Stablecoin Yield Guide

1. Stablecoin Lending & Borrowing:

Lending, as the most traditional financial yield model, derives its 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. Current stablecoin lending products in the market include:

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

The 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 flexible interest rates above 20%, but during quiet market periods, the general yield tends to be lower, maintained at 2%-4%. Therefore, flexible interest rates are also a straightforward indicator of market activity. Fixed interest lending sacrifices liquidity, so it generally yields higher than flexible rates most of the time, 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 highly representative Pendle protocol, which started with fixed-rate lending and evolved into yield tokenization, will be detailed later in this article. Early fixed-rate DeFi projects like Notional Finance and Element Finance, although they did not succeed, have design concepts worth referencing.
Introducing rate tranching and subordination mechanisms in lending;
Providing leveraged lending DeFi protocols;
DeFi lending protocols targeting institutional clients, such as Maple Finance's Syrup, which derives income 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, 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 the largest amounts of capital.

2. Yield Farming:

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 stablecoins supported in Curve Pools as an important indicator of new stablecoins' adoption in the industry. The advantage of Curve mining lies in its high security, while its disadvantage is the low yields (0-2%), which lack attractiveness. If non-large and long-term funds participate in Curve's liquidity mining, the returns may not even cover transaction gas fees.

Uniswap's stablecoin pool trading pairs face the same issue, as non-stablecoin trading pairs on Uniswap may incur liquidity mining losses. Other smaller DEX's stablecoin pool trading pairs, despite higher yields, still carry Rug Pull concerns, which do not align with the cautious and stable principles of stablecoin investment. We can see that current 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:

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, and the funding rate is positive.
When the perpetual contract price is lower than the spot price (backwardation), shorts pay longs, and the funding rate is negative.
Historical drawdown 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 when the funding rate is positive, shorting perpetual contracts, and collecting fees paid by longs.

Cash-and-Carry Arbitrage: This strategy utilizes 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 at expiration. 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 larger capital who can accept a lock-up period and are optimistic about basis convergence. It is 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 different exchanges are minimal. It requires automated arbitrage scripts and is more suitable for high-volatility markets and low market cap coins, making it challenging for retail participants. The Hummingbot platform can be referenced.
Additionally, there are triangular arbitrage, cross-chain arbitrage, and cross-pool arbitrage strategies in the market, which will not be further elaborated on in this article.

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

Users deposit stETH into the Ethena protocol to mint an equivalent amount of USDe tokens, while simultaneously opening 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 negative funding rate scenarios, Ethena will compensate for losses through reserves; over 65% of Ethena's income hedges the funding rate, and there are also some Ethereum staking, on-chain, or exchange lending yields (35%) as supplementary income. Additionally, user assets are held by a third-party custodian OES (Off Exchange Settlement), which regularly issues audit reports, 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 decoupling of pegged assets, the more critical core point lies in "losses in long-term negative funding rate scenarios that cannot be covered by the protocol's reserved funds." Based on historical drawdown 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. Therefore, under the premise that the team does not act maliciously, the Ethena protocol is unlikely to experience the death spiral pattern of Terra's algorithmic stablecoin. Instead, what may happen is a gradual decline in high yields subsidized by tokens, returning to a normal range of arbitrage yields.

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

Aside from Ethena's "Funding Rate Arbitrage" model, Pionex exchange also offers stablecoin investment 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 Bill Yields in RWA Projects:

The Federal Reserve's interest rate hike cycle from 2022 to 2023 has pushed U.S. dollar rates above 5%. Even though it has now shifted to gradual rate cuts, dollar rates above 4% remain a rare asset target in traditional finance that balances high safety and relatively high returns. RWA projects have high compliance requirements and operational models, and U.S. Treasury bonds, as a standardized asset with high trading volume, are among the few RWA products with valid business logic.

Ondo, with U.S. Treasury bonds as its underlying asset, offers USDY to non-U.S. retail clients and OUSG to 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 behind in regulatory compliance compared to Franklin Templeton's FOBXX and BlackRock's BUIDL. Meanwhile, the Usual protocol, which has emerged in this cycle, has introduced USD0, backed by a basket of U.S. Treasury bonds, and added the liquidity token USD0++, similar to Lido for Ethereum staking, providing liquidity for 4-year locked U.S. Treasury bonds and allowing participation in stablecoin liquidity mining or lending pools for additional yields.

It is important to note that most U.S. Treasury RWA projects stabilize yields around 4%, while the higher yields of Usual's stablecoin pool primarily stem from Usual token subsidies, Pills (Point) incentives, liquidity mining, and other speculative additional yields, which are not sustainable. As the most complete RWA project in the DeFi ecosystem, it still faces the risk of gradually declining yields without catastrophic failures in the future.

Although the redemption mechanism adjustment of USD0++ in early 2025 led to a decoupling and sell-off event, the root cause lies in the misalignment of its bond attributes with market expectations, compounded by governance errors. However, its liquidity design mechanism remains an industry innovation worth referencing for other U.S. Treasury RWA projects.

5. Structured Products in Options:

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

In practical operations, 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 strongly bullish markets, option premium returns are limited, making Buy Call a more suitable choice. In a strongly bearish market, Sell Put can lead to continuous losses after buying at a mid-range price. Newcomers to selling options trading may fall into the trap of pursuing short-term "high option premium yields" while ignoring the risk exposure brought by significant price declines. However, 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 mainly employed when market panic spreads during downturns, setting lower buy target prices to earn high option premium yields, while during market uptrends, choosing exchange flexible lending yields is more attractive.

As for the recently popular Shark Fin principal protection strategy on exchanges like OKX, it adopts a Bear Call Spread strategy (Sell Call to collect option premiums + Buy Call at a higher strike price to limit upside) + 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 yields within a range. Outside this range, buying and selling options hedge each other without additional yields. For users who prioritize principal safety without pursuing maximization of option premiums or currency-based yields, this is a suitable U-based investment solution.

The maturity of on-chain options is yet to be developed. Ribbon Finance was once the leading options vault protocol in the previous cycle, and top on-chain options trading platforms like Opyn and Lyra Finance can also manually trade option premium strategies, but they are no longer as prominent now.

6. Yield Tokenization:

The highly representative Pendle protocol in 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 yields, 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 at maturity.
YT (Yield Token): Represents the future yield portion, decreasing over time and worth zero at maturity.

Pendle's trading strategies mainly include:

Fixed yield: Holding PT to maturity can yield fixed returns, suitable for risk-averse individuals.
Yield speculation: Buying 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 promoted stablecoin pool not only includes the native yield of the underlying assets but also adds speculative yields from YT, 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 long-term benefits.

7. A Basket of Stablecoin Yield Products:

Ether.Fi, as the leading protocol for Liquid Restaking, has actively embraced change and transformed its products to launch 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, including lending interest (Syrup, Morpho, Aave), liquidity mining (Curve), funding rate arbitrage (Ethena), and yield tokenization (Pendle) in the form of actively managed funds. For users seeking stable on-chain yields, with insufficient capital and unwilling to operate frequently, this is a method that balances high yields 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 small investments, with the core risk lying in the development of the AO network and the uncertainty of token prices.

In summary, we have compiled the mainstream stablecoin yield models currently in the cryptocurrency market as shown 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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