Editor's Note: This report systematically breaks down the five main sources of on-chain yield: interest rate transmission from tokenized cash, staking and re staking rewards, lending/borrowing spreads, AMM fees, and structured design. Currently, a wide variety of on-chain yield tools are flourishing in the market, from stablecoin wrappers to re-staking/LRTs and structured vaults. Discussions often focus on annualized yield figures. This report provides a deeper perspective on the risks associated with high yields. In reality, APY does not equate to actual returns; the key question is what remains after discounting risk and complexity.

In today's market, there are an increasing number of projects offering attractive returns. As the number of yield-generating instruments proliferates, the gap between potential and sustainability is widening. Understanding the balance between returns, risks, and operational complexity is key to identifying long-term value. Investors should always ask themselves two questions: How much risk am I taking? And what is the net return after operating costs?

The following is the full text:

One of DeFi's most compelling innovations is on-chain yields—revenue generated through blockchain-based financial activities without relying on traditional intermediaries. Initially, DeFi yields primarily came from simple mechanisms like lending and liquidity provision. Today, the ecosystem has evolved into a diverse and complex landscape encompassing a wide range of risk types, economic models, and asset classes.

This article proposes a framework for understanding and comparing various yield-generating methods within the DeFi ecosystem. We categorize and analyze these methods based on yield volatility, underlying asset type, yield-generating mechanisms, and associated risks.

First, we focus on stablecoins that do not generate returns.

These assets are pegged to the US dollar and do not pay interest. They are designed for stability and fast settlement, not to generate income for holders. When held on self-custodial or non-incentivized platforms, these assets generate no income. While some platforms advertise incentives for custodial balances, these are not considered in this article. We focus on whether the issuer pays cash income to holders directly or through platform partners. Starting with zero income, we will gradually explore various tools and strategies that can capture income, with increasing complexity and risk.

Next, we discuss platform-dependent yield-generating stablecoins.

These tokens don't pay native interest; they only pass on revenue to users' escrow accounts when the platform reaches a revenue-sharing arrangement with the issuer. Revenue applies only to assets held on the platform; if self-custodied or the platform doesn't participate in such an arrangement, the yield remains zero. We categorize these assets separately to avoid confusing the revenue-sharing mechanism between the issuer and the platform with platform promotions or points programs. In contrast, there are also decentralized, non-yielding stablecoins where holders must actively participate in staking protocols, such as sDAI, to earn returns.

The article then moves on to debt-based strategies, which are the first tier where returns are designed to be distributed to holders. Partially collateralized stablecoins distribute a portion of their fixed returns to token holders, rather than accruing the entire amount to the issuer's reserves. Centralized fiat-collateralized wrapped assets hold short-term government securities and automatically pass on fund returns.

Next, the article analyzes protocol-level yield mechanisms—those generated through on-chain operations rather than issuer reserves. This category includes native staking, re-staking, and liquid staking mechanisms for Proof-of-Stake (PoS) assets, as well as lending markets. In these markets, interest rates fluctuate with capital utilization and credit demand, often exceeding the risk-free rate.

After protocols, we explore structured and actively managed income strategies. These strategies are actively operated or designed by teams or protocols, including projects such as Pendle V2, Boros, and Euler V2, and achieve income through combining cash flows, setting deadlines, or applying leverage.

The final layer is revenue driven by market activity itself, including fees earned by automated market makers (AMMs) for providing liquidity, incentive programs, and yield farming.

Finally, the article introduces a stablecoin risk framework and broadens its perspective to examine the entire ecosystem from the perspectives of return vs. risk, and return vs. complexity. We rank asset classes from cash-like stability to more engineered returns, helping readers weigh the risks and operational costs associated with each additional percentage point of return.

Non-yielding stablecoins: centralized issuance

Stablecoins are the primary medium of liquidity between exchanges, wallets, and protocols. Non-yielding stablecoins are typically pegged to the US dollar, with settlement backed by high-quality, liquid reserve assets such as short-term Treasury bills, overnight repurchase agreements, cash held in regulated custodians, or government money market funds.

For the purposes of this article, we classify USDT, FDUSD, and USD1 as non-yielding stablecoins because none of these issuers pay native interest to holders. While some platforms advertise returns on these assets, these returns are derived from the platforms' own lending or promotional activities, not directly from the issuers, and are therefore outside the scope of this article.

As the largest stablecoin by market capitalization, USDT serves as an anchor in exchange order books and on-chain processes. Its issuer, Tether, discloses reserves concentrated in cash equivalents and other short-term assets, with an "excess reserve" as a capital buffer to support the stability of the anchor and redemption mechanism. USDT does not distribute reserve earnings to holders. The returns advertised by exchanges come from the platform's own incentive programs, not from the issuer's profit pass-through.

FDUSD, issued by First Digital, is fiat-backed, with reserves consisting of government bonds and cash, primarily distributed to large centralized platforms. This token does not pay native interest, and the annualized percentage rate (APR) displayed on the platform falls under the platform's incentives and is not considered issuer income as defined in this document.

USD1 is a relatively new fiat-backed stablecoin, with reserves consisting of cash equivalents and a portion of government money market funds. Its current growth relies primarily on exchange distributions and point incentive programs offered by the issuer or platform. Because it pays no native interest to holders, we classify it as a non-yielding stablecoin; promotional incentives do not alter this classification.

Revenue is retained by the issuer, keeping these tokens simple. The redemption mechanism is designed to settle at par value (1 token ≈ $1), making the assets instantly usable across multiple platforms, and allowing issuers to control transfer costs while maintaining deep liquidity.

However, the opportunity cost for holders cannot be ignored. For example, Tether's Treasury bond holdings, calculated based on the average yield on short-term Treasury bills, have generated approximately $12.6 billion in interest income over the past three years. The result is a stable, highly liquid settlement layer designed for ubiquity and simplicity rather than for paying holders.

Platform-dependent income-generating stablecoins

USDC and PYUSD are both fiat-backed, USD-pegged stablecoins, with reserves comprised of high-quality, liquid assets. USDC's reserves are held partially at the Reserve Bank, with the remainder invested in short-term Treasury bills and reverse repurchase agreements through government money market funds. PYUSD, issued by Paxos Trust Company and regulated by the New York State Department of Financial Services, maintains reserves comprised of short-term Treasury bills and cash.

Where does the profit come from?

Neither token pays native interest. Users earn no yield when holding in self-custody or on platforms not participating in the rewards program. Circle, the issuer of USDC, has a business partnership with Coinbase, allocating a portion of its reserve revenue to Coinbase, which in turn pays USDC rewards to users. Regarding PYUSD, PayPal and Venmo may pay user balance rewards within their apps through a partnership with Paxos.

These rewards programs have a degree of autonomy, often with caps or tiered structures, and apply only to balances held on a specific platform. The GENIUS Act, signed by President Trump in July 2025, could restrict this type of indirect interest pass-through, though the specific impact depends on how regulators craft the implementing rules. If regulations tighten, platforms may shift away from cash rewards and toward points or cashback.

Since each platform only holds a small portion of the circulating supply, the majority of the reserve revenue remains with the issuer. This explains why platforms can advertise attractive yields while issuers can still maintain substantial profits.

