Hotcoin Research | The Rise of Yield-Generating Stablecoins: A Review of Stablecoin Appreciation Methods Amid Market Volatility

1. Overview of Stablecoins

Stablecoins are a type of cryptocurrency that is pegged to fiat currencies, precious metals, or other assets, aiming to combine the stability of digital currencies with the decentralization and security of cryptocurrencies. Due to their value stability, stablecoins are often used as important hedging tools in volatile markets.

The principle of stablecoins is to stabilize their value through different mechanisms (such as fiat collateral, crypto asset collateral, algorithmic control, etc.). These mechanisms ensure that stablecoins maintain their pegged value during market fluctuations, for example, maintaining a 1:1 exchange rate with fiat currencies like the US dollar.

Currently, in the stablecoin market, USDT and USDC still dominate, but emerging stablecoins are gradually rising. According to CoinGecko data, as of July 3, the total market capitalization of stablecoins reached $161.6 billion. Among them, USDT has a market cap of $112.7 billion, with a market share of up to 70%, followed by USDC with about 20%.

According to DefiLlama's Top 10 stablecoin landscape, fiat-collateralized stablecoins still dominate, especially in terms of liquidity and market acceptance. However, crypto asset-collateralized stablecoins and algorithmic stablecoins are also gradually gaining attention, as these new types of stablecoins provide more diversified options and higher yield potential. The rapid rise of yield-bearing stablecoins like USDe and BUIDL, which quickly became the fourth largest stablecoin, demonstrates the enormous potential of yield-bearing stablecoins.

2. Main Types of Stablecoins

Based on their collateral types, stablecoins can be roughly divided into four categories: fiat-collateralized stablecoins, crypto asset-collateralized stablecoins, other physical asset-collateralized stablecoins, and non-collateralized stablecoins:

1. Fiat-Collateralized Stablecoins

These stablecoins are backed by fiat currency reserves, such as USDT and USDC, and have a high degree of centralization and fiat credit risk.

The advantage of fiat-collateralized stablecoins lies in their high security and liquidity, as they primarily rely on fiat reserves to provide value support. Their operational principle is relatively simple: users mint stablecoins by depositing fiat currency and redeem them when needed. However, the main risks of these stablecoins come from fiat credit and systemic risks. If the fiat-issuing country experiences a financial crisis or policy changes, it may affect the value of these stablecoins.

Representative examples include USDT and USDC. USDT is issued by Tether, with reserve assets including cash, short-term US Treasury bonds, and other financial products. USDC is jointly issued by Coinbase and Circle, with its reserve assets primarily consisting of short-term US Treasury bonds and cash. These stablecoins ensure that each stablecoin has corresponding fiat reserves through a reserve proof mechanism, providing high transparency and security.

2. Crypto Asset-Collateralized Stablecoins

Such as DAI and USDe, these use crypto assets as collateral, have a high degree of decentralization, but face risks from collateral price volatility.

Crypto asset-collateralized stablecoins provide value support through crypto assets as collateral. These stablecoins are highly decentralized and typically achieve automated management and liquidation through smart contracts. However, due to the high volatility of crypto asset prices, these stablecoins need to adopt over-collateralization to cope with the risks of collateral value fluctuations.

For example, DAI is a decentralized stablecoin issued by MakerDAO, using ETH and other crypto assets as collateral. Users can mint DAI by staking ETH, maintaining price stability through stable fee rates and liquidation mechanisms. USDe, issued by Ethena Labs, uses ETH staking and derivative hedging strategies to provide high yields through staking rewards and funding rates.

3. Other Physical Asset-Collateralized Stablecoins

Such as PAXG, which uses physical assets like gold as collateral to provide stable value support.

Other physical asset-collateralized stablecoins provide value support through physical assets (such as gold and silver) as collateral. The value stability of these stablecoins is relatively high because physical assets have intrinsic value. However, the liquidity and scalability of these stablecoins may be limited by the management and storage of physical assets.

PAXG is a stablecoin issued by Paxos, backed by gold to provide stable value support. Users can purchase PAXG to obtain a corresponding amount of physical gold and redeem it when needed. The main risks of these stablecoins lie in the storage and management costs of physical assets, as well as the volatility of the physical asset market.

4. Non-Collateralized Stablecoins

Such as AMPL and FRAX, which achieve price stability through algorithmic control, have a high degree of decentralization but face significant price volatility risks.

Non-collateralized stablecoins achieve price stability through algorithmic control of supply. These stablecoins do not rely on any form of collateral and maintain value stability entirely through market supply and demand relationships and algorithmic control. Non-collateralized stablecoins are highly decentralized, with strong censorship resistance and transparency.

For example, AMPL adjusts its supply based on market demand through an elastic supply mechanism to maintain price stability. FRAX employs a partially collateralized and partially algorithmic control approach to maintain value stability through market arbitrage mechanisms. The main risks of these stablecoins lie in the rationality of the algorithm design and the maintenance of market confidence; if the algorithm fails or market confidence wanes, it may lead to severe price fluctuations.

The main types, characteristics, representative coins, and profit models of stablecoins are summarized as follows:

3. The Rise of Yield-Bearing Stablecoins

Yield-bearing stablecoins are a type of stablecoin that can provide investment returns to holders simply by holding the asset. Unlike traditional centralized stablecoins (such as Circle's USDC and Tether's USDT), yield-bearing stablecoin protocols share returns with holders through innovative yield models, such as investing in US Treasury bonds, blockchain staking yields, or structured strategies, providing users with tools to combat inflation and achieving the dual goal of asset preservation and appreciation.

Compared to traditional stablecoins, yield-bearing stablecoins have the following advantages:

1. Combat inflation: In the face of inflationary pressures, yield-bearing stablecoins provide investors with effective asset preservation methods.

