Forward the Original Title‘The New Wave of Yield-bearing Stablecoins’

• The new wave of yield-bearing Stablecoins generate yields from three diverse sources: real-world assets, Layer 1 token staking, and funding rates from perpetual futures contracts;
• Ethena offers the highest, but most volatile yield, while Ondo and Mountain protocols restrict U.S. users to mitigate the regulatory risk in order to distribute interest income;
• Lybra’s model redirecting $ETH staking yield to stablecoin stands out as the most decentralized, but faces the incentive problem;
• Ethena’s USDe and Mountain’s USDM lead with stablecoin adoption in terms of the number of holders and DeFi use cases;

Section 1 - Three Different Sources of Yield

Unlike the previous crypto bull cycle, where algorithmic stablecoins relied on subsidies or native token inflation to provide high but unsustainable yield, which ultimately led to the collapse of projects like Terra/Luna’s UST, the current cycle of stablecoins innovation provides sources of yield from legitimate sources.

The new wave of yield-bearing stablecoin innovation primarily relies on three sources of yield:

Yield from U.S. Treasuries

Centralized stablecoins are backed by US dollar deposits and short-term US government treasuries, which are considered the safest assets in the traditional financial market. The two largest stablecoin USDT and USDC are currently receiving billions of interest income per year from U.S. treasuries held and do not pass on any of these interest earned to stablecoin holders.

In contrast, new entrants in the centralized stablecoin market aim to challenge the USDT and USDC’s dominant position by passing on the interest income earned from their backed assets to stablecoin holders. Ondo’s USDY and Mountain Protocol’s USDM are two typical examples, both offering around 5% yield to stablecoin holders.

Yield from Layer 1 Blockchain Staking

The second category source of yield is staking yield from Layer 1 blockchain native token. Lybra’s eUSD on Ethereum and a new upcoming stablecoin on Solana’s Marginfi allow users to use liquid staked tokens (LST) like stETH and jitoSOL as collateral to mint stablecoins. These are typical collateralized debt position (CDP) types of stablecoin, the mechanism is similar to MakerDAO’s DAI.

Unlike traditional CDP types of stablecoins, when minters borrow stablecoins using LST as collateral, they do not incur any borrowing cost or interest on the stablecoin loan. Instead, the borrowing cost and interest on the stablecoin loan are covered by the yield generated from the LSTs as collateral. In other words, the yield earned from LSTs by minters is redirected to holders of stablecoins.

Yield from Structured Strategy

Ethena’s USDe is a synthetic stablecoin backed by delta neutral BTC and ETH position and farming the yields from the funding rate. Users can deposit their ETH or liquid staked ETH, such as stETH, for minting the stablecoin USDe issued by Ethena. The protocol then opens ETH short positions on centralized exchanges against the ETH held by the protocol. This puts the Ethena protocol in a delta-neutral position, ensuring no exposure to price changes. The protocol partnered with major derivative exchanges including Binance, OKX, Derbit, etc.

The protocol uses off-exchange MPC-secured custody accounts to access the liquidity on centralized exchanges. This means the protocol is not exposed to custody risk associated with centralized exchanges, as all protocol assets are held by regulated institutional-grade digital asset custodians.

The stablecoin USDe is backed by the delta-neutral strategy. The protocol generate yield from two sources: 1) ETH staking yields and 2) Yields from funding rate. Historically, there has been a positive funding rate earned by participants who short the ETH position. And in the current bull market, where most market participants are long ETH, the funding rate for short positions is very lucrative.

Section 2 - Features of Yield-bearing Stablecoins

Ethena’s USDe Rely on Positive Funding Rate

Ethena’s USDe provides an impressive yield of as high as 30%, derived from the positive funding rates of the perpetual futures market. In the perpetual futures market, a funding rate mechanism adjusts the cost periodically between long and short positions. When demand for long positions is higher than short positions, the funding rate is positive and the funding rate is paid from long futures buyers to short futures buyers. During a crypto bull market, the positive funding rate can be significantly high, enabling Ethena’s short position to receive significant funding rate payment.

According to Ethena, there has been a positive funding rate historically even during a bear market. For instance, the funding rate was 18% in 2021, 0.6% in 2022, and 7% in 2023. This means Ethena is able to provide a higher stablecoin yield even in a bear market condition, as major stablecoin yields less than 1% during the 2022/2023 crypto bear market. However, past performance is not a guarantee for the future and the yield is highly sensitive to the market condition. During market corrections, the yield from the positive funding rate can fluctuate drastically as demand for long positions shrinks. The recent market correction has already brought down the USDe yield from 35% to 15%.

While it is possible to have a negative funding rate when demand for long positions is less than short positions, the negative funding rates are not persistent and tend to revert to a positive mean. The protocol has a reserve fund to step in when the combined yield from ETH staking and funding rate is negative, ensuring that users do not experience a negative yield.