Key Points

Small stablecoins compete for market share: USDT and USDC dominate the stablecoin supply, while smaller, emerging projects (such as FDUSD, USD1, and PYUSD) compete for the remaining market share. USDT pays no yield regardless of where it is held; USDC only shares a portion of the yield on custodial balances on Coinbase, which represents a small fraction of the total supply. As a result, most USDT and USDC holders remain unrewarded, while the issuers retain the majority of the treasury interest income. While PYUSD, USD1, and FDUSD have garnered some attention as new stablecoins, their combined supply still represents only a small fraction of the non-yielding stablecoin market, leaving the market structure firmly controlled by long-standing dominant players.

Neglected Interest: The zero-yield structure of USDC and USDT means retail holders are missing out on significant potential interest. With short-term Treasury yields exceeding 4%, the opportunity cost of idle stablecoins has accumulated to tens of billions of dollars in just a few years, highlighting the scale of this structural problem.

Funds held in "cash-only" stablecoins are essentially just a change in on-chain custody. This paves the way for the next generation of decentralized assets: non-yielding stablecoins like USDS, DAI, USDf, and USDe, which are fully minted and burned on-chain. These tokens inherit the widespread availability of USDT and USDC while relying on transparent collateralized asset portfolios or real-time hedging mechanisms rather than centralized treasury assets. Before exploring yield-enhanced versions (such as those achieved through staking wrappers), it is crucial to understand how these base layers guarantee the value of $1 without paying interest.

Non-yield stablecoins: decentralized issuance

Similar to centralized, non-yielding stablecoins, decentralized stablecoins don't pay interest to holders, but they maintain their peg differently. Rather than relying on traditional assets like cash or government bonds, these tokens maintain their peg to $1 through on-chain mechanisms like overcollateralization, synthetic hedging, and internal surplus mechanisms.

USDe is a "delta-neutral" synthetic USD stablecoin. Whenever the system receives one dollar of spot collateral (such as ETH, stETH, or BTC), it opens a corresponding perpetual contract short position on a designated platform to hedge spot gains against contract losses. The system also maintains a small stablecoin reserve (approximately 1%, expressed in USDC/USDT) for redemptions and margin calls, and holds a small amount of ETH as margin for short positions in ETH-M (an ETH-denominated contract). This anchoring mechanism relies on continuous hedging operations and a liquidity buffer. Raw USDe pays no yield; only after staking as sUSDe can perpetual contract funding fees and staking returns when using Liquid Staking Tokens (LST) as collateral be earned.

USDS and DAI are over-collateralized stablecoins minted through on-chain vaults. Borrowers are required to deposit assets (such as ETH, stETH, WBTC, or approved on-chain RWA assets) and can mint USDS or DAI according to risk-assessed limits. The typical collateralization ratio is approximately 115%–175%, depending on the asset type. If the collateral vault falls below the liquidation threshold, the protocol will auction the collateral assets to repay the debt. Borrowers are required to pay a floating stability fee and incur penalties upon liquidation; these revenues go to the protocol's surplus pool or treasury and are used for system security or token repurchases, rather than being distributed to ordinary holders. Simply holding USDS or DAI does not generate any returns; returns can only be obtained by participating in the savings module (such as DAI → sDAI, USDS → sUSDS).

USDf is a stablecoin minted from a portfolio of on-chain collateralized assets, with a collateralization ratio of at least 116%. Acceptable collateral includes stablecoins, BTC, ETH, and some major tokens. The protocol does not maintain a separate reserve fund; the additional 16% of collateral serves as a redemption buffer and liquidation guarantee. Simply holding USDf does not generate returns; it must be staked in a designated savings module to earn returns.

Overall, these designs demonstrate that decentralization itself doesn't guarantee a stablecoin generates returns; it simply shifts the anchoring mechanism from fiat reserves to on-chain engineering. Whether collateralized assets are deposited in an overcollateralized vault or deployed in a delta-neutral hedging structure, the returns accrue to the protocol, not to end users. This undistributed return also fosters incentives similar to those of centralized stablecoins: once the underlying stablecoin gains market acceptance for stability and liquidity, the market quickly develops "collateralized wrappers" that pass the underlying cash flows to holders.

The next section explores these yield-generating derivatives, which are the first step in transforming otherwise idle stablecoins into productive assets on-chain.

Key Points

Diverse Designs, Common Result: Despite their distinct structures, the four decentralized, non-yielding stablecoins all maintain a $1 peg. However, the mechanisms employed differ significantly: USDS relies on a high degree of overcollateralization (approximately 270%); DAI and USDf offer moderate buffers (approximately 150% and ≥116%, respectively); and USDe maintains stability through a delta-neutral hedge plus a 1% reserve. While they belong to the same category, their risk profiles differ.

Adoption is fragmented: Among decentralized, non-yielding stablecoins, USDe has emerged as the most rapidly growing project, currently leading by market capitalization and deployed on 22 chains, demonstrating the potential of novel collateral designs to reshape market share. In contrast, DAI and USDS are in the middle, while USDf remains a niche product.

The opportunity cost remains: despite their different structures, these tokens still direct the majority of their reserves or strategy returns to the protocol treasury rather than to holders, highlighting a multi-billion dollar revenue gap. It is this gap that has given rise to the “staking wrappers” products discussed in the next section, which aim to redistribute these returns to users.

Issuer policies determine yield distribution: sDAI and sUSDS yields fluctuate, often tied to stability fees. However, Sky is actively promoting user migration to sUSDS and offering better parameters and incentives. Therefore, the yield differential between sUSDS and sDAI reflects not only market conditions but also the issuer's strategic choices.

The scale of decentralized stablecoins far exceeds that of small centralized stablecoins: the total market value of the top decentralized non-yielding stablecoins is close to US$20 billion, while the total market value of small centralized stablecoins is only about US$4 billion, which is in sharp contrast.

Having established the zero-yield benchmark, we turn our attention to yield-generating wrappers like sUSDS, sDAI, sUSDf, and sUSDe. These transform static stablecoins into automatically compounding, on-chain assets. The disparity between the "zero return" offered by centralized and decentralized non-yield tokens and the potential returns generated by their reserve assets reveals a significant market inefficiency. Staking vaults are a key tool to bridge this gap, allowing users to unlock the yield potential of stablecoins without sacrificing liquidity or composability.

Debt-Based Strategies

Collateralized Stablecoins

Collateralized stablecoins are an evolutionary layer for on-chain USD assets, allowing users to earn on-chain returns while maintaining the payability and broad applicability of the original tokens. When users deposit USDe, DAI, USDS, or USDf into the protocol's vault, they receive corresponding wrapped tokens (sUSDe, sDAI, sUSDS, or sUSDf, respectively). The redemption value of these wrapped tokens automatically increases with the inflow of protocol revenue. This return isn't reflected in the minting of new tokens, but rather through the increasing claim each wrapped token has on the underlying stablecoin. This allows wallet balances to remain constant, but purchasing power continues to compound in the background.

