I. Introduction
Stablecoins have long been seen as an important tool to combat the volatility of the crypto market due to their price-pegging characteristics. However, traditional stablecoins (such as USDT and USDC), while providing transaction convenience and value stability, have gradually revealed the limitations of their lack of asset appreciation capabilities.
Emerging stablecoin types such as BUIDL, USDe, and USD0, known as "yield-bearing stablecoins", are rapidly rising and attracting widespread attention. Unlike traditional stablecoins, yield-bearing stablecoins not only maintain relative price stability, but also provide additional investment returns to holders through innovative earning models. This feature not only meets the market's demand for safe assets, but also offers investors the possibility of inflation resistance, making them the new darling that investors are chasing in the current market.
This article will start with the definition and operating mechanism of yield-bearing stablecoins, deeply analyze their unique advantages and market demand, and also discuss the challenges they face and their future development potential, providing readers with a comprehensive understanding of yield-bearing stablecoins.
II. Overview of Yield-Bearing Stablecoins
1. What are Yield-Bearing Stablecoins
Yield-bearing stablecoins are a new type of cryptocurrency that not only have the characteristic of price stability, but also can bring considerable returns to holders. Their core feature lies in the innovative earning models, which allow holders to achieve asset appreciation without much active operation. This type of stablecoin combines the stability of traditional stablecoins and the return capability of investment tools, providing users with a brand-new financial experience.
The main features of yield-bearing stablecoins include:
Price Stability: Pegged to fiat currencies like the US dollar, maintaining a 1:1 exchange ratio.
Yield: Providing returns to users by investing in low-risk assets (such as government bonds), staking native tokens, or structured finance strategies.
Liquidity: Maintaining high liquidity, which can be used for transactions or exchange at any time.
Yield-bearing stablecoins not only expand the functionality of traditional stablecoins, but also provide more attractive holding reasons for users through their earning capabilities, making them a new choice for investors.
2. Core Advantages
(1) Combating Inflation: In the context of unstable global economic environment and persistently high inflation, the purchasing power of fiat currencies is gradually declining. Yield-bearing stablecoins provide investors with an effective means of value preservation and appreciation by distributing asset earnings, such as the interest returns from investing in short-term government bonds.
(2) Providing Diversified Earning Sources: The earning models of yield-bearing stablecoins vary by project, including:
Government Bond Investment Yield: Projects like BUIDL and USD0 obtain stable returns of around 5% annualized by holding short-term US Treasuries.
Structured Strategy Yield: Projects like USDe generate floating annualized yields of up to 30% through financial derivatives and hedging transactions.
Staking Rewards: Projects like FRAX and eUSD offer higher annualized returns by utilizing ETH staking or blockchain ecosystem rewards.
(3) Enhancing User Engagement: Through the transparent mechanism of smart contracts, users not only can clearly understand the source of earnings, but also can directly participate in on-chain governance and ecosystem building. This model reduces the interference of centralized operations, providing users with higher security and trust.
III. Representative Yield-Bearing Stablecoin Projects
1. USDe
USDe is a new synthetic US dollar stablecoin developed by Ethena Labs, aiming to provide a decentralized, scalable and censorship-resistant stablecoin solution.
Operating Mechanism: The core mechanism of USDe is to maintain a 1:1 peg to the US dollar through a delta-neutral strategy. For whitelisted users (usually institutions, exchanges and large holders), they can use ETH, BTC, USDT and stETH as collateral to mint USDe. Ethena Labs uses these collateral assets to open corresponding short perpetual contracts or futures positions to hedge price fluctuations, ensuring the stability of USDe's value. This strategy allows USDe to achieve stability and scalability without over-collateralization.
Currently, ordinary users cannot directly deposit ETH or BTC to mint USDe, but can purchase USDe through stablecoin assets (such as USDT, USDC, DAI, crvUSD, etc.) to avoid liquidation risk.
USDe's earnings mainly come from the following two aspects:
Staking Rewards: When users use liquid staking tokens (such as stETH) as collateral, these tokens will generate staking rewards, including consensus layer inflation rewards, execution layer transaction fees, and maximum extractable value (MEV). These earnings will accumulate over time, enhancing the value of USDe.
Funding Rates and Basis Yield: In the perpetual contract and futures market, traders holding long positions usually need to pay funding rates to traders holding short positions. In addition, the basis (the difference between the futures price and the spot price) can also generate yield. Ethena Labs utilizes these mechanisms to provide additional earning sources for USDe holders.
By staking USDe, users can obtain sUSDe and enjoy the staking rewards. The yield rate of USDe fluctuates based on market conditions and the funding rates of the hedging positions. It has previously reached an annualized yield rate (APY) of 80%, and according to the data on December 26th, the current yield rate of sUSDe is around 8.64%.
