Hotcoin Research | Steady Growth Amidst Challenges: Why Yield-Bearing Stablecoins Are Becoming Investors’ Favorites

I. Introduction

Stablecoins, with their pegged-to-value characteristics, have long been regarded as an essential tool for countering volatility in the cryptocurrency market. However, traditional stablecoins like USDT and USDC, while offering transactional convenience and value stability, have increasingly revealed their limitations in asset appreciation.

Emerging as a new category of stablecoins, yield-bearing stablecoins such as BUIDL, USDe, and USD0 are rapidly gaining traction and widespread attention. Unlike traditional stablecoins, yield-bearing stablecoins not only maintain relative price stability but also provide additional investment returns through innovative yield models. This unique feature satisfies the market’s demand for safe assets while offering investors a potential hedge against inflation, making them a sought-after choice in today’s market.

This article delves into the definition and operational mechanisms of yield-bearing stablecoins, analyzes their unique advantages and market demands, and explores the challenges they face and their potential for future development, offering readers a comprehensive understanding of yield-bearing stablecoins.

II. Overview of Yield-Bearing Stablecoins

1. What Are Yield-Bearing Stablecoins?

Yield-bearing stablecoins are a new type of cryptocurrency that combines the value stability of digital assets with the ability to generate significant returns for holders. Their core feature lies in enabling asset appreciation through innovative yield mechanisms without requiring excessive active management from the holder. These stablecoins merge the stability of traditional stablecoins with the profitability of investment instruments, offering users a novel financial experience.

Key characteristics of yield-bearing stablecoins include:

• Price Stability: Pegged to fiat currencies like the US dollar, maintaining a 1:1 exchange ratio.
• Yield Generation: Offering returns through investments in low-risk assets (e.g., treasury bonds), staking native tokens, or employing structured financial strategies.
• Liquidity: Maintaining high liquidity for seamless transactions or exchanges.

Yield-bearing stablecoins not only extend the functional boundaries of traditional stablecoins but also provide users with an attractive reason to hold them through their yield-generating capabilities, making them a preferred choice for investors.

2. Core Advantages

(1) Hedging Against Inflation
In a global economic environment characterized by instability and high inflation, the purchasing power of fiat currency holdings is gradually declining. Yield-bearing stablecoins provide an effective means of preserving and increasing value by distributing asset-generated yields, such as interest returns from short-term treasury bonds, to holders.

(2) Diverse Yield Sources
The yield models of yield-bearing stablecoins vary by project and include:

• Treasury Investment Returns: Projects like BUIDL and USD0 generate annualized returns of approximately 5% by holding short-term U.S. treasury bonds.
• Structured Strategy Yields: Projects like USDe leverage financial derivatives and hedging strategies to offer floating annualized returns of up to 30%.
• Staking Rewards: Projects like FRAX and eUSD utilize ETH staking or blockchain ecosystem rewards to provide higher annualized returns.

(3) Enhanced User Participation
Through the transparency of smart contracts, users can clearly understand yield sources and directly participate in on-chain governance and ecosystem building. This approach reduces interference from centralized operations and provides users with greater security and trust.

III. Representative Yield-Bearing Stablecoin Projects

1. USDe

USDe, developed by Ethena Labs, is a novel synthetic dollar stablecoin designed to provide a decentralized, scalable, and censorship-resistant stablecoin solution.

Operating Mechanism: USDe uses a delta-neutral strategy to maintain its 1:1 peg to the US dollar. For whitelisted users (typically institutions, exchanges, and large holders), collateral such as ETH, BTC, USDT, and stETH can be used to mint USDe. Ethena Labs utilizes these collateral assets to open corresponding short perpetual or futures positions to hedge price volatility, ensuring the stability of USDe’s value. This strategy eliminates the need for over-collateralization, achieving both stability and scalability.

Currently, regular users cannot directly deposit ETH or BTC to mint USDe; instead, they can purchase USDe using stablecoins like USDT, USDC, DAI, or crvUSD, thus avoiding liquidation risks.

Sources of USDe’s Yield:

• Staking Rewards: When users use liquid staking tokens (e.g., stETH) as collateral, these tokens generate staking rewards, including consensus layer inflation rewards, execution layer transaction fees, and Maximum Extractable Value (MEV). These rewards accumulate over time, enhancing USDe’s value.
• Funding Rates and Basis Yields: In perpetual and futures markets, traders holding long positions typically pay funding fees to those holding short positions. Additionally, the basis (difference between futures and spot prices) can generate returns. Ethena Labs leverages these mechanisms to provide additional yield to USDe holders.

