A guide to stablecoin yields: Which of the 8 types is best?

Author: Jacob Zhao

Recently, the crypto 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 on the stablecoin field from the end of last year, I would like to discuss the age-old but evergreen topic of stablecoin yields.

Currently, the main categories of stablecoins in the crypto market are as follows:

• USDT with conditional compliance and the highest market share: Sufficient application scenarios (trading pairs on exchanges, crypto industry company payroll, real international trade, and offline payment scenarios), with users hoping for a "too big to fail" status and Tether's ability to provide a safety net.
• Compliant stablecoins pegged 1:1 with fiat currency: USDC has the most chains and application scenarios, truly a on-chain US dollar, while other compliant stablecoins like PayPal USD and BackRock USD have certain limitations in application scenarios.
• Over-collateralized stablecoins: Mainly DAI from MakerDAO and USDS after upgrading to Sky Protocol; LUSD from Liquity, with its micro-innovation of 0% borrowing interest rate and low 110% collateralization ratio, has become a competitor.
• Synthetic asset stablecoins: In this cycle, Ethena's USDe is the most representative. Its funding rate arbitrage model for generating yields is also one of the stablecoin yield modes that will be focused on later in this article.
• RWA stablecoins with US Treasury bonds as underlying assets: In this cycle, USD0 from Usual and USDY from Ondo are the most representative. Usual's USD0++ provides liquidity for US Treasury bonds, similar to Lido for ETH Staking, which is innovative.
• Algorithmic stablecoins: After the collapse of Terra's UST, the track has been basically disproven. Luna's lack of real value support led to price volatility, and after a death spiral of sharp sell-offs and further declines, it ultimately depegged and collapsed. FRAX, combining algorithmic stablecoin and over-collateralization models, still has some application scenarios, while other algorithmic stablecoins have lost market influence.
• Non-USD stablecoins: Euro stablecoins (Circle's EURC, Tether's EURT, etc.) and other fiat stablecoins (BRZ, ZCHF, HKDR, etc.) currently have minimal impact on the USD-dominated stablecoin market. A non-USD over-collateralized stablecoin project I once invested in has basically gone to zero. The only path for non-USD stablecoins is payment business under a compliant regulatory framework, not application in the native crypto community.

• Cash-and-Carry Arbitrage: Spot and futures arbitrage utilizes price differences between the spot market and futures market, locking in profits through hedged positions. The core concept is "Basis", which is the difference between futures and spot prices. Typically operated in Contango (futures prices higher than spot) or Backwardation (futures prices lower than spot) markets. Cash-and-Carry arbitrage is suitable for investors with substantial capital, who can accept lock-up periods and believe in basis convergence, commonly seen among traditional financial traders.
• Cross-Exchange Arbitrage: Utilizing price differences across different exchanges to build neutral positions, this was a mainstream arbitrage method in the early Crypto industry. However, price spreads for mainstream trading pairs are now extremely low, requiring automated arbitrage scripts and being more suitable for high-volatility markets and small-cap coins, with high entry barriers for retail investors, referencing the Hummingbot platform.
• Additionally, the market includes arbitrage models such as triangular arbitrage, cross-chain arbitrage, and cross-pool arbitrage, which will not be further elaborated in this article.

Market-neutral arbitrage strategies are highly professional and mostly limited to professional investors. However, in this cycle, Ethena has brought the mature "Funding Rate Arbitrage" model on-chain, allowing ordinary retail users to participate.

Users deposit stETH in the Ethena protocol to Mint equivalent USDe tokens, simultaneously opening an equivalent short position on centralized exchanges to earn positive funding rates. According to historical data, funding rates are positive over 80% of the time, and in negative funding rate scenarios, Ethena will compensate losses through reserves. Over 65% of Ethena's protocol income comes from funding rate hedging, with additional income from Ethereum Staking and on-chain or exchange lending (35%). Moreover, user assets are entrusted to third-party custodian OES, which regularly provides audit reports, effectively isolating exchange platform risks.

Regarding Ethena's risks, beyond uncontrollable factors like exchange platform and custodian accidents, smart contract security, or asset de-pegging, the more critical point is "losses in long-term negative funding rate scenarios where protocol reserves cannot cover". Based on historical data drawdowns, this probability is low, and even if it occurs, it would mean the industry-wide applicable "Funding Rate Arbitrage" trading strategy has failed. Therefore, assuming the team acts in good faith, the Ethena protocol is unlikely to experience Terra's algorithmic stablecoin death spiral, but may see token-subsidized high yields gradually return to normal arbitrage returns.

Meanwhile, we must acknowledge Ethena's maximum data transparency, with clear historical yields, funding rates, positions across different exchanges, and monthly custody audit reports on their website, surpassing other funding rate arbitrage products in the market.

Apart from Ethena's "Funding Rate Arbitrage" model, Pionex exchange also offers a "Term Arbitrage" stablecoin financial product. Unfortunately, except for Ethena, there are currently few low-barrier market-neutral arbitrage products for retail customers.

Four, US Treasury Bills RWA Projects

The Federal Reserve's rate hike cycle in 2022-2023 pushed dollar rates above 5%. Even with current gradual rate cuts, dollar rates above 4% remain a rare asset class balancing high safety and relatively high yields in traditional finance. RWA business has high compliance requirements and operational modes, with US Treasuries being one of the few RWA products with viable business logic due to their high-volume, standardized nature.