Source: https://app.ethena.fi/dashboards/apy
Furthermore, Ethena Labs announced the launch of USDtb on December 16th. USDtb provides USDe holders with a tool to "cope with difficult market conditions". When market changes occur, Ethena can close the hedging positions behind USDe and reallocate the supporting assets to USDtb, further reducing the risk. USDtb's 90% reserves are supported by BlackRock's BUIDL, with the remaining 10% provided by stablecoins like USDC.
2. USD0
USD0 is a decentralized stablecoin pegged to the US dollar 1:1, issued by Usual Labs, aiming to provide users with a safe, transparent and compliant digital US dollar alternative.
Operating Mechanism: The value of USD0 is supported by a basket of tokenized real-world assets (RWA), mainly including ultra-short-term US Treasuries and other highly liquid, low-risk financial instruments. These assets are tokenized and managed on-chain by partners (such as Hashnote). Users can mint an equivalent amount of USD0 by depositing these tokenized assets, ensuring that each USD0 is backed by real assets.
USD0 itself does not directly generate earnings, but users can choose to convert it into USD0++, which is a liquid staking token (LDT). By holding USD0++, users can obtain the following rewards:
Base Interest: USD0++ holders are entitled to the base interest generated by the underlying real-world assets they have staked, such as the interest income from US Treasuries. These earnings are distributed periodically by the protocol to ensure stable returns for holders.
Protocol Growth Yield ("Alpha Yield"): In addition to the base interest, USD0++ holders can also participate in the governance and decision-making of the Usual protocol by obtaining the governance token $USUAL. As the protocol develops and adoption increases, the value of $USUAL may rise, bringing additional earnings to the holders.
Currently, the yield rate of USD0++ has reached up to 56%. In addition, holders can also participate in the protocol's growth yield by obtaining $USUAL tokens. It's worth noting that the staking period of USD0++ is 4 years, and holders should consider the liquidity constraints brought by this long-term lock-up period.
Source: https://usual.money/
3. BUIDL
BlackRock launched its first tokenized fund on the Ethereum network in March 2024, named BUIDL (BlackRock USD Institutional Digital Liquidity Fund), aiming to provide investors with a digital asset investment opportunity pegged to the US dollar.
Here is the English translation of the text, with the specified terms retained and not translated:Mechanism of Operation: The BUIDL Fund issues tokenized shares on the Ethereum blockchain, allowing investors to hold and trade the fund's shares digitally. The fund's assets are primarily invested in highly liquid, low-risk financial instruments such as cash, U.S. Treasuries, and repurchase agreements, ensuring that each BUIDL token is backed by real assets and maintaining a stable value of $1 per token.
Investors holding BUIDL tokens can enjoy the following benefits:
Daily Accrued Dividends: BUIDL tokens accrue daily earnings, which are paid directly to investors' wallets in the form of new tokens on a monthly basis. This means that investors' returns are reflected in the form of token increments, increasing the number of BUIDL tokens they hold.
Flexible Transfer and Custody: Investors can transfer their tokens to other pre-approved investors around the clock, providing higher liquidity. Additionally, fund participants have flexible custody options to hold the tokens in different ways.
As of December 26, 2024, the BUIDL Fund's total asset value has exceeded $620 million and has expanded to five other blockchains beyond Ethereum, including Polygon, OP Mainnet of Optimism, Avalanche, Arbitrum, and Aptos. Currently, its yield is roughly in line with the yield of U.S. short-term Treasuries, at around 4.5%.
Source: https://app.rwa.xyz/assets/BUIDL
4. USDY
USDY (Ondo U.S. Dollar Yield) is a yield-bearing U.S. dollar token launched by Ondo Finance, aiming to provide investors with a digital asset that is pegged to the U.S. dollar and generates yield.
Mechanism of Operation: The value of USDY is supported by highly liquid, low-risk financial instruments such as short-term U.S. Treasuries and bank demand deposits. Investors can use stablecoins like USDC to purchase USDY, and holding USDY is equivalent to indirectly holding these underlying assets. The yield on USDY is generated from the interest income of the underlying assets and is accrued daily in a compounding manner, with monthly distributions to holders. It's important to note that USDY is only available to non-U.S. individual and institutional investors, and there is a 40-day lock-up period after purchase, during which the tokens cannot be transferred.
Investors holding USDY can enjoy the following benefits:
Yield from Underlying Assets: The short-term U.S. Treasuries and bank deposits represented by USDY generate interest income, which is distributed to investors after deducting management fees.
Compounding Yield: The yield on USDY is accrued daily in a compounding manner and distributed monthly, allowing the value of investors' holdings to grow over time.
As of December 26, 2024, USDY has an annualized yield of around 4.65%, with a total asset value exceeding $450 million, supporting multiple blockchain networks, including Ethereum, Solana, Mantle, Noble, Sui, and Arbitrum.
