Key Takeaways:
- Stablecoins are cryptocurrencies tied to assets like fiat currencies or real-world assets (RWAs) to maintain stability, with fiat-backed stablecoins the most common with about 90% of the market.
- Yield-bearing stablecoins, categorised into rebase and non-rebase types, offer token rewards or increased token values as yields from their underlying collateral or decentralised finance (DeFi) activities.
- Key players in the yield-bearing stablecoin market include USDY, USDM, and eUSD, each using different methods, such as direct token distribution or increased value through staking, to generate and distribute yields.
- While yield-bearing stablecoins bridge traditional finance (TradFi) and crypto, offering yields on stable assets, they face criticisms like potential centralisation, yield volatility, and limited liquidity, which affect their utility and attractiveness.
- The rise of RWA tokenisation signifies a growing intersection between TradFi and digital assets, with expansion expected in a variety of yield-generating products to meet diverse demands.
What Are Stablecoins?
Stablecoins are defined as cryptocurrencies whose value is tied to an asset class, such as fiat currencies, real-world assets (RWAs), and other crypto assets. Issuers normally keep a reserve to store the assets backing the stablecoin in order to maintain the stability of the peg. In other words, the reserve is collateral, and whenever stablecoins are created or redeemed, assets in the reserve are theoretically added or taken out accordingly.
The stablecoin market sits at $157 billion (at the time of writing). Fiat-backed stablecoins are the most common type of stablecoins, with USDT (Tether) and USDC (USD Coin) alone dominating with a ~90% market share. Fiat-backed stablecoins use RWAs as reserves and are usually backed at a 1:1 ratio. Other decentralised stablecoins like DAI are also increasingly focused on RWAs. At the time of writing, around 31% of DAI was backed by RWAs, including US Treasuries. Note that, although adding RWAs may help maintain the stability of stablecoins, users who hold the stablecoins can’t receive the corresponding yields generated via investing in RWAs directly.
Learn more about stablecoins in this Crypto.com Research report.
What Are Yield-Bearing Stablecoins?
Yield-bearing stablecoins are a type of application of tokenised RWAs. They can be broadly classified in two categories based on their yield distribution mechanism:
Rebase
Rebase tokens are those with balances that adjust automatically. In this case, rebasing distributes token rewards (accrued interest) in the form of additional tokens. At the same time, price stability (the 1:1 peg to USD or another asset) is maintained.
RWA-backed examples include USDY (Ondo), BUIDL (BlackRock), and USDM (Mountain Protocol); while eUSD (Lybra) is a staked collateral-backed example.
Non-Rebase
Non-rebase tokens are either staking-/derivative- or decentralised finance (DeFi)-based.
Types of Yield
Staking/Derivatives
Yield is generated from staking user-deposited collateral (e.g., ETH) or engaging in derivative hedging (e.g., futures). For example, users stake USDe (Ethena) to get a staked token (sUSDe), and the accrued rewards are reflected through an increase in value of sUSDe. Users receive the yields when they unstake their USDe.
DeFi Lending
Users put down collateral on the platform and borrow against it, and yield comes from the underlying collateral and interest rates from lending. Examples include: DAI (Dai), GHO (GHO), and crvUSD (Curve).
Read the full report on Tokenisation of RWAs & Yield-Bearing Stablecoins.
Most Popular Yield-Bearing Stablecoins
The major players in the yield-bearing stablecoin space are listed in the table below. Here, we highlight some of the mechanisms in which yield is accrued for the selected stablecoin players.
RWA-Backed Stablecoins
For these RWA-backed players, interest is generated through the underlying collateral (e.g., US Treasury bills). BlackRock’s BUIDL fund, USDY (mUSD), and USDM (Mountain Protocol) are three popular examples, where traders obtain accrued interest through additional tokens directly airdropped into their wallets. Distribution periods can vary depending on the stablecoin issuer; for instance, USDY and USDM are daily, and BUIDL is monthly.
