Author: JacobZhao Source: mirror
The recent crypto market is lackluster, and conservative and stable returns have once again become market demand. Therefore, based on my investment experience in recent years and the concentrated research results in the field of stablecoins at the end of last year, I would like to talk about the old but evergreen topic of stablecoin returns.
The current stablecoin categories in the crypto market are mainly the following categories:
USDT, which is conditionally compliant but has the highest market share: The application scenarios are wide enough (exchange currency trading pairs, crypto industry company salary payments, real international trade and offline payment scenarios), and users hope that Tether is too big to fail and has the ability to cover the bottom.
Compliant stablecoins pegged 1:1 to fiat currencies: USDC has the most chains and application scenarios to support it, and is the real on-chain dollar, while the application scenarios of other compliant stablecoins such as PayPal USD and BackRock USD have certain limitations.
Overcollateralized stablecoins: Mainly MakerDAO's DAI and its USDS after upgrading to Sky Protocol; Liquity's LUSD has become one of the competitors with its micro-innovation of 0 collateral lending rate and 110% low pledge rate.
Synthetic asset stablecoins: The phenomenal Ethena's USDe is the most representative in this cycle. Its funding rate arbitrage model for obtaining income is also one of the stablecoin income models that will be analyzed later in this article.
RWA project stablecoins with underlying assets of US Treasuries: Usual's USD0 and Ondo's USDY are the most representative in this cycle. Usual's USD0++ provides liquidity for US Treasuries, which is similar to Lido's innovation for ETH Staking.
Algorithmic stablecoins: Terra's UST track was basically falsified after the collapse, and Luna lacked real value to support the violent fluctuations in token prices. After the death spiral of plummeting and selling and plummeting, it decoupled and finally collapsed. FRAX's algorithmic stablecoins and over-collateralization models still have some application scenarios, while the remaining algorithmic stablecoins have no market influence.
Non-USD stablecoins: Euro stablecoins (Circle’s EURC, Tether’s EURT, etc.) and other fiat stablecoins (BRZ, ZCHF, HKDR, etc.) currently have little impact on the dollar-dominated stablecoin market. A non-USD over-collateralized stablecoin project that the author once invested in has basically returned to zero. The only way out for non-USD stablecoins is payment business under a compliance regulatory framework rather than being used in the native crypto community.
Stablecoin market capitalization ranking, data source: https://defillama.com/stablecoins
The current model categories for obtaining income through stablecoins are mainly the following categories. This article will further analyze each type of income in detail:
Head Defi protocols are mainly Aave, Sky Protocol (MakerDAO upgraded brand), Morpho Blue, etc.
The platform security of the top exchanges and the top Defi protocols that have experienced the test of cycles are relatively high. During the rising market, due to the strong demand for lending, the U current account income can easily soar to more than 20%, but during the quiet market period, the general income is low and maintained at 2%-4%. Therefore, the current loan interest rate (Flexible Interest) is also a very intuitive indicator of market activity. Fixed interest lending sacrifices liquidity, so most of the time the income is higher than the current account, but it cannot capture the surge in current account income during the active market period.
In addition, there are some micro-innovations in the overall stablecoin lending market, including:
Fixed-rate lending Defi protocol: The Pendle protocol, which is very representative of this cycle, started with fixed-rate lending and ended up with tokenized returns, which will be introduced in detail later in this article; and although early fixed-rate Defi projects such as Notional Finance and Element Finance did not succeed, their design concepts are worth referring to.
Introducing rate tranching and subordination mechanisms in lending;
Providing leveraged lending (Leveraged Lending) Defi protocols;
Defi lending protocols for institutional customers, such as Maple Finance's Syrup, whose returns come from institutional lending.
RWA puts the income of real-world lending business on the chain, such as Huma Finance's on-chain supply chain financial products.
In short, the lending business, as the most traditional financial income model, is easy to understand and will continue to be the main stablecoin income model with the largest amount of funds.
Take Curve as a representative, its income comes from the handling fees and token rewards distributed to LP by AMM transactions. Curve, as the holy grail of stablecoin DEX platforms, has become an important indicator for measuring the adoption of new stablecoins in the industry as a stablecoin supported in Curve Pools. The advantage of Curve mining is that it is extremely safe, but the disadvantage is that the income is too low and lacks attractiveness (0-2%). If non-large and long-term funds participate in Curve's liquidity mining, the income may not even cover the transaction Gas Fee.
The stablecoin pool trading pairs of Uniswap face the same problem. The non-stablecoin trading pairs of Uniswap have the possibility of liquidity mining losses, and the stablecoin pool trading pairs of other smaller DEXs still have Rug Pull concerns even if the returns are higher, which does not conform to the principle of prudent and stable financial management of stablecoins. We can see that the current Defi stablecoin pool is still dominated by the lending model, and Curve's most classic 3Pool (DAI USDT USDC) is only ranked in the top 20 in TVL.