Staking USDe yields sUSDe, allowing users to earn staking rewards. The yield rate of USDe fluctuates based on market conditions and funding rates of hedged positions. Annualized yields (APY) have reached as high as 80%, and as of December 26, sUSDe’s yield stands at approximately 8.64%.

Source：https://app.ethena.fi/dashboards/apy

On December 16, Ethena Labs announced the launch of USDtb, a tool for USDe holders to “navigate challenging market conditions.” When market dynamics change, Ethena can close the hedged positions supporting USDe and reallocate assets to USDtb, thereby reducing risk. USDtb is backed 90% by BlackRock’s BUIDL and 10% by stablecoins like USDC.

2. USD0

USD0, issued by Usual Labs, is a decentralized stablecoin pegged 1:1 to the US dollar. It aims to provide a secure, transparent, and compliant digital alternative to the US dollar.

Operating Mechanism:
USD0 is backed by a basket of tokenized real-world assets (RWA), primarily consisting of ultra-short-term US Treasury bonds and other high-liquidity, low-risk financial instruments. These assets are tokenized through partners like Hashnote and managed on-chain for transparency. Users can mint USD0 by depositing equivalent tokenized assets, ensuring each USD0 is backed by tangible value.

USD0 itself does not directly generate yield, but users can convert it into USD0++, a liquid staking token (LDT). By holding USD0++, users can access the following benefits:

• Base Interest: USD0++ holders earn base interest from the underlying real-world assets, such as interest income from US Treasury bonds. These returns are periodically distributed by the protocol to ensure stable payouts.
• Alpha Yield: In addition to base interest, USD0++ holders receive governance tokens ($USUAL) from the Usual protocol. As the protocol develops and adoption grows, $USUAL may appreciate, offering additional returns.

Currently, USD0++ offers an APY of up to 56%. However, it comes with a staking lock-up period of four years, limiting liquidity during this time.

Source：https://usual.money/

3. BUIDL

In March 2024, BlackRock launched its first tokenized fund on the Ethereum network, called BUIDL (BlackRock USD Institutional Digital Liquidity Fund). It offers investors a dollar-pegged digital asset investment opportunity.

Operating Mechanism:
The BUIDL fund issues tokenized shares on the Ethereum blockchain, enabling investors to hold and trade fund shares digitally. The fund primarily invests in cash, US Treasury bonds, and repurchase agreements — high-liquidity, low-risk financial instruments. Each BUIDL token is backed by real assets, striving to maintain a stable value of $1 per token.

Benefits for BUIDL Token Holders:

• Daily Accrued Dividends: BUIDL tokens calculate daily accrued income, distributed monthly in the form of additional tokens directly to investors’ wallets. This means investor returns are reflected as an increase in the quantity of BUIDL tokens held.
• Flexible Transfer and Custody: Investors can transfer tokens 24/7 to pre-approved participants, ensuring high liquidity. Additionally, participants have flexible custody options for holding tokens.

As of December 26, 2024, the total asset value of the BUIDL fund exceeds $620 million. It has also expanded beyond Ethereum to five additional blockchains, including Polygon, Optimism’s OP Mainnet, Avalanche, Arbitrum, and Aptos. Its yield aligns with short-term US Treasury bonds, approximately 4.5%.

Source：https://app.rwa.xyz/assets/BUIDL

4. USDY

USDY (Ondo U.S. Dollar Yield), issued by Ondo Finance, is a yield-bearing dollar token that provides investors with a dollar-pegged digital asset that earns interest.

Operating Mechanism:
USDY’s value is backed by short-term US Treasury bonds and bank deposits — high-liquidity, low-risk financial instruments. Investors can purchase USDY using stablecoins like USDC, effectively gaining exposure to the underlying assets. USDY generates yield from the interest income of these assets, compounded daily and distributed monthly to holders.

Note: USDY is only available to non-US individual and institutional investors. It also has a 40-day lock-up period during which the tokens cannot be transferred.

Benefits for USDY Holders:

• Yield from Underlying Assets: The Treasury bonds and bank deposits backing USDY generate interest income, which is distributed to investors after deducting management fees.
• Compounded Returns: USDY’s yields accrue daily and are distributed monthly, gradually increasing the token’s value over time.

