Stablecoin Yield Guide

Recently, the cryptocurrency market has been lackluster, and conservative and stable returns have once again become a market demand. Therefore, combining my investment insights from recent years and concentrated research on the stablecoin sector at the end of last year, I would like to discuss the age-old yet evergreen topic of stablecoin yields.

The current categories of stablecoins in the cryptocurrency market mainly include the following:

USDT: The most widely used stablecoin with conditional compliance: It has a broad range of application scenarios (trading pairs on exchanges, salary payments in the crypto industry, real international trade, and offline payment scenarios), and users hope for a large stablecoin that cannot fail, with Tether providing a safety net.
Regulated stablecoins pegged 1:1 to fiat currencies: USDC has the most chain and application support, making it a true on-chain dollar, while other regulated stablecoins like PayPal USD and BlackRock USD have certain limitations in their application scenarios.
Over-collateralized stablecoins: Primarily represented by MakerDAO's DAI and its upgraded version, USDS, after becoming Sky Protocol; Liquity's LUSD has become a competitor with its zero-collateral lending rate and 110% low collateralization ratio.
Synthetic asset stablecoins: The most representative in this cycle is Ethena's USDe, which has a yield model based on capital rate arbitrage that will be analyzed in detail later in this article.
RWA project stablecoins backed by U.S. Treasury assets: The most representative in this cycle are Usual's USD0 and Ondo's USDY. Usual's USD0++ provides liquidity for U.S. Treasuries, similar to how Lido does for ETH staking, showcasing innovation.
Algorithmic stablecoins: After the collapse of Terra's UST, this category has been largely discredited. Luna's lack of real value support led to severe price volatility, resulting in a death spiral of sell-offs and eventual collapse. FRAX combines algorithmic stablecoins with over-collateralization models, still having some application scenarios, while other algorithmic stablecoins have lost market influence.
Non-U.S. dollar stablecoins: Euro stablecoins (Circle's EURC, Tether's EURT, etc.) and other fiat stablecoins (BRZ, ZCHF, HKDR, etc.) currently have minimal impact on the U.S. dollar-dominated stablecoin market. A non-U.S. dollar over-collateralized stablecoin project I previously invested in has essentially gone to zero. The only way forward for non-U.S. dollar stablecoins lies in payment services under a compliant regulatory framework rather than applications in the native crypto community.

Stablecoin Market Capitalization Rankings

Data Source: https://defillama.com/stablecoins

Currently, the main categories of yield generation through stablecoins include the following, which will be further analyzed in detail:

1. Stablecoin Lending & Borrowing:

Lending and borrowing, as the most traditional financial yield model, derive their returns from the interest paid by borrowers. It is essential to consider the security of the platform or protocol, the probability of borrower default, and the stability of returns. The current stablecoin lending products in the market include:

Cefi platforms primarily focus on interest-bearing products from leading exchanges (Binance, Coinbase, OKX, Bybit).
Leading DeFi protocols include Aave, Sky Protocol (the rebranded MakerDAO), Morpho Blue, etc.

The platform security of leading exchanges and DeFi protocols that have withstood the test of cycles is relatively high. During bullish market periods, the demand for lending can easily drive U's interest rates above 20%, while in quiet market periods, returns generally remain low at 2%-4%. Therefore, the flexible interest rate is a straightforward indicator of market activity. Fixed interest rate lending sacrifices liquidity, so it generally yields higher returns than flexible rates, but it cannot capture the spikes in flexible rates during active market periods.

Additionally, there are some minor innovations in the overall stablecoin lending market, including:

Fixed-rate lending DeFi protocols: The Pendle protocol is highly representative of this cycle, starting with fixed-rate lending and evolving into yield tokenization, which will be detailed later in this article. Early fixed-rate DeFi projects like Notional Finance and Element Finance, although not successful, have design concepts worth referencing.
Introducing rate tranching and subordination mechanisms in lending;
Providing leveraged lending DeFi protocols;
DeFi lending protocols aimed at institutional clients, such as Maple Finance, where Syrup's yield comes from institutional lending.
RWA projects bringing real-world lending business yields on-chain, such as Huma Finance's on-chain supply chain finance products.