For example, say a user holds 100 USDM, and Mountain Protocol is paying an APY of 5%. New USDM tokens are automatically distributed to the user wallet every day, equating to a total of 105 USDM after a year.
eUSD
With eUSD (Lybra), traders deposit ETH or another accepted liquid staking token (LST) — for example, stETH or rETH — onto Lybra as collateral. Over time, the LSTs accrue rebase yields, which are converted to eUSD. Traders are distributed a portion of the total eUSD proceeds as interest daily, determined by the LST APRs, eUSD supply and collateral ratio, etc. At the same time, traders can borrow eUSD against the collateral at zero interest and either hold on to it, use it to purchase ETH, or use it in other DeFi activities to earn additional yield. Interest is accrued automatically as long as traders hold eUSD.
DAI
The oldest example of a yield-bearing stablecoin, DAI is over-collateralised by holdings from MakerDAO, which include ETH, USDC, and RWAs like US Treasuries. MakerDAO generates stability fees from its holdings, as well as interest rates from crypto-backed lending. DAI holders do not automatically earn the Dai Savings Rate (DSR), but have to deposit DAI into the Maker Protocol system to get sDAI, in which sDAI’s value increases to reflect the yield accumulation. This is different from rebasing tokens, where interest is automatically accrued in traders’ wallets without further action and the coin value remains stable.
USDe
Ethena is one of the newest players in the yield-bearing stablecoin sector, having introduced a new way of generating yields through a combination of LSTs and delta-hedging. Traders deposit ETH, LSTs, or USDT as collateral to obtain USDe, after which — similar to DAI/sDAI — USDe holders need to stake USDe to obtain sUSDe to receive yield. The yield is not paid directly; instead, it accumulates within the staking contract and is reflected in an increase in value of sUSDe. Traders are only able to unlock the accrued yields when they unstake their USDe.
Pros and Cons of Yield-Bearing Stablecoins
Yield-bearing stablecoins represent an important application of RWAs, bridging the TradFi and crypto worlds. They provide an option to earn yields on safe-haven assets while simultaneously opening the gateway for TradFi institutions to participate in crypto adoption, starting with crypto’s least volatile asset — stablecoins.
However, yield-bearing stablecoins have also received criticism:
Definition as Coins
One of the core purposes of stablecoins is to be a capital-efficient medium of exchange. By allowing stablecoins to be staked, and locked up for yields, introduces additional complexities to its purpose.
Centralisation
Using treasury bills or securities as collateral can be seen as a form of centralisation; to the point, stablecoin giants USDT and USDC have received similar criticisms. Even for stablecoins that claim to be decentralised — Ethena, for example — leveraging centralised exchanges to hedge staked assets occurs.
Yield Volatility
Yields fluctuate — those based on RWAs would likely come down in line with interest rates (expected to see adjustments during the latter part of 2024). DAI’s savings rate has historically fluctuated, from 8% to 5%, and most recently hiked up to 15%. Ethena’s yields also fluctuate based on funding rates. In fact, in the event of negative funding rates (normally associated with bearish market sentiment), Ethena’s yields are expected to decline.
Limited Liquidity and Use Cases
There has been an increasing number of players coming into the stablecoin market, yet the competitive advantages of the players remain limited (only a small differentiation in collateral backing, yield offerings, etc.). These new players are often small, each with limited liquidity and use cases for their stablecoins, which potentially reduces market attractiveness.
Conclusion
The rise of yield-bearing stablecoins in 2024 does not only form a bridge between TradFi and the digital asset space for crypto natives, it also opens up the crypto world to many new users and products.
Various institutions have taken their first steps to jump on the bandwagon of tokenisation to find new opportunities for yield (for example, BlackRock’s recent BUIDL). While there are still limitations in the investor base, scope, and transferability of these tokens, we believe the target is clear — to bring in more assets, users, and efficiency. We expect to see continued growth and new products to satisfy users’ different demands — higher-yielding credit products or equities, for example.
Read the full report on Tokenisation of RWAs & Yield-Bearing Stablecoins.
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