While these wrapped tokens share an automatic compounding mechanism, their underlying cash flow sources are different:

sDAI and sUSDS transmit Treasury interest and stability fee income from the Overcollateralized Debt Vault;

sUSDf delivers fixed-rate credit income from FalconX, an institutional lending platform;

sUSDe combines perpetual contract funding fees with liquid staking rewards, collected by Ethena's Delta neutral hedging strategy.

Together, these mechanisms transform idle stablecoin balances, which would otherwise be in an opportunity cost state, into flexible USD-denominated savings instruments while still allowing them to circulate freely in DeFi.

Different wrapped tokens receive varying regulatory treatment in different jurisdictions. In some markets, such products may be considered securities or collective investment vehicles, leading some issuers to impose geographic restrictions on US users or provide access through accredited investor exemptions.

Wrapped tokens can be directly connected to lending markets, liquidity pools, and leverage cycles, allowing users to flexibly switch between "stability" and "profitability" according to their needs, converting the same US dollar asset into an interest-bearing on-chain tool.

Key Points

Ethena’s sUSDe has become a leading product in the field of collateralized stablecoins: in the entire collateralized stablecoin sector, sUSDe currently dominates in terms of total locked value (TVL), daily returns and cumulative distribution amount, far exceeding sDAI, sUSDS and sUSDf.

In early 2024, sUSDe yields briefly exceeded 50%. During this period, Ethena generated exceptionally high revenue from perpetual contract funding fees and basis trading, while staking returns from its ETH collateral contributed several additional percentage points. Due to the relatively small amount of USDe staked initially, the limited sUSDe supply concentrated returns, driving up the annualized percentage yield (APY). As funds continued to flow in and arbitrage opportunities narrowed, the same pool of funds had to be distributed among a larger group of sUSDe holders, resulting in a decline in yields.

After mid-2024, funding rates also stabilized, further compressing returns. Today, sUSDe's 30-day rolling annualized yield has stabilized in the range of approximately 7% to 12%, still reflecting positive capital flows but no longer reflecting the high volatility of its early days.

What is the reason for the recent increase in sUSDe yields?

sUSDe's revenue is derived from daily funding fees and incentive income, divided by the current amount of sUSDe in circulation. Three recent developments have pushed up the numerator, while the denominator has remained largely unchanged:

SPAC funds drive ENA buybacks, enhancing basis trading

In July 2025, the publicly traded special purpose acquisition company (SPAC) TLGY announced plans to merge with StablecoinX, a treasury company within the Ethena ecosystem, along with a matching PIPE investment of approximately $360 million ($260 million in cash and $100 million in ENA). The cash will be used to repurchase locked ENA from a subsidiary of the Ethena Foundation, which will then use this capital to conduct market buybacks of approximately $5 million per day for approximately six weeks. The transaction is expected to close in the fourth quarter, after which StablecoinX will continue to accumulate ENA under the multi-year agreement. Market makers will hedge this liquidity through the same spot long/perpetual short basis trade as Ethena, thereby increasing funding rates and boosting sUSDe's revenue stream.

Treasury redemptions reduce USDe circulation, but sUSDe remains stable

Ethena's treasury repurchases and redeems USDe in the secondary market, reducing the circulating supply of unstaked USDe while leaving the supply of sUSDe virtually unchanged. Since protocol revenue is distributed only to sUSDe holders, the denominator remains unchanged while the numerator increases, resulting in higher returns per sUSDe. Simply put: less USDe available for staking means less newly issued sUSDe, thus preventing yield dilution.

Liquidity Leverage and Incentives on the Aave Protocol

In Aave's efficient mode (E-Mode), users can hold 50% USDe/50% sUSDe positions in a circular manner, and in addition to the native sUSDe income, they can also receive an additional approximately 12% platform incentive tokens, which are distributed daily.

Yields are converging: After experiencing funding rate fluctuations at the end of 2024, the 30-day rolling annualized yields of the four staked stablecoins have converged. sUSDe's extreme volatility has stabilized, currently concentrated around 10%, comparable to the upper limit of other products.

The yield differences reflect the design of the underlying mechanisms: sDAI and sUSDS have relatively smooth yield adjustments, controlled by governance mechanisms; whereas sUSDe and sUSDf have more volatile yield curves, reflecting their reliance on perpetual contract funding and institutional credit flows. Overall, the yield range of the four has stabilized in the mid-single digits to low double digits.

Centralized fiat-collateralized income stablecoin

Centralized fiat-collateralized yield-bearing stablecoins are tokenized assets issued against regulated cash equivalents (such as US dollar deposits and short-term Treasury bills) and typically held in custody by a single trust institution or asset manager. Issuers operate under a strict regulatory framework, requiring implementation of Know Your Customer (KYC) and Anti-Money Laundering (AML) procedures. These issuers are typically only open to accredited investors and regularly publish audit or attestation reports to demonstrate 1:1 asset backing for each token.

This sounds similar to USDC and USDT. However, unlike these two major stablecoins, these tokens distribute returns to holders. As long as the user's address is whitelisted and the assets remain within the issuer's ecosystem, returns are automatically distributed without any additional effort. The trade-off is clear: investors gain professional custody, transparent audits, and institutional-grade market access, but lose the free minting/burning, composability, and open liquidity of a fully decentralized model.

Unlike payment stablecoins restricted by the GENIUS Act, tokenized cash-equivalent funds like BlackRock's BUIDL and Franklin Templeton's BENJI are securities and can still distribute fund income under securities laws. Ondo's USDY is also issued as a security, so its retail availability in the US is restricted by securities laws, not the GENIUS Act. In short, GENIUS restricts interest payments on payment stablecoins and does not prohibit income distributions from tokenized money market funds or similar securities.

Key Points

The tokenized Treasury bond market has seen parabolic growth: the sector’s market capitalization reached $5.6 billion in April 2025, an increase of approximately $4.7 billion, or 545%, from its previous high, setting a new record high.

Treasury trackers in token form: These tokens hold approximately 80%–100% of their reserves in short-term Treasury bills and overnight repos, so their 4%–5% yields are essentially a pass-through of front-end Treasury yields. Yields are market-driven, reflecting supply and demand and market expectations regarding the Fed's policy path. Consequently, the annualized yields of these tokens are highly correlated with the return on three-month Treasury bills, with only slight deviations due to fees, cash drag, or differences in asset allocation.

High barriers to entry and limited distribution channels: The primary issuance of BUIDL, BENJI, and USDY was only available to accredited investors, which also explains the fact that they have very few on-chain holding addresses: BENJI has less than 1,000 addresses and BUIDL has less than 100 addresses, despite their market capitalizations reaching billions of dollars.

The market is highly concentrated and the target users are clear: BUIDL alone accounts for nearly half of the market value of this sector, and is clearly aimed at institutional vault users who want to gain exposure to the tokenized currency market; USDY and BENJI attract a smaller group of investors who focus on RWA (real world assets).

Liquidity remains limited: Currently listed on only 5–10 exchanges, with the majority of liquidity concentrated in permissioned institutional channels rather than public AMM (automated market maker) markets. Until a wider range of exchanges list and improve on-chain liquidity, these tokens are more like “tokenized fund shares” than truly fungible and composable stablecoins.