As of December 26, 2024, USDY offers an APY of approximately 4.65% and has a total asset value exceeding $450 million. It supports multiple blockchain networks, including Ethereum, Solana, Mantle, Noble, Sui, and Arbitrum.

Source: https://app.rwa.xyz/assets/USDY

5. FRAX

FRAX is an innovative stablecoin from the Frax Finance protocol that maintains a 1:1 peg to the US dollar through a combination of fractional reserves and algorithmic stability mechanisms.

Operating Mechanism:
FRAX uses a hybrid mechanism of fractional reserves and algorithmic stability. Each FRAX stablecoin is minted with a proportion of collateral (e.g., USDC) and governance tokens (FXS). For instance, if the Collateral Ratio (CR) is 90%, minting one FRAX requires 0.9 USDC and 0.1 FXS. The system dynamically adjusts the supply of FRAX based on market demand, maintaining its dollar peg.

Frax Finance employs an Algorithmic Market Operations Controller (AMO), enabling the protocol to manage monetary policy through open market operations rather than relying solely on collateral.

Ways to Earn with FRAX:

• Interest Income: Users can stake USDC or FXS to earn interest, with the staked assets supporting FRAX’s liquidity and stability.
• Liquidity Mining: Users providing liquidity (e.g., on decentralized exchanges) for FRAX can earn additional rewards, usually in FXS or other tokens.
• Governance Token (FXS): FXS holders can participate in protocol governance and earn through minting fees, redemption fees, and seigniorage. FXS value may also appreciate as the protocol succeeds.

As of December 26, 2024, FRAX offers an APY of approximately 10%, with a market capitalization exceeding $646 million.

Source：https://facts.frax.finance/

Recently, Securitize Markets submitted a governance proposal to Frax Finance to include BlackRock’s BUIDL tokens in FRAX’s reserve assets. This collaboration could significantly reduce counterparty risks for its reserves. If approved, FRAX will join the ranks of stablecoins like Ethena’s USDtb, which also use BUIDL as supporting assets.

IV. The Potential of Yield-Bearing Stablecoins

1. Market Environment as a Driving Force

In recent years, global economic uncertainty has increased significantly, driven by inflation, geopolitical conflicts, and monetary policy adjustments, boosting investor demand for stable assets.

• Inflation Pressure: Persistently high global inflation rates have eroded the real purchasing power of fiat currencies. Yield-bearing stablecoins, through treasury yields or staking returns, provide investors with an effective tool for hedging against inflation.
• Market Volatility and Risk Aversion: Turbulence in equity and cryptocurrency markets has prompted capital to flow into lower-risk assets. Stablecoins, as a hedge against volatility, offer value stability, while yield-bearing stablecoins enhance their appeal with added returns.
• Changing Interest Rate Environment: As the Federal Reserve raises interest rates, the yields on low-risk assets like short-term treasuries have risen, creating a stable source of income for yield-bearing stablecoins. This yield model attracts institutional and individual investors seeking steady returns.

2. Meeting Core Investor Needs

The rise of yield-bearing stablecoins is not only driven by market conditions but also by their ability to meet the diverse needs of investors.

• High Security: Yield-bearing stablecoins are typically backed by short-term treasuries or high-quality crypto assets. These low-risk reserves appeal to risk-averse investors. Unlike traditional bank deposits, yield-bearing stablecoins avoid liquidity and credit risks associated with commercial banks.
• Attractive Returns: Compared to traditional stablecoins, which offer “zero returns,” yield-bearing stablecoins provide annualized returns of 5%-30%, attracting both individual and institutional investors.
• Diverse Applications: Yield-bearing stablecoins can be used in DeFi lending, liquidity provision, and cross-border payments, offering flexible asset allocation options. For example, users can stake USD0 to convert it into USD0++, enabling participation in higher-yield investment opportunities.

3. Industry Trends

As investor demands evolve, yield-bearing stablecoins are becoming an innovation engine for the entire cryptocurrency market.

• Rapid Market Growth: According to recent data, the total market value of yield-bearing stablecoins has surpassed $200 billion and continues to grow. Emerging stablecoin projects like USDe and USD0 are attracting significant capital inflows, reflecting rising demand for high-yield stablecoins.
• Product Diversification: Yield-bearing stablecoins are expanding from single-income models (e.g., treasury yields) to diverse strategies (e.g., staking and structured financial products). USDe stands out for its flexible structured finance strategy, while USDY focuses on the low-risk treasury market.
• Integration with Traditional Finance: Traditional financial institutions are increasingly involved in yield-bearing stablecoins. For example, BlackRock’s BUIDL fund has become a major participant in the sector. This integration enhances the legitimacy of yield-bearing stablecoins and attracts more institutional users.

