A Guide to Earning Stablecoin Yield

Author: Jacob Zhao

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 the concentrated research results in the stablecoin field at the end of last year, I would like to discuss the old but evergreen topic of stablecoin yields.

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

• USDT, which is conditionally compliant but has the highest market share: Its application scenarios are broad enough (trading pairs on exchanges, salary payments in the crypto industry, real international trade, and offline payment scenarios), and users hope for a large entity that cannot fail, with Tether having the ability to back it up.

• Compliance stablecoins pegged 1:1 to fiat currencies: USDC has the most chain and application scenario support, making it a true on-chain dollar, while other compliant stablecoins like PayPal USD and BlackRock USD have certain limitations in their application scenarios.

• Over-collateralized stablecoins: Mainly represented by DAI from MakerDAO and its upgraded version USDS under 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 the phenomenal USDe from Ethena. Its funding rate arbitrage model for obtaining yields will also be one of the stablecoin yield models analyzed in detail later in this article.

• RWA project stablecoins backed by U.S. Treasury bonds: The most representative in this cycle are USD0 from Usual and USDY from Ondo. Usual's USD0++ provides liquidity for U.S. Treasury bonds, similar to how Lido does for ETH staking, showcasing innovation.

• Algorithmic stablecoins: After the collapse of Terra's UST, the track has basically been discredited. Luna lacked real value support, leading to severe price fluctuations and a death spiral of sell-offs and crashes. FRAX, which combines algorithmic stablecoins and over-collateralization models, still has 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. The only way for non-U.S. dollar stablecoins to survive is through payment services under a compliant regulatory framework rather than being applied in the native crypto community.

Stablecoin Market Cap Ranking Source: https://defillama.com/stablecoins

Currently, the main categories of yield acquisition through stablecoins are as follows, and this article will further analyze each type of yield:
Stablecoin Yield Categories

1. Stablecoin Lending & Borrowing:

Lending, as the most traditional financial yield model, derives its returns primarily from interest paid by borrowers, requiring consideration of platform or protocol security, borrower default probability, and yield stability. 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 mainly include Aave, Sky Protocol (the rebranded MakerDAO), Morpho Blue, etc.

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

Additionally, there are some micro-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 introduced in detail later; while early fixed-rate DeFi projects like Notional Finance and Element Finance have not succeeded but their design concepts are 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 derives income from institutional lending.

• RWA brings 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 continues to be the primary stablecoin yield model due to its capacity to handle the largest amount of funds.

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 stablecoins supported in Curve Pools as an important indicator of new stablecoins' adoption in the industry. The advantage of Curve mining lies in its extremely high security, while the downside is its low yields, which lack attractiveness (0-2%). If non-large and long-term funds participate in Curve's liquidity mining, the returns may not even cover trading 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 if they offer higher yields, still raise concerns about Rug Pulls, which do not align with the cautious and stable principles of stablecoin investment. We can see that the 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 Ranking Source: https://defillama.com/yields?token=ALLUSDSTABLES

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 align with spot prices through the 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 mainly comes from buying spot in positive funding rate scenarios, shorting perpetual contracts, and collecting fees paid by longs.

Ethena Historical Funding Rate Statistics, the probability of a positive funding rate is long-term greater than that of a negative funding rate

• 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. It is usually 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 locking periods 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 between different exchanges are very low, requiring reliance on automated arbitrage scripts and being more suitable for high-volatility markets and low market cap coins, making it difficult 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 elaborated on further in this article.

Market neutral arbitrage strategies, due to their high professionalism, are mostly 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 in the Ethena protocol, which mints 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 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 entrusted to a third-party custodian OES (Off Exchange Settlement), which regularly issues audit reports, effectively isolating exchange platform risks.
Ethena Protocol Flowchart

Regarding the risks of Ethena, aside from platform and custodian accidents, smart contract security issues, or decoupling of pegged assets, which are uncontrollable factors for the project, the more important 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 probability is relatively low. Even if it occurs, it means that the widely applicable "funding rate arbitrage" trading strategy in the industry has failed. Therefore, under the premise that the team does not act maliciously, the Ethena protocol will not experience the death spiral model of Terra's algorithmic stablecoin, but rather what may occur is a gradual decline in high yields subsidized by tokens back to normal arbitrage yield ranges.

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 on different exchanges, and monthly custodial audit reports on the official website, which is superior to other funding rate arbitrage products in the market.