To date, stablecoin revenue has primarily come from debt structures within the traditional financial system, with returns dependent on off-chain collateral and interest rates, ultimately determined by issuers, banks, and market makers. Protocol-level revenue operates differently: rewards are distributed in native tokens, funded by block issuance, transaction fees, and other on-chain revenue. Native re-staking mechanisms further leverage the same collateral across multiple services to generate additional returns, shifting risk from traditional finance to smart contracts, slashing, and increasing cross-protocol dependencies.

Protocol-Based Yield

Native staking mechanism

Native staking transforms Proof-of-Stake (PoS) tokens into productive assets, allowing holders to share in the revenue earned by validators for maintaining the network's security and operation (after deducting the commissions retained by validators). The majority of this revenue comes from newly minted tokens, which compensate validators for proposing and validating blocks; another portion comes from transaction fees and other on-chain revenue sources, such as Maximum Extractable Value (MEV), which is growing.

Since token inflation decreases over time and transaction fee income fluctuates with network activity, the actual yield is a dynamic variable influenced by the token economics model, network throughput, and validator behavior. When evaluating staking returns, it is important to consider both the liquidity costs associated with locking up your tokens and tail risks such as slashing.

Where does the income come from? (Taking Ethereum as an example)

Ethereum is currently the largest staking protocol, and its main sources of revenue are as follows:

Newly issued ETH (protocol rewards)

Ethereum issues new ETH through the PoS mechanism.

Rewards are distributed among validators for:

Propose a block (when selected as a block proposer)

Validate blocks (vote on block validity)

Participate in the Sync Committee (for light client support)

These basic rewards will be algorithmically adjusted based on the amount of ETH staked across the entire network.

Priority Fees (also known as tips)

Users can attach a priority fee when submitting a transaction to incentivize validators to process the transaction faster.

Unlike the basic transaction fee, the priority fee is not destroyed but is paid directly to the validator who proposed the block.

Priority fees are volatile, typically rising during periods of network congestion or DeFi activity.

Maximum Extractable Value (MEV)

Validators who integrate MEV relays or block builders can extract additional value by reordering, inserting, or shielding transactions in blocks.

Common MEV strategies include:

Sandwich Attack

Arbitrage between decentralized exchanges

Preemptive liquidation

MEV rewards are optional, non-guaranteed, and only available to validators who connect to MEV relays (such as Flashbots).

MEV revenue fluctuates greatly and is significantly affected by market activities and validator participation.

Native staking on Ethereum

Run your own validation node (minimum 32 ETH)

Deposit exactly 32 ETH into the official staking contract.

If you run a verification node yourself, you need to ensure that the node is online, otherwise you will face penalties.

All rewards go directly into the validator balance.

To withdraw funds, you need to initiate the exit process and wait in the validator queue.

Revenue sources: from block proposals, block validation, and priority fees collected through validator participation.

Staking through exchanges (e.g., Coinbase, Kraken) — custodial native staking

Deposit ETH into your exchange account and select "Stake".

The exchange uses its validator infrastructure to stake ETH on behalf of users.

Users will not receive liquidity tokens (unless they actively choose wrapped tokens such as cbETH).

Rewards will be displayed in the staking balance within the platform.

Exchanges typically charge a fee from staking rewards.

Revenue source: Same as running your own node, but shared between the exchange and users. Users receive the net profit after deducting platform fees.

Key Points

Revenue structure: Rewards primarily come from two sources: most chains pay validators or delegators through newly issued tokens, while the other portion comes from transaction fees and on-chain revenue (such as MEV). This structural difference is crucial—newly issued tokens are inflationary, while fee-driven revenue does not dilute the token's value.

From a real yield perspective: Nominal yields must be evaluated in conjunction with token supply expansion and validator commissions. A high APR may have negative purchasing power after deducting inflation and fees. However, models with burn mechanisms like Ethereum may result in actual returns exceeding the nominal interest rate.

The relationship between participation and security: A higher stake ratio generally means more economic weight is used to secure the network, but it may also compress yields and reduce circulating supply, thereby increasing price volatility when large holders exit.

Liquidity disparity: Unstaking times vary significantly across chains: For example, Hedera's HBAR and Cardano's ADA are instantly withdrawn, while Stellar's XLM and Polkadot's DOT require weeks of waiting, with variable timeframes. Ethereum's experience demonstrates that even a "flexible" system can experience congestion when a large number of validators exit simultaneously.

risk

Exit queue congestion: In late July 2025, the size of the Ethereum validator exit queue exceeded 600,000 ETH, equivalent to approximately $2.3 billion, and wait times extended to over eight days, a record high. Galaxy's report, "Why the Ethereum Exit Queue Suddenly Bulged," provides a detailed analysis of this issue. Such a large backlog could lead to trapped funds during periods of market stress and create price pressure when unstaked tokens finally flow into exchanges.

Penalty Mechanism and Performance Risk: Validators who double-sign or go offline may face penalties and confiscation of a portion of their staked assets. Delegators also bear this tail risk and must trust the operational capabilities and discipline of the nodes they support.

Reward volatility: Token monetary policies may change (e.g., XLM recently lowered its maximum inflation rate to 10%), while fee income fluctuates with network usage, so consistent and stable returns are not guaranteed.

Smart Contract and Cross-Chain Bridge Risks: Even with native staking, the validator software and underlying protocol still rely on complex smart contracts and code, which may contain vulnerabilities or security risks. While native staking avoids the common bridging and oracle risks of liquid staking, it is still exposed to potential issues in client implementation or consensus rules.

Regulatory and tax uncertainty: Different jurisdictions have different taxation timings for pledge income (when received or when sold), and policy changes may alter the economic benefits of staking in a short period of time.

Re-pledge

As mentioned earlier, staking has become a foundational practice in DeFi since Ethereum transitioned from Proof-of-Work (PoW) to Proof-of-Stake (PoS) in 2022. By locking ETH (or SOL on Solana) in network contracts, token holders help maintain consensus security and earn rewards. While traditional staking supports the network's validation mechanism, it also means assets are locked until the withdrawal or unbonding process is complete, limiting liquidity and leaving capital idle that could be used for other purposes.

Liquid Staking addresses this limitation. When users stake ETH or SOL, they receive a fungible Liquid Staking Token (LST) representing their staked assets. LST holders can trade, borrow, or use it as collateral in DeFi, while still receiving base staking rewards.

In short, liquid staking is the process of entrusting native staking to a third-party operator in exchange for a composable token.

Where does the profit come from?

Liquid staking generates returns in the same way as native staking. The difference lies in the operational approach: users delegate validator operational responsibilities (key management, node uptime, block proposals and verification, fee and MEV reward settings) to a third-party operator in exchange for a Liquid Staking Token (LST) that can be freely used in DeFi. Subsequent chapters will further explore the application opportunities of these tokens in the on-chain ecosystem.

Risks and Key Points

Unstable anchoring (risk of losing anchor)

Liquid staking tokens (LST) like stETH are designed to maintain a peg to ETH, but this connection can deviate. In a recent example, stETH experienced a discount due to a combination of pressures: surging ETH borrowing costs on the Aave protocol, users accumulating leverage in circulating staking, and a congestion in the validator exit queue that slowed redemptions. In this scenario, arbitrage mechanisms weaken, pools become unbalanced, and LST prices can deviate from ETH. If large holders collectively sell during periods of illiquidity, even a minor imbalance can persist unless the market develops deeper and more stable liquidity or faster redemption mechanisms.

