApps, stalling the flywheel where usage justifies further infrastructure build-out.

Evidence: The $7.1B gap. In 2023, over $7.1B of venture funding flowed into blockchain infrastructure. Less than 15% targeted sector-specific applications, with RWAs receiving a fraction of that. The infrastructure is built for a demand surge that may never materialize without parallel application investment.

Infrastructure is overfunded. VCs have poured billions into tokenization rails like Centrifuge, Ondo Finance, and Maple, creating a saturated market of pipes. This capital chases the 'picks and shovels' narrative but ignores a fundamental truth: infrastructure value accrues only with usage.

Use cases are undercapitalized. The real innovation bottleneck is not the plumbing but the on-chain primitives and applications that consume tokenized assets. Protocols building DeFi yield vaults, structured products, or payment systems for RWAs struggle for funding despite driving network effects.

The liquidity trap. This creates a liquidity mismatch: billions sit in idle infrastructure while nascent applications like Backed Finance's bC3M or Matrixdock's T-Bills fight for meager on-chain liquidity. The result is high TVI (Total Value Inefficiency).

Evidence: Ondo's OUSG fund holds ~$400M, yet its primary on-chain utility is as collateral in a handful of Morpho Blue pools. The infrastructure-to-application capital ratio is inverted, stalling the entire vertical's flywheel.

The infrastructure-first fallacy prioritizes pipes over water. Protocols like Centrifuge and Ondo Finance have built sophisticated on-chain securitization rails, but the end-user demand for tokenized T-bills or mortgages remains speculative and niche.

Capital follows liquidity, not compliance. The successful DeFi primitives like Uniswap and Aave grew because they solved a liquidity problem first. Over-engineered RWA infrastructure, focused on legal wrappers and KYC, ignores the fundamental need for deep, composable secondary markets.

Evidence: The total value locked in RWA protocols is ~$8B, dwarfed by the $50B+ in DeFi-native stablecoins like DAI and USDC, which achieved scale by being useful first and compliant later.

Infrastructure precedes applications. The current blockchain stack—from privacy to compliance oracles—lacks the throughput and legal certainty for mass-market RWAs. Building a compliant settlement layer is a prerequisite, not a distraction.

Capital follows the hardest problems. Protocols like Centrifuge and Maple proved basic tokenization, but scaling requires solving KYC/AML, asset servicing, and off-chain data verification first. This justifies funding for Chainlink CCIP and Polygon ID.

Premature app funding destroys value. Pouring capital into consumer-facing RWA apps atop brittle infrastructure creates systemic risk and regulatory blowback. The 2022 collapse of crypto lending platforms, which were primitive RWAs, is the precedent.

Evidence: The total value locked in DeFi is ~$90B, while the addressable RWA market is in the trillions. The infrastructure gap explains the capital allocation; the pipe must be built before the water flows.

Infrastructure is overfunded. VCs poured billions into RWA issuance rails like Centrifuge and tokenization platforms, betting on a 'build it and they will come' thesis. This created a saturated market of pipes with little water flow.

Demand-side is undercapitalized. The real bottleneck is on-chain use cases for RWAs. DeFi protocols like MakerDAO and Aave need novel yield sources, not more tokenized T-bills. Capital must shift to applications that create utility.

The correction is liquidity. The market will consolidate around standardized primitives like ERC-3643 and cross-chain asset bridges like Wormhole. Projects that fail to attract meaningful TVL or integrate with major DeFi bluechips will die.

Evidence: Ondo Finance's OUSG, a tokenized treasury product, holds ~$400M TVL. This dwarfs the TVL of most pure-infrastructure RWA projects, proving demand follows yield utility, not technical novelty.