Aside from Ethena's "funding rate arbitrage" model, the 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 RWA Projects

The Federal Reserve's interest rate hike cycle from 2022 to 2023 has pushed U.S. dollar interest rates above 5%. Even though it has now shifted to a gradual rate cut, a U.S. dollar interest rate above 4% remains a rare asset target in traditional finance that balances high security and relatively high returns. RWA businesses have high compliance requirements and operational models, and U.S. Treasury bonds, as standardized assets with high transaction volumes, are among the few RWA products with valid business logic.
U.S. Treasury RWA Growth Trend Chart: Source: https://app.rwa.xyz/treasuries

Ondo, with U.S. Treasury bonds as the underlying asset, offers USDY for non-U.S. retail clients and OUSG for qualified U.S. institutional clients, both yielding 4.25%. It is the leader in the RWA track in terms of multi-chain support and ecological applications, but in terms of regulatory compliance, it is slightly inferior to Franklin Templeton's FOBXX and BlackRock's BUIDL. Meanwhile, the Usual protocol, which has emerged strongly in this cycle, has added liquidity tokens USD0++ on top of USD0, which is backed by a basket of U.S. Treasury bonds, providing liquidity for 4-year locked U.S. Treasury bonds and allowing participation in stablecoin liquidity mining or lending pools for additional returns.
Usual Protocol USD0 and USD0++ Yield Illustration

It is worth noting that most U.S. Treasury RWA projects stabilize their yields around 4%, while the higher yields of Usual's stablecoin pool mainly 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 slowly declining yields but not catastrophic failures in the future.

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

5. Structured Products (Options)

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

In practical operations, the sell options strategy is more suitable for range-bound markets, where the Sell Put target price is set at the lower limit of the range and the Sell Call target price at the upper limit. For unidirectional bullish markets, the option premium returns are limited, making it easier to miss out, so choosing Buy Call is more appropriate. For unidirectional bearish markets, Sell Put can easily 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 ignoring the risk exposure brought by significant price declines, but setting the target price too low results in option premium returns 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 returns, while during bullish market periods, choosing exchange flexible lending yields is more attractive.

As for the recently popular Shark Fin principal protection strategy 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) + 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 with no additional returns. This is a suitable U-based investment solution for users who prioritize principal safety without pursuing maximization of option premiums or coin-based returns.
OKX SharkFin Options Structured Product Illustration

The maturity of on-chain options is yet to be developed. Ribbon Finance once became the leading options vault protocol in the last cycle, while leading 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 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 upon maturity.

• YT (Yield Token): Represents the future yield portion, which decreases over time and becomes worthless upon maturity.

Pendle's trading strategies mainly include:

• Fixed Income: Holding PT until maturity to obtain fixed returns, suitable for risk-averse individuals.

• Yield Speculation: Purchasing YT to bet on future yield increases, suitable for risk-seeking individuals.

• Risk Hedging: Selling YT to lock in current yields and avoid market downturn risks.

• Liquidity Provision: Users can deposit PT and YT into liquidity pools to earn trading fees and PENDLE rewards.

Currently, its main stablecoin pool, in addition to the native yields of the underlying assets, also adds YT speculative yields, LP yields, Pendle token incentives, Points, and other incentive measures, making its overall yield rate attractive. One downside is that Pendle's high-yield pools generally have shorter terms, making it impossible to operate once and for all like staking or liquidity mining or lending pools; it requires frequent on-chain operations to switch yield pools.

7. Basket of Stablecoin Yield Products:

Ether.Fi, as the leading protocol for Liquid Restaking, actively embraces change and product transformation after entering a saturated downward trend in the Restaking track, launching numerous yield products in BTC, ETH, and stablecoins, maintaining its leading position in the entire DeFi industry.

In its Market-Neutral USD pool, it provides users with a basket of stablecoin yield products such as lending interest (Syrup, Morpho, Aave), liquidity mining (Curve), funding rate arbitrage (Ethena), 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.
Ether.Fi Market-Neutral USD Asset Allocation
Ether.Fi Market-Neutral USD Participating Protocols

8. Stablecoin Staking Returns:

Stablecoin assets do not possess staking attributes like ETH and other POS public chains. However, the AO network launched by the Arweave team accepts on-chain staking of stETH and DAI in its Fair Launch token issuance model, and the staking of DAI has 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 greater returns, 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 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 of the cryptocurrency market on a solid financial foundation.