Tokens All the Way Down: A Money View of Decentralized Finance
For researchers and practitioners in decentralized finance, this paper provides a structural understanding of token hierarchy and liquidity fragmentation as key risk factors, reframing 'double counting' as a structural risk question.
This paper constructs a Token Graph of 10,200 tokens across 200 blockchains to show that by late 2025, each dollar of base assets supports $4.7 of total claims in decentralized finance, and decomposes yield variation into compositional and liquidity channels, finding that liquidity fragmentation is the primary mechanism associated with yield variation across the token hierarchy.
In traditional banking, repeated deposit-and-lend cycles let a single dollar of reserves support multiple dollars of claims. Decentralized finance produces an analogous structure with tokens. Constructing a Token Graph of 10,200 tokens across 200 blockchains, this paper maps the resulting hierarchy and shows that, by late 2025, each dollar of base assets supports $4.7 of total claims. An embedded yield correction disentangles two channels that raw data conflates: a compositional channel, where lending protocols concentrate in deeper tiers and mechanically raise average yields; and a liquidity channel, where each derivation step reduces secondary-market depth and depresses yields in liquidity-sensitive pools. The liquidity channel concentrates in DEX pools and vanishes in lending pools. A yield decomposition shows that the tier gradient operates entirely through fundamental protocol yields, not incentive-token emissions; quantile regressions reveal that the structural associations concentrate in the upper tail of the yield distribution, with near-zero effects at the median. These findings reframe DeFi's "double counting" as a structural risk question and identify liquidity fragmentation as the primary mechanism associated with yield variation across the token hierarchy.