Yield-bearing stablecoins are a unique type of stablecoin designed to generate interest or rewards (yield) simply by holding them. Unlike traditional stablecoins that primarily focus on maintaining price stability by pegging to fiat currencies or other assets, yield-bearing stablecoins incorporate mechanisms to earn passive income. This is typically achieved through lending protocols, where the stablecoins are lent out to borrowers in exchange for interest, or through staking, where they participate in blockchain network validation to earn rewards.
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The fundamental principle of yield-bearing stablecoins is leveraging their inherent stability to participate in financial activities that generate higher returns. This allows investors to benefit from both the stability of their investment and the opportunity to earn additional income. This innovative approach is particularly attractive in the volatile cryptocurrency market, where traditional investments often face significant price fluctuations.
Key Difference Between Stablecoins and Yield-Bearing Stablecoins:
- Traditional Stablecoins: Holding stablecoins like USDT or USDC primarily preserves value. They function like holding USD in a digital wallet, without accruing interest.
- Yield-Bearing Stablecoins: In addition to maintaining price stability, they automatically generate returns, similar to earning interest on a savings account.
How Yield-Bearing Stablecoins Work
Price Stability Mechanisms
Yield-bearing stablecoins employ mechanisms similar to traditional stablecoins to maintain price stability, typically pegged to a fiat currency like the USD. These mechanisms include:
- Collateralization: Backing the stablecoin with real-world assets like fiat currency or government bonds.
- Algorithmic Control: Utilizing algorithms to adjust supply and demand to maintain a stable price peg.
Categorization Based on Yield Distribution
Yield-bearing stablecoins, a form of tokenized Real-World Assets (RWAs), can be categorized based on their yield distribution mechanisms:
Rebase Tokens: These tokens automatically adjust the token balance in a user’s wallet. Rebasing distributes rewards (accrued interest) as additional tokens while maintaining the price peg (e.g., 1:1 with USD). Examples of RWA-backed yield-bearing stablecoins include USDY (Ondo), BUIDL (BlackRock), and USDM (Mountain Protocol). eUSD (Lybra), backed by staking assets, is another example.
Non-Rebase Tokens: These tokens do not automatically adjust wallet balances. Instead, rewards are distributed through mechanisms like staking, derivative products, or DeFi protocols. Users still earn yield, but the process is simpler and doesn’t alter the number of tokens held.
Further Reading: Rebase Token: A Deep Dive into Supply-Adjusting Tokens.
Sources of Yield
Yield-bearing stablecoins generate returns by deploying underlying assets into Decentralized Finance (DeFi) protocols. Common yield generation strategies include:
- Liquidity Provision: Contributing to liquidity pools, where trades are executed, and earning fees in return.
- Lending and Borrowing: DeFi protocols like Aave, Compound, and MakerDAO facilitate lending and borrowing of stablecoins, with interest from borrowers distributed to lenders.
- Staking and Liquidity Mining: Some protocols reward users for staking stablecoins or providing liquidity to specific pools.
- Auto-Compounding: Reinvesting earned interest automatically to maximize returns.
For example, using 100 USDC to purchase a yield-bearing stablecoin like aUSDC (from Aave):
- You hold 100 aUSDC; Aave receives 100 USDC.
- Aave lends the USDC at 4% annual interest.
- After one year, your wallet automatically holds 104 aUSDC, representing principal and interest.
Holding the stablecoin in your wallet is all that’s required. Yields are typically distributed periodically and automatically through smart contracts. However, returns are subject to market conditions and the performance of underlying DeFi protocols. Understanding the specific mechanisms and associated risks is crucial before investing.
Popular Yield-Bearing Stablecoins
RWA-Backed Stablecoins
These derive yield from underlying assets like U.S. Treasury bonds. Examples include BUIDL (BlackRock), USDY (mUSD), and USDM (Mountain Protocol). Interest is paid in additional tokens, automatically distributed to wallets, with varying frequencies (USDY and USDM daily, BUIDL monthly). For instance, holding 100 USDM at 5% APY would result in 105 USDM after a year, with daily token distributions.
eUSD (Lybra)
eUSD is backed by Liquid Staking Tokens (LSTs) like stETH or rETH. Users deposit ETH or LSTs as collateral on Lybra. LSTs automatically generate yield through rebasing, which is then converted to eUSD and distributed daily to users based on LST APR, eUSD supply, and collateralization ratio. Notably, users can borrow eUSD interest-free against their collateral, potentially using it to acquire more ETH or participate in other DeFi activities for further yield generation.
DAI (MakerDAO)
DAI, issued by MakerDAO, is a long-standing yield-bearing stablecoin collateralized by assets like ETH, USDC, and U.S. Treasury bonds. MakerDAO generates revenue from stability fees on DAI and interest from lending out collateral. DAI holders don’t automatically earn interest; they must deposit DAI into the Maker Protocol to convert it to sDAI, which accrues value representing accumulated yield. This differs from rebase tokens where yield accrues automatically.
USDe (Ethena)
USDe, a newer stablecoin from Ethena, utilizes a combination of LSTs and delta-hedging strategies for yield generation. Users deposit ETH, LSTs, or USDT as collateral to receive USDe. Similar to DAI/sDAI, users stake USDe to receive sUSDe, which accrues value representing profit. Yield isn’t paid directly but accumulates in the staking contract, unlocked upon unstaking, benefiting long-term holders.
The continuous evolution of DeFi and digital assets positions yield-bearing stablecoins as a significant component in optimizing capital efficiency and expanding the decentralized financial ecosystem.