Source: https://app.rwa.xyz/assets/USDY
5. FRAX
FRAX is an innovative stablecoin that is part of the Frax Finance protocol, maintaining a 1:1 peg to the U.S. dollar through a combination of partial collateralization and algorithmic mechanisms.
Mechanism of Operation: FRAX employs a hybrid mechanism of Fractional Reserve and Algorithmic Stability. Specifically, the minting of each FRAX stablecoin requires a certain ratio of collateral (such as USDC) and governance token (FXS. For example, when the Collateral Ratio (CR) is 90%, minting one FRAX requires 0.9 USDC and 0.1 FXS. When market demand increases, the system will mint more FRAX to meet the demand; conversely, when demand decreases, the system will reduce the FRAX supply. This dynamic adjustment mechanism helps maintain the peg of FRAX to the U.S. dollar.
Frax Finance has introduced the Algorithmic Market Operations Controller (AMO), which allows the monetary policy of FRAX to be managed through open market operations, rather than relying solely on collateral. This flexibility enables FRAX to more effectively respond to market fluctuations.
Users holding FRAX can earn yield in the following ways:
Interest Income: Users can earn interest by staking USDC or FXS. The staked assets are used to support the liquidity and stability of FRAX, and users also receive the corresponding earnings.
Liquidity Mining: Users can earn additional rewards by providing liquidity (e.g., providing FRAX liquidity on decentralized exchanges). These rewards are typically distributed in the form of FXS or other tokens.
Governance Token FXS: Holders of FXS can participate in protocol governance and earn yield through seigniorage, minting/redemption fees, and potential capital appreciation as the protocol succeeds.
As of December 26, 2024, USDY has an annualized yield of around 10% and a market capitalization exceeding $646 million.
Source: https://facts.frax.finance/
Recently, Securitize Markets has submitted a governance proposal to Frax Finance, suggesting the inclusion of BUIDL tokens, issued by BlackRock, as a reserve asset for the FRAX stablecoin. If the proposal is approved, FRAX will adopt BUIDL tokens as a supporting asset, similar to USDtb from Ethena, significantly reducing the counterparty risk of its reserve assets.
IV. Development Potential of Yield-Bearing Stablecoins
1. Market Environment Drivers
In recent years, the global economy has faced a high degree of uncertainty, with factors such as high inflation, geopolitical conflicts, and changes in monetary policy driving an increase in investor demand for stable assets.
(1) Inflationary Pressure: Global inflation rates have remained elevated, leading to a decline in the real purchasing power of fiat currencies. Yield-bearing stablecoins, through government bond yields or staking rewards, provide investors with an effective tool to hedge against inflation.
(2) Market Volatility and Demand for Safe Haven: Stock and crypto markets have experienced significant volatility, leading capital to flow towards lower-risk assets. Stablecoins, as a safe haven, provide stability in value, and yield-bearing stablecoins further enhance their appeal.
(3) Changes in Interest Rate Environment: With the Federal Reserve's rate hikes, the yields on low-risk assets (such as short-term Treasuries) have risen, providing a stable source of income for yield-bearing stablecoins. This yield model has attracted more institutional and individual investors seeking stable returns.
2. Core Investor Needs
The rise of yield-bearing stablecoins is driven not only by changes in the market environment but also by their ability to meet the multi-layered needs of investors.
(1) High Security: The reserve assets of yield-bearing stablecoins are primarily short-term Treasuries or high-quality crypto assets, the low-risk nature of which satisfies the needs of risk-averse investors. Compared to traditional bank deposits, yield-bearing stablecoins avoid the liquidity and credit risks of commercial banks.
(2) Yield: In contrast to the "zero yield" of traditional stablecoins, the annualized returns (5%-30%) of yield-bearing stablecoins are highly attractive. This yield not only appeals to individual investors but also draws in institutional capital.
(3) Diverse Application Scenarios: Yield-bearing stablecoins can be used in various DeFi applications, such as lending, liquidity provision, and cross-border payments, providing investors with flexible asset allocation options. For example, users can convert USD0 to USD0++ by staking, and then participate in higher-yielding investment opportunities.
3. Industry Trends
As investor needs continue to evolve, yield-bearing stablecoins are becoming an innovation engine for the entire crypto market.
(1) Rapid Growth in Market Size: According to the latest data, the total market capitalization of yield-bearing stablecoins has surpassed $200 billion and is maintaining a sustained growth trend. Emerging stablecoin projects like USDe and USD0 are attracting a significant influx of capital, indicating a rapidly growing demand for high-yield stablecoins.
Diversification of product types: The types of interest-bearing stablecoins are constantly expanding, from a single yield model (such as government bonds) to multiple yield models (such as staking, structured strategies). For example, USDe stands out with its flexible structured finance strategies, while USDY focuses on the low-risk government bond yield market.