Liquidity crisis

Whether users can smoothly enter and exit their LST positions depends heavily on the health of the secondary market. For example, Curve Finance's stETH/ETH trading pair is the primary liquidity hub for stETH, but it is prone to imbalances during market fluctuations. If a large amount of LST is dumped into these pools, it can lead to one-sided liquidity, resulting in high slippage and poor trade execution. Although Lido has over 9 million ETH staked, its market share has recently declined. This, coupled with Curve's pool parameter adjustments, has exposed the fragility of the LST liquidity infrastructure. If liquidity becomes thin and the exit queue backlogs, users may be left holding discounted assets without immediate redemption.

Leverage amplification effect

Many users use LST (such as stETH or rETH) as collateral to borrow ETH, then redeem the ETH for more LST and re-stake it, creating a circular leveraged strategy. This strategy can amplify returns during stable markets, but it also introduces systemic risks. When the peg deviates or interest rates spike, these positions are vulnerable to liquidation, potentially triggering a chain reaction of LST sales, further depressing prices, draining liquidity pools, and triggering more liquidations, creating a feedback loop. Leverage amplifies returns but also exacerbates risks, especially in volatile markets.

Centralization and Counterparty Risk

While LST protocols aim to decentralize the staking process, many still rely on a small number of validator operators and governance structures. For example, Lido manages a large amount of liquid staked ETH, introducing systemic concentration risks. Any governance issues, validator failures, or smart contract vulnerabilities could impact protocol stability and trigger ripple effects across the market. Furthermore, the DeFi ecosystem's reliance on a small number of liquidity pools and wrapped tokens means that design parameters (such as Curve's amplification factor or redemption mechanism) have a significant impact on user experience and market health.

Redemption Delays and Market Fragility

While Ethereum supports the withdrawal of staked ETH after the Shapella upgrade in 2023, LST's redemption process still relies on the blockchain's validator exit queue. During peak demand periods, this queue can become severely backlogged, leading to redemption delays. If the secondary market also comes under pressure at this time, users may be unable to sell their unstaked ETH at face value. This mismatch between redemption logic and market liquidity exposes LST to the risk of liquidity shortages during periods of high volatility or structural stress.

Liquidity re-pledge

Liquid restaking is the next evolutionary step in on-chain capital efficiency, building on the foundation of liquid staking. Through protocols like EigenLayer, users can deposit their Liquid Staking Tokens (LST) into "Active Validation Services" (AVS)—decentralized systems that rely on trustless validators for security. In exchange, users receive a new Liquid Restaking Token (LRT), such as eETH, ezETH, or rsETH. These LRTs retain the composability and liquidity of the original LST while adding new revenue streams.

The core advantage of liquid re-staking lies in its incentive stacking capability:

Users continue to receive staking rewards from Ethereum;

At the same time, you can obtain incentives provided by AVS, including points (similar to the encrypted version of "mileage points"), airdrops and early token distribution;

Many LRT protocols also support DeFi integration, such as liquidity mining, lending, etc., to further increase potential returns without sacrificing asset liquidity.

This multi-layered incentive structure transforms passive, locked collateral assets into active tools that generate income and can participate in DeFi. It makes ETH or SOL multi-purpose capital, capable of providing security for multiple networks simultaneously and earning rewards from them.

As the restaking economy matures, liquid restaking is expected to become a key component of the modular infrastructure of Ethereum and Solana.

Where does the profit come from?

Liquid Re-staking Tokens (LRT) unlock additional revenue streams on top of standard staking returns, thereby increasing overall returns. This includes:

Re-staking incentives from AVS: LRT participates in "Active Verification Services" (AVS) in networks such as EigenLayer, providing security for emerging decentralized services. These services will pay incentives to re-stakers, including points (similar to the crypto version of frequent flyer rewards), early token distribution, or future airdrops.

Protocol incentive programs: LRT issuers (such as Renzo, ether.fi, and Kelp DAO) often offer loyalty points, reward multipliers, or liquidity mining programs to attract user participation. These incentives can significantly increase net returns, especially in the early stages.

DeFi Integration: LRT can typically be deposited into lending markets, decentralized exchange (DEX) pools, or automated vaults, allowing users to earn additional on-chain income while receiving staking rewards.

Key Points

LRT Expands Staking to New Yield Tiers

Liquid Restaking Tokens (LRT) redeploy staked ETH or SOL to decentralized services, providing security for them and unlocking new incentives beyond standard staking rewards.

Restaking returns are driven by AVS, not just Ethereum

Unlike LST, which relies solely on Ethereum’s native PoS rewards, LRT also superimposes incentives from AVS, including points, airdrops, and early token distribution, representing an extended revenue path for EigenLayer and its ecosystem.

LRT maintains liquidity and composability

Similar to LST, LRT is an ERC-20 (or SPL on Solana) token that can be freely traded, participate in DeFi, and access lending markets, vaults, and AMMs. Users can continuously earn returns without locking up their positions.

Not all earnings are paid in ETH or SOL

Many LRTs currently offer rewards in the form of points, future protocol tokens, or ecosystem incentives. These rewards are not always liquid or deterministic, but they play a central role in current revenue strategies.

Protocols compete through multi-layered incentives

Leading LRT issuers (such as Renzo, ether.fi, Kelp DAO) are actively promoting user returns through loyalty points, reward multiplier mechanisms, and integration with EigenLayer and partner AVS, making LRT a dynamic component in the DeFi yield stack.

LRT is still under development

Re-staking is still an emerging field, and risks such as slashing, AVS reliability, smart contract complexity, and incentive dilution still require continued attention.

risk

LRT's composability offers powerful strategies, but also carries risks. If an AVS is attacked or a node operator violates penalty rules, multiple positions could be penalized simultaneously, forcing LRT holders, LST holders, and native stakers to share the losses. While seemingly attractive, the potential for accumulating returns depends on the operator's prudence, the transparency of the governance mechanism, and the market's ability to withstand liquidity shocks, especially when large positions are exited in a concentrated manner.

Lending mechanism

On-chain lending transforms idle tokens into productive capital. Depositors contribute assets to money market contracts and receive interest-bearing certificates. Borrowers, in turn, overcollateralize their positions and borrow assets from the liquidity pool at a floating interest rate, which increases with capital utilization. When the margin of a position falls below a safety threshold, the smart contract automatically triggers liquidation. Interest paid by borrowers is transferred to depositors in real time on a per-block basis, so yields directly reflect the market's immediate demand for leverage.

Unlike non-yielding stablecoins, which remain statically stored in wallets as digital cash, DeFi lending protocols channel these assets into shared liquidity pools, turning them into yield-generating capital. Anyone can deposit stablecoins, instantly becoming a "lender" and receiving a floating interest rate set by the protocol's algorithm. Borrowers, in turn, provide separate collateral assets, borrow funds from the public pool, and pay interest back to the pool. This mechanism creates a real-time credit market where supply and demand continuously and dynamically adjust: when lending demand surges, yields rise; when liquidity is abundant, yields fall. Liquidation is automatically executed when the value of the collateral assets falls below a safety threshold.