In summary, lending business, as the most traditional financial yield model, is straightforward and will continue to be the primary stablecoin yield model due to its capacity to handle large amounts of capital.

2. Yield Farming Returns:

Represented by Curve, its yields come from AMM trading fees distributed to LPs and token rewards. Curve, as the holy grail of stablecoin DEX platforms, has its supported stablecoins in Curve Pools becoming an important indicator of new stablecoins' adoption in the industry. The advantage of Curve mining lies in its high security, while its drawback is the low and unattractive yields (0-2%). If non-large and long-term funds participate in Curve's liquidity mining, the returns may not even cover the transaction gas fees.

Uniswap's stablecoin pool trading pairs face the same issue, as non-stablecoin trading pairs on Uniswap may incur losses from liquidity mining. Other smaller DEX's stablecoin pool trading pairs, even with higher yields, still carry the risk of rug pulls, which does not align with the cautious and stable principles of stablecoin investment. We can see that DeFi stablecoin pools are still primarily based on lending models, with Curve's classic 3Pool (DAI USDT USDC) only ranking in the top twenty for TVL.

Stablecoin Pool TVL Rankings

Source: https://defillama.com/yields?token=ALL_USD_STABLES

3. Market Neutral Arbitrage Returns:

Market-neutral arbitrage strategies have long been widely used by professional trading institutions. By simultaneously holding long and short positions, the net market exposure of the investment portfolio approaches zero. Specifically in crypto, the main strategies include:

Funding Rate Arbitrage: Perpetual futures have no expiration date, and their prices are kept in line with spot prices through a funding rate mechanism. The funding rate needs to be paid periodically, shortening the short-term price difference between spot and perpetual contracts.
When the perpetual contract price is higher than the spot price (contango), longs pay shorts, resulting in a positive funding rate.
When the perpetual contract price is lower than the spot price (backwardation), shorts pay longs, resulting in a negative funding rate.
Historical data shows that the probability of a positive funding rate is long-term greater than that of a negative funding rate. Therefore, the yield primarily comes from buying spot in a positive funding rate scenario and shorting perpetual contracts, collecting fees paid by longs.

Cash-and-Carry Arbitrage: This strategy utilizes the price differences between the spot market and the futures market to lock in profits through hedged positions. The core concept is "basis," which is the difference between the futures price and the spot price. It is typically operated in contango (futures price higher than spot) or backwardation (futures price lower than spot) markets. Cash-and-carry arbitrage is suitable for investors with large capital who can accept a lock-in period and are optimistic about basis convergence, commonly seen among traders with traditional financial thinking.
Cross-Exchange Arbitrage: This involves utilizing price differences between different exchanges to construct neutral positions. It was a mainstream arbitrage method in the early days of the crypto industry, but currently, the price differences for mainstream trading pairs across exchanges are minimal, requiring automated arbitrage scripts and being more suitable for high-volatility markets and small-cap coins, making it challenging for retail investors to participate. Hummingbot platform can be referenced for this.
Additionally, there are arbitrage models such as triangular arbitrage, cross-chain arbitrage, and cross-pool arbitrage, which will not be further elaborated in this article.

Market-neutral arbitrage strategies, due to their high level of professionalism, are primarily limited to professional investors. However, the emergence of Ethena in this cycle has brought the mature model of "Funding Rate Arbitrage" on-chain, allowing ordinary retail users to participate.

Users deposit stETH into the Ethena protocol and mint an equivalent amount of USDe tokens. At the same time, they open an equivalent short position on a centralized exchange to hedge and earn positive funding rates. According to historical statistics, over 80% of the time, the funding rate is positive, and in scenarios with negative funding rates, Ethena compensates for losses through reserves. Over 65% of Ethena's income hedges funding rates, and there are also some supplementary earnings from Ethereum staking and on-chain or exchange lending (35%); additionally, user assets are held by a third-party custodian OES (Off Exchange Settlement) and regularly audited, effectively isolating exchange platform risks.