Integration with traditional finance: Traditional financial institutions are gradually entering the interest-bearing stablecoin field, such as the BUIDL fund supported by BlackRock, which has become an important participant in this field. This integration not only enhances the legitimacy of interest-bearing stablecoins, but also brings more institutional users to them.
V. Potential Risks and Challenges of Interest-Bearing Stablecoins
1. Sustainability of Yields
The attractiveness of interest-bearing stablecoins lies in their yield capability, but this feature may also be constrained by multiple external factors.
(1) Yield models dependent on external markets: For example, a decline in government bond yields may weaken the attractiveness of stablecoins based on government bond yields.
(2) Uncertainty in the crypto market: The yields of stablecoins based on the pledge of crypto assets are closely related to the price fluctuations of the crypto market. If the market experiences severe volatility, the pledge yields may be unable to cover the risks.
(3) Intensified competition leading to a yield race: As the number of interest-bearing stablecoins increases and competition intensifies, different projects can only attract more users by raising their yield rates, leading to a yield race. However, high yields imply high risks, and how to balance sustained high yields and safety has become a dilemma faced by projects.
(4) Intervention of macroeconomic policies: Adjustments to monetary policy by central banks, such as interest rate hikes or cuts, will directly affect government bond yields, thereby changing the yield levels of interest-bearing stablecoins based on government bond investments. In the context of rapidly changing global financial environments, the sustainability of yield models may face challenges.
2. Lack of Liquidity and Use Cases
Interest-bearing stablecoins involve a trade-off between high yields and liquidity, which may limit their application and growth.
(1) Liquidity risk: Interest-bearing stablecoins often require locking up assets to obtain yields, which may lead to insufficient liquidity, especially when market volatility increases and redemption demand surges, which may trigger a liquidity crisis. Some protocols adopt complex pledge mechanisms, which may further reduce the liquidity of user funds.
(2) Limitations of use cases: Compared to traditional stablecoins, the application scenarios of interest-bearing stablecoins are not yet rich enough, mainly concentrated in the field of asset appreciation. In payment, trade settlement and other scenarios requiring high liquidity, interest-bearing stablecoins may not be able to compete with traditional stablecoins.
3. Technical and Contract Risks
Interest-bearing stablecoins rely on smart contracts and blockchain technology, which, while bringing transparency and efficiency, also introduce risks at the technical level.
(1) Smart contract vulnerabilities: Defects in smart contract code may lead to protocol hacking and fund losses. Although many interest-bearing stablecoin protocols have undergone audits, contract risks still exist, especially in complex yield mechanisms.
(2) Black swan events: Technical failures, blockchain network congestion, or external attacks may temporarily disrupt the redemption function of interest-bearing stablecoins. For example, when on-chain transaction volume surges or cross-chain bridges encounter problems, users may not be able to obtain liquidity in a timely manner.
(3) Inadequate risk management: Some projects may overlook risk management measures in their rapid expansion, such as failing to establish sufficient insurance funds or effectively manage reserve assets. This situation may cause stablecoins to lose their anchoring value during market turmoil.
4. Regulatory and Compliance Pressures
As an innovative financial instrument, interest-bearing stablecoins are receiving high attention from global regulatory authorities.
(1) Global regulatory trends: Governments around the world are strengthening their regulation of stablecoins, such as the EU's MiCA Act and the US's stablecoin legislation drafts, which set higher requirements for reserve assets, transparency, and compliance. For interest-bearing stablecoins, regulators may pay particular attention to whether their yield distribution models comply with financial regulations.
(2) Conflicts between decentralization and compliance: The decentralized nature of interest-bearing stablecoins may conflict with compliance requirements (such as KYC/AML), which may limit their market expansion. For example, some projects may need to give up some of their decentralization features to meet regulatory requirements, which may weaken their core competitiveness.
(3) Increased operating costs: To meet regulatory requirements, interest-bearing stablecoin projects may need to invest more resources in compliance audits, transparency disclosures, and other areas, which may increase operating costs and reduce investment returns.
VI. Conclusion and Outlook
The rise of interest-bearing stablecoins has not only changed the landscape of the stablecoin track, but also injected new vitality into the cryptocurrency field. As an asset type that combines stability and profitability, interest-bearing stablecoins have successfully integrated the stability of traditional stablecoins and the appreciation capability of innovative financial instruments, providing investors with a new asset choice, and have become an important part of the crypto market, gradually attracting the attention of the traditional financial field.
Looking to the future, interest-bearing stablecoins may occupy a significant share in the stablecoin market and become a mainstream financial instrument. Expanding from asset appreciation to more application scenarios such as payment, insurance, and savings, they may become a new type of reserve asset in the digital economy era, driving the global financial system to develop in a more open, transparent, and efficient direction.