In essence, non-yielding stablecoins only provide USD exposure to a single issuer and do not generate income; while the DeFi lending market recycles these collateral assets among multiple participants, transforming idle tokens into systemic credit instruments while distributing returns and risks between lenders and borrowers.

Where does the profit come from?

The lending agreement operates in coordination through multiple mechanisms to create overlapping profit paths for both the supply and demand sides of the market.

Interest paid by the borrower

The core concept is that lenders earn a floating interest rate paid by borrowers. This interest rate adjusts dynamically based on capital utilization—the higher the demand for loans, the higher the interest rate. Borrowers may use this to hedge risk, increase leverage, or release liquidity without selling assets.

Protocol Incentive Plan

Many lending protocols, especially in their early stages or during their growth phase, distribute native governance tokens (such as COMP, AAVE, and MORPHO) to both lenders and borrowers. These incentives act as subsidies, increasing lenders' net annualized yield (APY) while offsetting borrowers' costs. In some cases, these incentives even exceed the base interest rate, enabling "yield farming" even in a low-interest rate environment.

Native returns of underlying assets

When users lend assets with native yields (such as stETH, rETH, or ezETH), they can still earn the staking or re-staking rewards embedded in these tokens. These rewards continue to passively accumulate while the assets are deployed to the lending pool, creating a dual source of income:

Part of it comes from the pledge or re-pledge mechanism;

The other part comes from lending interest or protocol incentives.

In some cases, this structure can be further amplified through a leverage cycle (for example, lending ETH and then staking or lending it again) to achieve compound returns.

Income superposition mechanism: an important part of DeFi innovation

Stacking yield is becoming a representative innovation in the DeFi space. Previous analysis has pointed out that users can stake ETH or SOL for Liquid Staking Tokens (LSTs), such as stETH, rETH, or JitoSOL, and further stake them for Liquid Restaking Tokens (LRTs), such as eETH or ezETH. These underlying assets themselves can generate continuous returns through the protocol's staking and restaking processes.

However, this is only the initial level of the earnings structure.

On lending platforms like Aave, users can deposit LST or LRT into the lending market, earning additional interest on top of existing staking returns. These platforms typically pay depositors a variable annualized yield (APY), funded by borrowers providing collateral to generate liquidity. This mechanism allows users to generate dual income streams: from protocol staking and interest income from the lending market, without having to unstake or sell their assets.

The emergence of this model reflects that DeFi income strategies are evolving towards greater complexity and efficiency.

Achieving profit accumulating with stETH

Imagine a user holds $10,000 worth of stETH, an asset representing ETH staked through Lido that continuously earns Ethereum- staking rewards. Rather than holding stETH statically in their wallet, they choose to deposit it into Aave V3, the protocol’s most advanced marketplace, as collateral.

Through this operation, users not only continue to receive staking income from stETH, but are also eligible for additional lending income from the Aave protocol. On the Aave platform, other users can borrow stETH, and stETH holders can share the interest paid by borrowers.

This strategy enables a single asset to generate multiple streams of yield simultaneously, combining passive staking income with protocol-layer lending returns, while preserving the liquidity of the collateralized asset to access funds when needed.

Stablecoin income stacking strategy

The concept of yield stacking naturally extends to stablecoins. For example, users can deposit stETH into Aave as collateral and borrow stablecoins such as USDe or DAI.

The borrowed stablecoins can be further used for the following purposes:

Deposit again into Aave or other protocols to earn lending income

Invest in a yield farm or automated strategy vault

Exchange for more stETH or other LST to cycle holdings and increase exposure

Whether passively held or actively deployed, this borrowed capital forms the second layer of a broader yield strategy, making leverage a composable, capital-efficient tool for maximizing returns across multiple protocols.

Revenue loop mechanism on Aave

Aave also allows users to compound returns through "looping," lending against collateral and then reinvesting the borrowed assets into similar assets. For example, a user could use stETH as collateral, borrow ETH, convert the ETH into more stETH, and redeposit it back into Aave. Each loop increases the user's exposure to stETH and further compounds their staking and lending returns. This strategy is often referred to as "leveraged staking."

While looping can amplify potential returns, it also introduces leverage risk. Because the strategy is backed by debt, changing market conditions (such as stETH prices falling below ETH or rising lending rates) can rapidly increase the loan-to-value (LTV) ratio. Once the LTV exceeds the protocol's liquidation threshold, users' collateral may face partial or full liquidation.

Therefore, revolving strategies are inherently more volatile and require active monitoring, especially in environments with low liquidity or volatile markets. For most users, this strategy offers high returns, but requires risk tolerance and operational precision.

The stack of colored bands in the chart above shows capital scattering across dozens of chain-specific deployments. While this diversifies tail risk, it also dilutes onchain liquidity and forces traders to bridge or pay up for cross-chain liquidity, an operational headache that did not exist when lending was an almost-pure Ethereum story in 2020-2021.

Together the charts confirm that the lending sector has recovered in size but not in efficiency: abundant deposits chase episodic borrowing booms, rates gyrate accordingly, and liquidity is now spread over far more venues and chains than in the last cycle, a landscape that rewards active rate-shopping and careful collateral management.

Key Points

Market activity has returned to high levels, but the structure is shifting. Activity in the decentralized lending market is nearing all-time highs, but the funding mix is ​​shifting significantly. Total funding market supply has now exceeded $80 billion, while outstanding loans are approaching $35 billion, returning to levels seen during the 2021–2022 bull run. While the Ethereum mainnet (black in the chart) remains the primary support, the fastest growth is coming from Layer 2 networks (L2) like Optimism and emerging alternative Layer 1 networks (alt-L1). This trend echoes the migration noted in Galaxy Research's April "State of Crypto Lending" report.

Despite a rebound in overall activity, fund utilization remains weak, reflecting a structural excess of liquidity. With each market upswing, the gap between fund supply and lending continues to widen. Currently, only approximately 40% of deposits are actually loaned out. This "idle" state has kept lending rates for major assets at moderately low levels, maintaining minimal fluctuations even amidst rising speculative demand.

Borrowing costs fluctuate cyclically rather than forming long-term trends. The annualized interest rate (APR) for stablecoins on the Ethereum mainnet was below 2% at the end of 2022, then soared to 15% during funding rate fluctuations in the first quarter of 2024. The current 7-day moving average has stabilized in the 5%–6% range. This pattern is consistent with observations from the April report, which show that borrowing returns are closely tied to leveraged trading (such as arbitrage and rehypothecation cycles) rather than sustainable credit demand.

Risk factors of DeFi lending

Liquidity mismatch and utilization risk

The current DeFi lending market holds nearly $85 billion in deposits, while outstanding loans total only approximately $35 billion, meaning approximately 60% of funds are idle. Galaxy's April lending report noted, "By the end of 2024, total open DeFi lending will be just $19 billion across 20 protocols, despite a nearly 9.6-fold rebound from the bear market low." If the market suddenly shifts to safer yield streams, protocols could be forced to lower interest rates or incentivize users to withdraw funds, putting particular pressure on smaller chains with less liquidity.