Ondo, with US Treasuries as underlying assets, offers USDY for non-US retail customers and OUSG for qualified US institutional customers, both yielding 4.25%. It leads the RWA track in multi-chain support and ecosystem applications, though slightly less compliant than Franklin Templeton's FOBXX and BlackRock's BUIDL. The emerging Usual protocol, using a basket of US Treasuries as underlying assets for USD0, has added liquidity token USD0++, similar to Lido's approach to Ethereum staking, providing liquidity for 4-year locked US Treasuries and allowing additional earnings through stablecoin liquidity mining or lending pools.

It's worth noting that most US Treasury RWA projects stabilize yields around 4%, while Usual's stablecoin pool's higher yields primarily come from Usual token subsidies, Pills (Point) incentives, and liquidity mining - speculative additional earnings that are not sustainable. As the most DeFi-integrated US Treasury RWA project, it still faces risks of slowly declining yields without catastrophic collapse.

Although the USD0++ redemption mechanism adjustment in early 2025 led to price de-pegging and selling, rooted in the misalignment of bond attributes with market expectations and governance failures, its liquidity design mechanism remains an industry innovation worth emulating by other US Treasury RWA projects.

Five, Structured Option Products

Current structured products and dual-currency strategies on most centralized exchanges originate from "selling options to earn premiums" Sell Put or Sell Call strategies in options trading. USDT-based stablecoins primarily use the Sell Put strategy, with income derived from option premiums paid by option buyers, earning stable USDT option premiums or purchasing BTC or ETH at lower target prices.

In practical implementation, selling options strategies are more suitable for range-bound markets, with Sell Put targeting the lower bound and Sell Call targeting the upper bound. For unilateral rising markets, option premium income is limited and prone to missing pumps, making Buy Call more appropriate. In unilateral falling markets, Sell Put easily becomes a position that continues losing after buying mid-way. New option sellers often fall into the trap of pursuing short-term "high option premium yields" while overlooking the risk exposure from significant price drops, but setting target prices too low also lacks sufficient attractiveness. Based on years of options trading experience, the Sell Put strategy is mainly used during market panic to set lower buy target prices for high option premium yields, while choosing exchange lending rates during market rises.

The recent Shark Fin principal protection strategy on exchanges like OKX uses a Bear Call Spread strategy (Sell Call to collect option premiums + Buy Call at higher strike price to limit upside) + Bull Put Spread (Sell Put to collect option premiums + Buy Put at lower strike price to limit downside), earning option premium income within the range, with no additional returns outside the range as buying and selling options offset each other. For users prioritizing principal safety without pursuing maximum option premium or token-based returns, this serves as a suitable USDT-based financial solution.

On-chain options development remains immature. Ribbon Finance was the top options vault protocol in the previous cycle, and leading on-chain options trading platforms like Opyn and Lyra Finance also allow manual options premium strategies, though they have lost their former glory.

VI. Yield Tokenization

The representative Pendle protocol of this cycle, which began with fixed-rate lending in 2020 and matured in yield tokenization in 2024, allows users to lock in fixed income, speculate on future yields, or hedge yield risks by splitting yield assets into different components.

• Standardized yield tokens (SY) can be split into Principal Token (PT) and Yield Token (YT)
• PT (Principal Token): Represents the principal part of the underlying asset, which can be redeemed at a 1:1 ratio at maturity.
• YT (Yield Token): Represents the future yield portion, which decreases over time and becomes zero at expiration.

Pendle's trading strategies mainly include:

• Fixed Income: Holding PT until maturity provides fixed income, suitable for risk-averse investors.
• Yield Speculation: Buying YT to bet on future yield increases, suitable for risk-seeking investors.
• 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, their promoted stablecoin pool offers attractive overall yields by combining underlying asset native yields, YT speculative yields, LP yields, Pendle token incentives, and Points incentives. One drawback is that Pendle's high-yield pools generally have shorter terms, requiring frequent on-chain operations to switch yield pools, unlike Staking, liquidity mining, or lending pools that can be set up once and left.

VII. Basket of Stablecoin Yield Products:

Ether.Fi, as a leading Liquid Restaking protocol, actively embraced product transformation by launching various yield products for BTC, ETH, and stablecoins after the Restaking track entered a saturated downward trend, 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 through an actively managed fund, including lending (Syrup, Morpho, Aave), liquidity mining (Curve), funding rate arbitrage (Ethena), and yield tokenization (Pendle). For users seeking stable on-chain yields with insufficient funds who are unwilling to operate frequently, this approach offers a method of balancing high yields and risk diversification.

VIII. Stablecoin Staking Yields:

Stablecoin assets do not have Staking attributes like ETH and other PoS public chains. However, the AO network launched by the Arweave team accepts stETH and Dai staking in its token Fair Launch distribution model, with Dai staking offering the highest AO yield capital efficiency. We can categorize this stablecoin staking model as an alternative stablecoin yield method, which ensures Dai asset safety while earning additional AO token rewards, with the core risk being the uncertainty of AO network development and token price.

In summary, we have summarized the mainstream stablecoin yield models in the current crypto market as shown in the table above. Stablecoin assets are the most familiar yet easily overlooked market for crypto practitioners. Understanding the sources of stablecoin yields and making reasonable allocations can help navigate the uncertainties of the crypto market more confidently on a stable financial foundation.