Regarding the risks associated with Ethena, aside from uncontrollable factors such as exchange platform and custodian incidents, smart contract security issues, or the decoupling of pegged assets, a more critical point lies in the "losses in long-term negative funding rate scenarios that cannot be covered by the protocol's reserved funds." Based on historical data, we can understand that this is a low-probability event; even if it occurs, it would mean the failure of the widely applicable "funding rate arbitrage" trading strategy in the industry. Therefore, under the premise that the team does not act maliciously, the Ethena protocol is unlikely to experience the death spiral model of Terra's algorithmic stablecoin. Instead, what may happen is a gradual decline in the high yields subsidized by tokens, returning to a normal range of arbitrage yields.

At the same time, we must acknowledge that Ethena has achieved the highest level of data transparency, allowing users to clearly check historical yields, funding rates, positions across different exchanges, and monthly custody audit reports on its official website, surpassing other funding rate arbitrage products in the market.

In addition to Ethena's "funding rate arbitrage" model, Pionex also offers stablecoin financial products with a "term arbitrage" model. Unfortunately, apart from Ethena, there are currently not many market-neutral arbitrage products available for retail customers to participate in with low thresholds.

4. U.S. Treasury Yield RWA Projects

The Federal Reserve's interest rate hike cycle from 2022 to 2023 pushed U.S. dollar rates above 5%. Even though it has now shifted to a gradual rate reduction, a dollar interest rate above 4% remains a rare asset target in traditional finance that balances high security and relatively high returns. RWA (Real World Asset) businesses have high compliance requirements and operational models, and U.S. Treasuries, as a standardized asset with high trading volume, are among the few RWA products with a valid business logic.

Ondo, with U.S. Treasuries as its underlying asset, offers USDY for non-U.S. retail customers and OUSG for qualified U.S. institutional clients, both yielding 4.25%. It is a leader in the RWA sector in terms of multi-chain support and ecological applications, but it is slightly lacking in regulatory compliance compared to Franklin Templeton's FOBXX and BlackRock's BUIDL. Meanwhile, the Usual protocol, which has emerged strongly in this cycle, has introduced USD0, backed by a basket of U.S. Treasuries, and added the liquidity token USD0++, similar to how Lido provides liquidity for Ethereum staking, offering liquidity for 4-year locked U.S. Treasuries and allowing participation in stablecoin liquidity mining or lending pools for additional returns.

It is important to note that most U.S. Treasury RWA projects have stable yields around 4%, while the higher yields of Usual's stablecoin pool mainly come from Usual token subsidies, Pills (Point) incentives, liquidity mining, and other speculative additional returns, which are not sustainable. As the most complete U.S. Treasury RWA project within the DeFi ecosystem, it still faces the risk of slowly declining yields in the future, but not to the point of a catastrophic failure.

Although the price decoupling and sell-off event caused by the adjustment of the redemption mechanism for USD0++ in early 2025 stemmed from a misalignment between its bond attributes and market expectations, compounded by governance errors, its liquidity design mechanism remains an industry innovation worth referencing for other U.S. Treasury RWA projects.

5. Structured Products

Currently, structured products and dual-currency strategies popular on most centralized exchanges originate from options trading strategies like "selling options to earn premiums," specifically Sell Put or Sell Call strategies. U-based stablecoins primarily utilize the Sell Put strategy, with returns coming from the premiums paid by option buyers, allowing for the earning of stable USDT option premiums or purchasing BTC or ETH at lower target prices.

In practical application, selling options strategies are more suitable for range-bound markets, with Sell Put target prices set at the lower limit of the range and Sell Call target prices at the upper limit. For a unidirectional bullish market, the returns from option premiums are limited, making Buy Call a more suitable choice. In a unidirectional bearish market, Sell Put can lead to continuous losses after buying at a mid-point. Newcomers to selling options trading may fall into the trap of pursuing short-term "high option premium returns" while neglecting the risk exposure from significant price declines, but setting target prices too low can result in option premium yields lacking sufficient attractiveness. Based on my years of options trading experience, the Sell Put strategy is primarily employed when market panic spreads during downturns, setting lower buy target prices to earn high option premium returns, while during market uptrends, choosing exchange flexible lending yields is more favorable.