Mortgage assets are dispersed and liquidation is centralized

Currently, over a dozen L1 and L2 networks host lending pools, but the liquidation mechanisms for most assets still rely on a small number of bots and arbitrageurs. In the event of a price-coordination shock, cross-chain liquidations can occur rapidly, even outpacing the ability of bridges or arbitrageurs to react, amplifying market drawdowns during every funding rate spike.

Interest rate fluctuations are driven by speculative leverage, not sustainable credit demand

Since 2021, the annualized interest rate (APR) for stablecoins in the Ethereum lending market has fluctuated wildly between 2% and 16%, primarily driven by funding rate transactions and re-collateralization cycles rather than genuine demand for capital. A Galaxy report notes that "borrowing returns are closely tied to leveraged trading, not long-term credit demand." Investors should be aware that high-yield periods (e.g., interest rates exceeding 12%) are often short-lived and quickly revert to the mean.

Asymmetric access

While anyone can provide liquidity, many high-yield opportunities (such as independent lending pools on small L2s) often require cross-chain operations, custom oracles, or governance whitelisting. Regular users who leave their funds on the mainnet may face the same market risks but receive lower returns, reflecting a structural mismatch between risk and availability that is not reflected in the surface APR metric.

In summary, despite the continued growth of the DeFi lending market, it still faces structural risks such as liquidity mismatch and cyclical volatility, which are not common in non-yielding collateralized stablecoins (such as the CDP model). While pursuing returns, investors must carefully assess the underlying systemic vulnerabilities.

Structured/Managed Yield

As DeFi evolves from basic lending and staking mechanisms to more complex financial structures, a wave of emerging protocols is exploring how to repackage and customize the returns themselves. This area, known as "structured returns," focuses on separating, automating, or tokenizing future cash flows to bring return mechanisms closer to the complex instruments of traditional finance.

Pendle and Euler v2 are representative innovative projects in this field. Both are committed to providing users with advanced income strategies, but their approaches differ: Pendle achieves income splitting and trading through income tokenization, while Euler v2 builds flexible income portfolios through a modular strategy vault.

Pendle V2

Max Boosted APY: The "Maximum Boosted APY" displayed by Pendle is a theoretical upper limit, assuming users receive the full vePENDLE incentive bonus, select the optimal liquidity pool, consistently capture rewards, and adhere to the current incentive plan. This yield is volatile, dependent on the incentive mechanism, and is not guaranteed. It typically requires locking up PENDLE tokens or actively managing LP (liquidity provider) and YT (yield token) positions. Actual returns may be significantly lower than the theoretical value and do not include transaction fees, slippage, and gas costs.

Pendle is a DeFi protocol that allows users to split yield-generating assets into two independent tokens, enabling more granular control over returns over time. This mechanism, known as "yield tokenization," enables users to separate, trade, and structure returns, transcending the limitations of traditional staking or lending protocols.

When a user deposits a supported asset (such as stETH, ezETH, sDAI, or USDe), Pendle locks the asset and issues:

Principal Tokens (PT): Represent the right to redeem the original asset at a set maturity date. PTs do not generate income and typically trade at a discount. Holding PTs is equivalent to locking in a fixed return, regardless of market returns during the holding period.

Yield Token (YT): Captures all floating returns from the inception of an investment until maturity. YT holders are rewarded based on accumulated returns. Its market price reflects expectations of future rewards, making it useful for speculation or hedging against interest rate movements.

This structure, similar to the "principal/interest separation" mechanism of mortgage-backed securities introduced on Wall Street in the 1980s, allows users to tailor their exposure based on their risk preferences. Risk-averse users can purchase PT to lock in fixed returns, while those seeking higher returns or directional trading can purchase YT to earn floating returns such as staking APY or protocol incentives. These tokens are freely tradable and can be combined or sold individually.

Users can deposit PT tokens as collateral on Aave or Morpho to manually cycle yield. However, such strategies require active management, including monitoring borrowing limits, liquidation risk, and rebalancing positions during market fluctuations. Lending platforms typically accept PT over YT because PT is similar to a zero-coupon bond, paying out at par upon maturity, offering clearer pricing and risk assessment. YT, on the other hand, is a floating, time-decaying yield token and is generally not accepted as collateral.

Pendle separates principal from returns and automates its operations through ecosystem tools. For example, the Boros protocol builds a PT yield cycle strategy based on Pendle: borrowing against PT, purchasing more PT, redepositing, and repeating the process, all within a pre-set risk range. The goal is to capture the spread between the fixed return implied by PT and the floating lending rate, generating a stable return after deducting fees and slippage. While cycle strategies are common in DeFi, this "fixed spread" model is unique to Pendle's PT design. Cycling operations on other assets (such as LST) primarily serve to amplify exposure rather than lock in a spread.

Boros

Boros is a platform within the Pendle ecosystem that automates a specific type of yield strategy: leveraging principal tokens (PT) based on funding rate differentials. Unlike manual operations on Pendle, Boros encapsulates the entire process into a simplified vault mechanism, allowing users to earn amplified fixed income without having to manage complex processes themselves.

At a high level, Boros's vault operates in the following cycle:

Purchase discounted principal tokens (such as PT-USDe or PT-sDAI) on Pendle, which are redeemable at par upon maturity;

Deposit your PT as collateral on lending platforms such as Morpho or Aave;

Borrow stablecoins (such as USDC or USDe) with PT as collateral;

Use the borrowed stablecoins to purchase PT again;

Repeat the above process to continuously compound exposure.

This cycle amplifies the returns of Pendle's fixed income positions through capital reuse, effectively creating leveraged exposure to fixed income assets. The core of this strategy lies in the positive spread between the fixed yield implied by the PT and the floating borrowing rate on the lending platform. As long as the borrowing cost is lower than the PT's implied yield, the strategy generates net positive returns.

Boros automates this cycle through smart contract vaults, managing collateralization ratios, borrowing limits, and position health, eliminating the need for users to manually monitor liquidation risk or rebalance. Vault parameters are pre-set and publicly auditable, allowing users to choose different risk levels and maturity structures based on their preferences.

By simplifying complex multi-step operations into a one-time deposit, Boros transforms advanced interest rate arbitrage strategies into instantly deployable DeFi tools, enabling users to capture structured returns using fixed-income instruments in the Pendle ecosystem in a more capital-efficient manner.

Where does the profit come from?

In the Pendle protocol, stETH is split into two tokens:

YT-stETH (yield token): Current market price is approximately 0.04 stETH

PT-stETH (principal token): current market price is approximately 0.96 stETH

Expiration time: about one year

Basic annualized yield (Lido staking): approximately 5%

PT's market implied annualized rate of return: approximately 4.2%

When a user purchases 1 YT-stETH, they gain full rights to the staking rewards of that stETH until maturity. If the staking rewards for a year is 0.05 stETH, and the user only paid 0.04 stETH for YT, the net return is 0.01 stETH, a 25% annualized return, without the need for leverage or borrowing.