Ethena’s USDe is backed by $ETH structured trading strategy. Although $ETH is a crypto-native asset, the trading and hedging strategy are carried out on centralized exchanges and involve regulated crypto custodians. As a result, USDe does not qualify as a decentralized stablecoin.

Lybra’s eUSD needs to Incentivize Stablecoin Minters

Lybra’s eUSD is minted using overcollateralized liquid staked $ETH, the stablecoin’s yield come from the $ETH staking yield.This method leverages crypto-native assets and executes fully on-chain, hence considered as a decentralized stablecoin. The staking yield from minters is redirected to stablecoin holders. While this offers stablecoin holders sustainable real yield, it lacks sufficient incentives for stETH holders to mint the stablecoin and forgo the staking yield. Consequently, the protocol has to rely on its native token $LBR emission to subsidize stablecoin minters.

Furthermore, although a 5% yield for an interest-bearing stablecoin was appealing in a bear market, it falls short of attractiveness in a bull market, where more established stablecoins can earn upwards of 10% through DeFi lending.

USDY and USDM restrict U.S. users in order to distribute interest

Ondo Finance and Mountain Protocol’s interest-bearing centralized stablecoins target a niche market underserved by USDC and USDT. Both USDC and USDT do not distribute the interest income earned to stablecoin holders due to the regulatory uncertainty in the U.S. Their main concern is they could be classified as securities by paying interest on stablecoins, or they could potentially violate laws by offering interest without a banking license. USDY and USDM choose to only serve the non-U.S. users by restricting U.S. citizens from using their stablecoins.

Section 3 - Adoption & Stability

A good stablecoin should have board use cases in DeFi, deep liquidity in exchanges, and a large number of unique holders. While these newly emerged yield-bearing stablecoins are not able to challenge the market position of USDT and USDC in the foreseeable future, they have each undertaken diverse strategies to expand their adoption.

Among the four discussed stablecoins, Mountain’s USDC and Ethena’s USDe showcase fairly good adoption in terms of number of holders and Defi use cases.

The majority of USDM exists on Ethereum mainnet, followed by Manta Pacific, and there are small balances held on Base, Arbitrum and Optimism. Mountain protocol has partnered with one of the top Ethereum Layer 2 Manta Pacific, where USDM is the major stablecoin in the Manta Pacific ecosystem and used in DeFi. USDM can be used as collateral in Manta Pacific’s largest lending protocol LayerBank.

Ethena, as currently the hottest new stablecoin project, has partnered with major DeFi protocols in the Ethereum ecosystem. The partnership with MakerDAO and Morpho allows users to use USDe as collateral to mint DAI for up to 1 billion.

Ondo Finance’s USDY is at early stage of adoption. The protocol has seized noteworthy partnerships with Tradfi giant BlackRock and leading Layer 1 and Layer 2 chains including Solana, Mantle Network and Sui. These partnerships hold the potential to significantly enhance the adoption. Ondo Finance is the top project of current real world asset (RWA) narratives with a significant fully diluted market cap. While it has strong backer and partnerships, it should be noted that the two products USDY stablecoin and OUSG US Treasuires all have very limited number of holders at present, with USDY having less than 1000 holders and OUSG having less than 100 holders.

Stability

Mountain’s USDM and Ethena’s USDe are traded very close to $1 peg, while Ondo’s USDY is a interest-accruing token and traded above $1 peg. Ondo is now working on introducing a rebasing version of USDY, so that it can be used as a normal US dollar stablecoin.

For Lybra’s eUSD, there is a consistent depeg below $1. eUSD is fully collateralized by liquid staked ETH and the minimum collateralization ratio is 150%. The protocol is safe and backed by enough collateral. The depeg can be attributed to a design choice. In the case of an overcollateralized stablecoin like eUSD, arbitrageurs can purchase the stables on the open market at a discount if the stablecoin trades below $1, and then redeem the underlying collateral in full, thus making a profit. This arbitrage behavior drives up the stablecoin’s price back to $1. Interestingly for Lybra Finance, stablecoin minters have the option to choose if their position can be redeemed or not. Many users choose not to activate the redemption option, which prevents the execution of arbitrage.

Liquidity on DEXs

We measured the liquidity of stablecoin by slippage when swapping 100K and 1M to USDT in the DEX Aggregator LlamaSwap. USDe has the best liquidity with zero slippage when swapping 1 million tokens. It is worth noting USDM, being relatively small in stablecoin market cap, has fairly good liquidity.

Disclaimer：

1. This article is reprinted from [tokeninsight]. Forward the Original Title‘The New Wave of Yield-bearing Stablecoins’. All copyrights belong to the original author [0xEdwardyw]. If there are objections to this reprint, please contact the Gate Learn team, and they will handle it promptly.
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