As for the recent Shark Fin principal protection strategy popular on exchanges like OKX, it employs a Bear Call Spread strategy (Sell Call to collect option premiums + Buy Call at a higher strike price to limit upside) combined with a Bull Put Spread (Sell Put to collect option premiums + Buy Put at a lower strike price to limit downside), allowing the entire options portfolio to earn option premium returns within a range, while outside the range, buying and selling options hedge each other without additional returns. For users who prioritize principal safety and do not seek to maximize option premiums or currency-based returns, this is a suitable U-based financial solution.

The maturity of on-chain options is still under development. Ribbon Finance was once the leading options vault protocol in the last cycle, and top on-chain options trading platforms like Opyn and Lyra Finance also allow for manual trading of option premium strategies, but unfortunately, they are no longer as prominent as before.

6. Yield Tokenization

The Pendle protocol, highly representative of this cycle, began with fixed-rate lending in 2020 and evolved into yield tokenization in 2024. By splitting yield-bearing assets into different components, it allows users to lock in fixed returns, speculate on future yields, or hedge yield risks.

Standardized yield tokens (SY) can be split into principal tokens (PT) and yield tokens (YT).
PT (Principal Token): Represents the principal portion of the underlying asset, redeemable at a 1:1 ratio for the base asset upon maturity.
YT (Yield Token): Represents the future yield portion, decreasing over time, with a value of zero upon maturity.

Pendle's trading strategies mainly include:

Fixed income: Holding PT until maturity to receive fixed returns, suitable for risk-averse individuals.
Yield speculation: Purchasing YT to bet on future yield increases, suitable for risk-tolerant individuals.
Risk hedging: Selling YT to lock in current yields and avoid market downturn risks.
Providing liquidity: Users can deposit PT and YT into liquidity pools to earn trading fees and PENDLE rewards.

Currently, its main stablecoin pool not only includes the native yield from the underlying assets but also adds speculative YT yields, LP yields, Pendle token incentives, and Points, making its overall yield attractive. One downside is that Pendle's high-yield pools generally have shorter durations, requiring frequent on-chain operations to switch yield pools, unlike staking or liquidity mining or lending pools, which can be set up once for ongoing returns.

7. A Basket of Stablecoin Yield Products:

Ether.Fi, as a leading protocol in Liquid Restaking, has actively embraced change and transformed its product offerings to include various yield products in BTC, ETH, and stablecoins after entering a saturated downward trend in the Restaking sector, maintaining its leading position in the entire DeFi industry.

In its stablecoin Market-Neutral USD pool, it provides users with a basket of stablecoin yield products through actively managed funds, including lending (Syrup, Morpho, Aave), liquidity mining (Curve), funding rate arbitrage (Ethena), and yield tokenization (Pendle). For users seeking stable on-chain yields, with insufficient capital and unwilling to operate frequently, this is a method that balances high returns and diversified risks.

8. Stablecoin Staking Yields:

Stablecoin assets do not possess staking attributes like ETH on POS public chains. However, the Arweave team has launched the AO network, which accepts on-chain staking of stETH and DAI under the Fair Launch token issuance model, with DAI staking offering the highest AO yield capital efficiency. We can categorize this type of stablecoin staking model as an alternative stablecoin yield model, which ensures the safety of DAI assets while earning additional AO token rewards for a small investment, with the core risk lying in the development of the AO network and the uncertainty of token prices.

In summary, we have summarized the mainstream stablecoin yield models currently available in the cryptocurrency market in the table above. Stablecoin assets are the most familiar yet easily overlooked market for cryptocurrency practitioners. Understanding the sources of stablecoin yields and making reasonable allocations can help better cope with the uncertainties and risks in the cryptocurrency market on a solid financial foundation.

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