Yield Token (YT)
YT entitles holders to all returns on the underlying asset—in this case, Lido's stETH staking rewards. Returns are calculated by subtracting the cost of purchasing YT from the actual staking returns. Because YT trades well below its nominal value, even modest returns can generate a high return on capital. Therefore, YT is often viewed as a "quasi-leveraged" income vehicle without the risk of borrowing or liquidation. If actual returns exceed the market-implied rate of return, YT holdings will generate excess returns.

Principal Tokens (PT)
PT represents the principal portion. Users purchase PT at a discount (e.g., 0.96 stETH) and redeem it at par value of 1 stETH at maturity. This discount represents a fixed return. PT behaves similarly to a zero-coupon bond, with its price gradually moving toward par value as maturity approaches. The "fixed annualized yield" displayed in the Pendle app represents this yield to maturity. PT does not participate in staking rewards or incentive points, providing stable and predictable returns.

Trading flexibility In Pendle's automated market making mechanism (AMM), both PT and YT can be traded freely before expiration:

YT: Can be sold at any time. A common strategy is to sell in advance when part of the profit has been realized or when market interest rates and prices rise to lock in profits.

PT: You can sell it at any time. While holding it to maturity will earn you the full discount, if market interest rates fall or demand for fixed income rises, you can cash it out early when the PT price rises.

Boros's profit mechanism

Boros generates structured returns by automating the execution of Pendle Principal Token (PT)-based revolving strategies, leveraging the spread between PT fixed income and stablecoin borrowing costs.

The specific process is as follows:

Fixed income source: The Boros Treasury first purchases Pendle’s principal tokens (such as PT-USDe or PT-sDAI), which are usually traded at a discount and can be redeemed at face value upon maturity.

Leverage: Boros uses PT as collateral to borrow stablecoins (such as USDC or USDe) on platforms like Morpho or Aave. The borrowed funds are then used to purchase more PT, expanding the size of the position. This cycle can be repeated multiple times within the risk threshold, thereby amplifying the returns on the original capital.

Interest Rate Carry Return: The core profit of this strategy comes from the spread between the fixed yield of the PT and the floating rate of the lending platform. Net return is approximately the annualized PT yield minus the lending rate, related fees, and slippage. The vault operates within the risk limit, and the final return is approximately the net interest rate spread multiplied by the leverage factor. The larger the interest rate spread, the higher the return; if the lending rate exceeds the PT yield, the strategy may turn negative.

Cycle efficiency: This refers to the achievable exposure per unit of capital after deducting slippage, fees, and collateralization limits. Higher efficiency allows for more cycles and greater leverage; lower efficiency limits the leverage effect.

Optional incentive layer: Some vaults may incorporate Pendle incentives (such as PENDLE issuance or LP rewards) to further enhance returns. While these incentives are not guaranteed, they can significantly increase net annualized returns under certain market conditions.

Through automated loops and smart contract management, Boros transforms complex fixed-income arbitrage strategies into one-click DeFi vaults, enabling users to obtain structured, leveraged returns in a more capital-efficient manner, backed by on-chain logic.

Risks and Key Points

Return spread risk (YT)
If the implied annualized yield of the Yield Token (YT) market price is higher than the actual yield of the underlying staked asset, the transaction may not achieve the expected return unless market conditions improve. Even if the implied yield is lower than the actual yield at the time of initial purchase, the future annualized staking return may still decline to below the expected level at the time of purchase.

Time Effect of YT Price As Pendle tokens approach maturity, the price of YT will generally decline gradually as its value is limited only by the remaining unpaid proceeds, unless there is a significant change in the yield of the underlying asset.

Interest Rate and Market Value Fluctuation (PT)
The market price of Principal Tokens (PTs) fluctuates with interest rate expectations. If sold before maturity, the actual return may be higher or lower than the expected fixed income. However, if held to maturity, the PTs can be redeemed at par value.

No liquidation ≠ no risk
YT’s “leverage-like” nature stems from its pricing mechanism, not from lending, so there is no liquidation or oracle risk. However, the ultimate return still depends on whether future returns are realized.

Pendle Yield Curve: Inverted Structure

Tokens with shorter maturities have higher yields than longer-term tokens. This phenomenon is usually driven by the following factors:

PTs that are about to expire usually trade at a deeper discount

Market demand focuses on short-term transactions

Investors may price in long-term market uncertainty or volatility

Traditional Treasury Yield Curve: Normal Structure

Long-term bonds typically offer higher yields to compensate for time and inflation risk. This is a common structure in traditional interest rate markets, such as U.S. Treasury bonds.

Returns in traditional finance refer to the U.S. Treasury’s fixed-maturity series (such as 1-month, 3-month, and 6-month Treasury bills, and 1-year, 2-year, and 5-year Treasury bonds).

Euler V2

The Euler v2 protocol offers users fundamental yield opportunities through its decentralized lending market. Users can deposit their assets in independent ERC-4626-compliant vaults to earn interest or use them as collateral to lend other tokens at customizable interest rates. However, the platform's core innovation lies in its Managed Strategy Vaults. These vaults are typically managed by risk curators, whose parameters are dynamically adjusted to optimize risk management. They automate complex DeFi operations and enable users to deploy funds into structured products with minimal manual intervention.

By tokenizing strategies into transferable shares, Euler v2 transforms passive lending into actively managed positions, enhancing the composability of the entire ecosystem.

Strategy 1: Leveraged Cycle Operation of LST and LRT

What's this?

This strategy is a recursive lending mechanism designed to amplify exposure to yield-generating tokens. Users deposit LST (Liquidity Staking Token) or LRT (Liquidity Re-staking Token) into a vault. The vault then uses this asset as collateral to lend the underlying asset (typically WETH). The borrowed WETH is then redeemed for more of the original LST/LRT and redeposited back into the vault. This process, known as "looping" or "folding," leverages the user's base yield through repeated operations.

Assets involved

The main assets include high-quality LST (such as wstETH) and LRT (such as eETH), and the lent assets are usually WETH.

Sources of Revenue

This strategy generates returns from two sources: the annualized yield on staking or re-staking the LST/LRT itself; and the annualized supply yield paid by the Euler vault on deposited assets. Because the position is leveraged, both staking/re-staking and supply returns are accumulated on a larger notional amount, thereby increasing overall returns.

Strategy 2: Leveraged LP (Liquidity Provider) Positions

What's this

This strategy allows liquidity providers (LPs) to earn a yield while holding LP tokens and leverage these tokens. Users deposit LP tokens from automated market makers (AMMs) such as Uniswap into a Euler vault. The vault uses these tokens as collateral to lend out the underlying asset in the trading pair. The borrowed asset can be used to purchase more LP tokens or free up funds for other purposes, without having to sell the original LP tokens.

Assets involved

The collateral asset is the LP token (such as WETH/USDC LP), and the loan asset is the base token in the trading pair (such as WETH or USDC).

Sources of Revenue

The main income comes from the basic return of LP positions, that is, the transaction fees generated in the AMM pool. Through leverage operations, users can amplify their exposure to these fees. In addition, users can also obtain the supply fees paid by the Euler platform for providing LP tokens as collateral.