V. Risks and Challenges of Yield-Bearing Stablecoins

1. Sustainability of Returns

The attractiveness of yield-bearing stablecoins lies in their ability to generate income, but this characteristic may be constrained by external factors:

• Dependence on External Markets: Falling treasury yields may reduce the appeal of stablecoins reliant on treasury income.
• Cryptocurrency Market Volatility: Stablecoin yields based on crypto asset staking are closely tied to market price fluctuations. Severe market turbulence could result in staking returns failing to offset risks.
• Intensified Competition Leading to Yield Wars: As the variety of yield-bearing stablecoins increases, competition intensifies. Projects may raise yields to attract users, leading to unsustainable yield wars. High yields often come with high risks, presenting a dilemma between maintaining returns and ensuring safety.
• Macroeconomic Policy Intervention: Central bank actions, such as interest rate adjustments, directly impact treasury yields, altering the returns of treasury-backed stablecoins. In a rapidly changing financial environment, the sustainability of yield models could face challenges.

2. Liquidity and Use Case Limitations

Yield-bearing stablecoins often balance high yields and liquidity, which may limit their applications and growth.

• Liquidity Risks: Yield-bearing stablecoins typically require assets to be locked to generate returns, potentially leading to insufficient liquidity. In times of market volatility, surging redemption demands may trigger liquidity crises. Complex staking mechanisms in some protocols can further reduce user liquidity.
• Limited Use Cases: Compared to traditional stablecoins, yield-bearing stablecoins are primarily focused on asset appreciation. In scenarios requiring high liquidity, such as payments and trade settlements, they may struggle to compete with traditional stablecoins.

3. Technical and Contract Risks

Reliance on smart contracts and blockchain technology introduces transparency and efficiency but also brings technical risks.

• Smart Contract Vulnerabilities: Bugs in smart contract code can expose protocols to hacks and result in significant losses. Although many yield-bearing stablecoin protocols undergo audits, contract risks persist, especially with complex yield mechanisms.
• Black Swan Events: Technical failures, network congestion, or external attacks could temporarily disrupt redemption functions for yield-bearing stablecoins. For instance, during periods of high on-chain transaction volume or cross-chain bridge issues, users may face liquidity challenges.
• Inadequate Risk Management: Some projects may overlook risk management measures during rapid expansion, such as failing to establish adequate insurance funds or effectively managing reserve assets. This could undermine the stablecoin’s ability to maintain its peg during market turbulence.

4. Regulatory and Compliance Pressure

As an innovative financial tool, yield-bearing stablecoins are under close scrutiny from global regulatory bodies.

• Global Regulatory Trends: Governments are strengthening stablecoin regulations. For instance, the EU’s MiCA legislation and the US stablecoin bills impose higher standards on reserve assets, transparency, and compliance. Regulatory bodies may focus on whether the income distribution models of yield-bearing stablecoins align with financial regulations.
• Conflict Between Decentralization and Compliance: The decentralized nature of yield-bearing stablecoins may conflict with compliance requirements, such as KYC/AML measures, potentially limiting market expansion. Some projects may need to sacrifice decentralization to meet regulatory demands, weakening their core competitiveness.
• Increased Operating Costs: To meet regulatory requirements, yield-bearing stablecoin projects may need to allocate more resources for audits and transparency disclosures, increasing operational costs and reducing investment returns.

VI. Conclusion and Outlook

The rise of yield-bearing stablecoins has not only reshaped the stablecoin sector but also revitalized the cryptocurrency space. As a unique asset class combining stability and yield, yield-bearing stablecoins successfully merge the stability of traditional stablecoins with the value-adding potential of innovative financial tools. They have become an integral part of the crypto market, gradually gaining attention from traditional financial sectors.

Looking ahead, yield-bearing stablecoins are poised to capture a significant share of the stablecoin market and become mainstream financial instruments. Their use cases could expand from asset appreciation to payments, insurance, and savings, establishing them as a new reserve asset for the digital economy era and driving the global financial system toward greater openness, transparency, and efficiency.

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