Stablecoin pool TVL ranking, source: https://defillama.com/yields?token=ALL_USD_STABLES
Market neutral arbitrage strategies have been widely used in professional trading institutions for a long time. By holding long and short positions at the same time, the net market exposure of the portfolio is close to zero. Specifically for Crypto, the main ones are:
Funding Rate Arbitrage: Perpetual Futures have no expiration date, and their prices are consistent with spot prices through the Funding Rate mechanism. Funding rates need to be paid regularly to shorten the short-term price difference between spot and perpetual futures.
When the perpetual futures price is higher than the spot price (premium), longs pay shorts, and the funding rate is positive.
When the perpetual futures price is lower than the spot price (discount), shorts pay longs, and the funding rate is negative.
According to historical retracement data, the probability of a positive funding rate is greater than the probability of a negative funding rate in the long term. Therefore, the main source of income is spot buying in a positive funding rate scenario, shorting perpetual futures, and collecting fees paid by longs.
Cash-and-Carry Arbitrage: Cash-and-Carry Arbitrage uses the price difference between the spot market (Spot) and the expiring futures market (Futures) to lock in profits by hedging positions. The core concept is "Basis", which is the difference between the expiring futures price and the spot price. It is usually operated in the contango (futures price is higher than spot) or backwardation (futures price is lower than spot) market. Cash-and-Carry Arbitrage is suitable for investors with large funds, who can accept the lock-in period and are optimistic about the convergence of basis, and is common among traders with traditional financial thinking.
Cross-exchange arbitrage: Using price differences between different exchanges to build neutral positions is the mainstream arbitrage method in the early days of the Crypto industry. However, the current price spreads of mainstream trading pairs between different exchanges are already extremely low, and it is necessary to rely on automated arbitrage scripts and is more suitable for highly volatile markets and small-cap coins. The threshold for retail investors to participate is high, so you can refer to the Hummingbot platform.
In addition, there are arbitrage models such as triangular arbitrage, cross-chain arbitrage, and cross-pool arbitrage in the market, which will not be further expanded in this article.
Market-neutral arbitrage strategies are mostly limited to professional investors due to their high professionalism. The emergence of Ethena in this cycle has moved the mature model of "Funding Rate Arbitrage" to the chain, and ordinary retail users can participate.
Users who deposit stETH in the Ethena protocol will receive an equivalent amount of USDe tokens at Mint. At the same time, they can open an equivalent amount of short orders on centralized exchanges to hedge and earn positive funding rates. According to historical statistics, more than 80% of the time there is a positive funding rate, and in the case of a negative funding rate, Ethena will make up for the loss through reserves; more than 65% of the Ethena protocol's income hedges the funding rate, and there is also some Ethereum Staking, on-chain or exchange lending income (35%) as supplementary income; in addition, user assets are entrusted to a third-party custodian OES (Off Exchange Settlement) and audit reports are issued regularly, effectively isolating the exchange platform risks.
As for the Ethena risk, apart from the uncontrollable factors of the project party such as the exchange platform and the custodian, the security issues of the smart contract or the decoupling of the anchored assets, the more important core point is "the loss under the long-term negative funding rate scenario and the agreement reserved funds cannot cover it". According to the retracement of historical data, we can understand that the probability is low. Even if it happens, it means that the "funding rate arbitrage" trading strategy generally applicable in the industry will fail. Therefore, under the premise that the team does not do evil, the Ethena protocol will not appear in the death spiral mode of the Terra algorithmic stablecoin, but it is possible that the high yield of the token subsidy will gradually decline and return to the normal arbitrage income range.
At the same time, we have to admit that Ethena has achieved the greatest degree of data transparency. On the official website, you can clearly query the historical returns, funding rates, positions of different exchanges, and monthly custody audit reports, which is better than other funding rate arbitrage products on the market.
In addition to Ethena's "funding rate arbitrage" model, Pionex Exchange also has a stablecoin wealth management product with a "term arbitrage" model. Unfortunately, apart from Ethena, there are not many market-neutral arbitrage products that retail customers can participate in with a low threshold.
The Fed's 2022-2023 interest rate hike cycle will push the US dollar interest rate to more than 5%. Even though it has turned to a gradual interest rate cut, the US dollar interest rate of more than 4% is still a rare asset target that combines high security and high returns in the traditional financial industry. The RWA business has high compliance requirements and a heavy operating model. U.S. Treasury bonds, as a standardized target with high trading volume, are one of the few RWA products with established business logic.
Ondo, which uses U.S. Treasuries as underlying assets, has a yield of 4.25% for its USDY for non-U.S. general retail customers and OUSG for U.S. institutional qualified customers. It is the leader in the RWA track in terms of multi-chain support and ecological applications, but is slightly inferior to FOBXX launched by Franklin Templeton and BUIDL of BlackRock in terms of regulatory compliance. The Usual protocol, which has emerged in this cycle, has added a liquidity token USD0++ on top of USD0, which is an underlying asset of a basket of U.S. Treasuries. This is similar to Lido's staking on Ethereum, providing liquidity for 4-year locked U.S. Treasuries, and can participate in stablecoin liquidity mining or lending pools to obtain additional income.