2. Diversified yields: Different yield models meet the needs of investors with varying risk preferences.

3. Enhanced market attractiveness: Injecting new vitality into the cryptocurrency market and attracting more capital inflows.

Yield-bearing stablecoins significantly differ from traditional stablecoins in terms of centralization, yield, value stability, liquidity, and application scenarios:

4. Overview of Yield-Bearing Stablecoin Returns

1. Returns from Treasury Securities

• USDY and USDM: Ondo Finance's USDY and Mountain Protocol's USDM provide stable and relatively high annual returns (around 5%) by investing in short-term US Treasury bonds.
• BUIDL: BlackRock's tokenized fund, the BlackRock USD (BUIDL) fund, invests in cash, US Treasury bills, and repurchase agreements, with holders receiving a cryptocurrency called BUIDL, each token valued at $1.
• DAI and GHO: Additionally, the collateral of the two over-collateralized decentralized stablecoins DAI launched by MakerDAO and GHO launched by Aave also invests heavily in US Treasury bonds and low-risk financial securities.

The advantage of this yield model lies in its high stability, as US Treasury bonds and related securities are considered among the lowest-risk assets. However, their yields are relatively low, primarily suitable for risk-averse investors.

2. Returns from Crypto Asset Staking Yields

• eUSD: Lybra Finance's eUSD redistributes staking rewards to stablecoin holders using liquid staking tokens (such as stETH) as collateral.
• YBX: Marginfi, launched on Solana, allows users to use liquid staking tokens (LST), such as stETH and jitoSOL, as collateral to mint yield-bearing stablecoin YBX.
• stUSDT: A yield product called stUSDT launched by the team of Tron founder Justin Sun allows investors to invest USDT and receive stUSDT tokens representing their investment. These tokens can accumulate passive income from RWA investments, directly increasing investors' yields.

This method leverages the decentralized nature of blockchain technology to earn yields by staking native tokens (such as ETH). The advantage of this yield model is its high degree of decentralization, but it carries the risk of price volatility of the staked assets.

3. Returns from Structured Strategies

USDe: Ethena's USDe provides holders with floating annual returns of 0%-35% by utilizing structured ETH positions and funding rates.

Structured strategies achieve high yields through complex financial instruments and derivatives. The advantage of this yield model lies in its potential for high returns, but its complexity and risks are also higher, making it suitable for investors with a higher risk tolerance.

According to the latest data from DefiLlama, the yields of major representative yield-bearing stablecoins are shown in the following chart:

5. Risks and Challenges of Yield-Bearing Stablecoins

1. Sustainability of Yields

The yield sources of yield-bearing stablecoins may be affected by market fluctuations and policy changes. For example, a decline in Treasury yields and an increase in Ethereum staking ratios may lead to a decrease in yields. Therefore, investors need to closely monitor market dynamics and policy changes to assess the sustainability of yields.

2. Liquidity and Use Case Challenges

Yield-bearing stablecoins may face challenges in liquidity and use cases due to issues such as scalability, liquidation risks, low capital efficiency, or permissioned use cases. This limits their growth potential and may affect investor confidence.

3. Contract Risks

Like all DeFi protocols, yield-bearing stablecoins cannot completely avoid contract risks. Some protocols may also face liquidity risks and composability risks. Therefore, investors must understand the various risks and take appropriate risk management measures when selecting specific strategies.

6. Outlook on the Stablecoin Landscape

1. Continuous Expansion of Market Size

The stablecoin market has shown rapid growth in recent years, with a total market capitalization exceeding $160 billion and continuing to expand. As the global cryptocurrency market matures and investors' demand for stability increases, the market size of stablecoins is expected to further grow. Fiat-collateralized stablecoins still dominate, while decentralized crypto asset-collateralized stablecoins and algorithmic stablecoins are also increasing their market share.

2. Diversification of Stablecoin Types

The trend of diversification in stablecoin types is significant, with different types of stablecoins meeting various investor needs. Fiat-collateralized stablecoins provide high stability and liquidity, suitable for most investors; crypto asset-collateralized stablecoins offer greater decentralization and transparency, attracting attention from the DeFi community; algorithmic stablecoins explore new value stabilization methods in the market through innovative mechanisms. These different types of stablecoins will continue to coexist and complement each other.

3. The Rise of Yield-Bearing Stablecoins

Yield-bearing stablecoins provide investors with opportunities to obtain additional returns while maintaining asset stability through innovative yield models. As investors' dual demand for yield and stability increases, yield-bearing stablecoins are gradually rising. By investing in US Treasury bonds, blockchain staking, and structured strategies, yield-bearing stablecoins offer holders stable and attractive returns, and are expected to occupy a larger share in the stablecoin market in the future.

4. Strengthening of Global Regulation

Global regulatory agencies are gradually increasing their attention to stablecoins, and countries may introduce corresponding policies and regulations to regulate the issuance and trading of stablecoins. For example, the US Congress has introduced two versions of stablecoin legislation, and the stablecoin rules in the EU's Markets in Crypto-Assets (MiCA) regulation came into effect on June 30. Stablecoins with strong compliance and high transparency will benefit from this trend, gaining more market recognition and support.

Conclusion

Yield-bearing stablecoins provide investors with tools to combat inflation through various innovative yield models, offering a relatively robust way to appreciate assets in turbulent market conditions. As the market continues to develop, yield-bearing stablecoins are expected to occupy a larger share in the stablecoin market. However, their future development still faces challenges such as yield sustainability, liquidity, and market acceptance. Investors need to choose suitable types of stablecoins and investment strategies based on their risk preferences and investment needs.