It should be pointed out that the returns of most U.S. Treasury RWA projects are stable at around 4%, and the higher returns of the Usual stablecoin pool mainly come from Usual token subsidies, Pills (Point) incentives, liquidity mining and other speculative additional returns that are not sustainable. As the U.S. Treasury RWA project with the most complete Defi ecosystem, it still faces the risk of slowly declining returns in the future, but not to the point of a crash.
Although the price decoupling and sell-off caused by the adjustment of the redemption mechanism of USD0++ in early 2025 was rooted in the misalignment of its bond attributes and market expectations and governance errors, its liquidity design mechanism as an industry innovation is still worthy of reference for other US debt RWA projects.
The structured products and dual-currency strategies currently popular in most centralized exchanges are derived from the Sell Put or Sell Call strategy of "selling options to earn premiums" in option trading. U-based stablecoins are mainly Sell Put strategies, and the income comes from the premium paid by the option buyer, that is, earning stable USDT premiums or buying BTC or ETH at a lower target price.
In actual practice, the sell option strategy is more suitable for range-bound market conditions. The Sell Put target price is the lower limit of the range, and the Sell Call target price is the upper limit of the range. For a unilateral rising market, the premium income is limited and it is easy to miss the opportunity, so it is more appropriate to choose Buy Call. For a unilateral falling market, Sell Put is likely to become a state of continuous loss after buying halfway up the mountain. For novices in selling options trading, it is easy to fall into the trap of pursuing short-term "high premium income" and ignore the risk exposure brought by a sharp drop in the price of the currency, but if the target price is set too low, the premium yield is not attractive enough. Combined with the author's many years of options trading, the Sell Put strategy mainly sets a lower buying target price to earn high premium income when the market is in a state of panic, and the exchange's current lending yield is more considerable during the market rise. As for the Shark Fin principal protection strategy that has been popular in recent exchanges such as OKX, it adopts the Bear Call Spread strategy (Sell Call collects option premium + Buy Call with a higher strike price limits the rise) + Bull Put Spread (Sell Put collects option premium + Buy Put with a lower strike price limits the fall), so that the entire option portfolio earns option premium income within the range, and there is no additional income from buying and selling options outside the range to hedge each other. For users who focus on principal security and do not pursue maximizing option premiums or currency-based income, it is a suitable U-based financial management solution.
The maturity of on-chain options needs to be developed. Ribbon Finance once became the top option vault protocol in the last cycle. Top on-chain option trading platforms such as Opyn and Lyra Finance can also manually trade option premium strategies, but now they are no longer popular.
The Pendle protocol, which is very representative of this cycle, started with fixed-rate lending in 2020 and ended with yield tokenization in 2024. By splitting the income assets into different components, users can lock in fixed income, speculate on future income, or hedge income risks.
Standardized yield tokens SY (standardized yield tokens) can be split into principal tokens PT and yield tokens YT
PT (Principal Token): represents the principal part of the underlying asset, which can be redeemed for the underlying asset at a 1:1 ratio upon maturity.
YT (Yield Token): represents the future yield part, which decreases over time and returns to zero value upon maturity.
Pendle's trading strategies are mainly:
Fixed income: Holding PT until maturity can obtain fixed income, which is suitable for risk-averse people.
Income speculation: Buy YT to bet on future income increase, suitable for risk appetite.
Risk hedging: Sell YT to lock in current income and avoid market decline risk.
Liquidity provision: Users can deposit PT and YT into the liquidity pool to earn transaction fees and PENDLE rewards.
The current main stablecoin pool, in addition to the native income of the underlying assets, also superimposes YT speculation income, LP income, Pendle token incentives, Points and other incentives to make its overall yield considerable. One of the shortcomings is that Pendle's high-yield pool generally has a short-term term, and it cannot be operated once and for all like Staking or liquidity mining or lending pools. Regular on-chain operations are required to change the income pool.
As the leading protocol of Liquid Restaking, Ether.Fi actively embraced the transformation of products and launched many income products in BTC, ETH and stablecoins after the Restaking track entered a saturated downward trend, and continued to maintain its leading position in the entire Defi industry.
In its stablecoin Market-Neutral USD pool, it provides users with a basket of stablecoin income products such as lending interest (Syrup, Morpho, Aave), liquidity mining (Curve), funding rate arbitrage (Ethena), and income tokenization (Pendle) in the form of actively managed funds. For users who pursue stable on-chain income, have insufficient funds and are unwilling to operate frequently, it is a way to balance high returns and risk diversification.
Stablecoin assets are not POS public chains such as ETH that have Staking attributes. However, the AO network launched by the Arweave team accepted on-chain pledges of stETH and DAI in the token Fair Launch issuance model, and the pledge of DAI has the highest AO income capital efficiency. We can classify this type of stablecoin pledge model as an alternative stablecoin income model, that is, earning additional AO token rewards on the premise of ensuring the safety of DAI assets in order to make a small investment for a big gain, and its core risk lies in the uncertainty of AO network development and token prices.
To sum up, we summarize the mainstream stablecoin income models in the current crypto market as shown in the table above. Stablecoin assets are the most familiar but most easily overlooked market for crypto market practitioners. Only by understanding the source of stablecoin income and then making reasonable allocations can we more calmly deal with the uncertainty risks in the crypto market on the basis of a solid financial foundation.
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