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 late last year, I will discuss the age-old but evergreen topic of stablecoin yields.
Currently, the main categories of stablecoins in the crypto market are as follows:
Conditionally compliant but highest market share USDT: Sufficient application scenarios (trading pairs on exchanges, crypto industry salary payments, 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 chain and application scenario support, truly being an 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; Liquity's LUSD with zero collateral borrowing rate and 110% low collateralization rate is a minor innovation competitor.
Synthetic asset stablecoins: In this cycle, USDe from the phenomenal Ethena is the most representative. Its funding rate arbitrage yield model 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, and is innovative.
Algorithmic stablecoins: After Terra's UST collapse, the track was basically disproven. Luna's lack of real value support led to token price volatility, a death spiral of steep sell-offs, and ultimately decoupling and collapse. FRAX still has some application scenarios by combining algorithmic stablecoin and over-collateralization models, while other algorithmic stablecoins have lost market influence.
Non-USD stablecoins: Euro stablecoins (Circle's EURC, Tether's EURT, etc.) and other fiat currency stablecoins (BRZ, ZCHF, HKDR, etc.) currently have minimal impact on the USD-dominated stablecoin market. The only path for non-USD stablecoins is payment business under a compliant regulatory framework, not application in the native crypto community.
Stablecoin Market Cap Ranking Data source: https://defillama.com/stablecoins
Currently, the main modes of obtaining yields through stablecoins are as follows, and this article will further analyze each yield type in detail:
Stablecoin Yield Categories
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Ethena's historical funding rate statistics show that the probability of positive funding rates is long-term higher than the probability of negative funding rates
**Cash-and-Carry Arbitrage**: Spot-futures arbitrage utilizes price differences between spot and futures markets by hedging positions to lock in profits. The core concept is the "Basis", which is the difference between futures and spot prices. Typically operated in Contango (futures price higher than spot) or Backwardation (futures price lower than spot) markets. **Spot-futures arbitrage** is suitable for investors with large 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 exchanges to build neutral positions, this was a mainstream arbitrage method in early Crypto industry. However, price spreads between mainstream trading pairs are now extremely low, requiring automated arbitrage scripts and being more suitable for high-volatility markets and small-cap coins. Retail investor entry barriers are high, with Hummingbot platform as a reference.
Additionally, the market includes arbitrage models such as **triangular arbitrage, cross-chain arbitrage, and cross-pool arbitrage** which are not further elaborated in this text.
Market-neutral arbitrage strategies are highly professional and mostly limited to professional investors. However, this cycle's 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 equal short positions on centralized exchanges to earn positive funding rates. According to historical statistics, **over 80% of the time shows positive funding rates**, and in negative funding rate scenarios, Ethena will compensate losses through **reserves**. The Ethena protocol derives **over 65% of its income from funding rate hedging, with additional income from Ethereum Staking, on-chain or exchange lending** (35%). Moreover, user assets are entrusted to third-party **Off Exchange Settlement (OES)** with regular audit reports, effectively isolating exchange platform risks.
Considering Ethena's risks, beyond uncontrollable factors like exchange platform and custody institution accidents, smart contract security, or asset de-pegging, the more critical point is "**potential losses during long-term negative funding rates that exceed protocol reserves**". Historical data suggests this probability is low, and even if it occurs, it would mean the industry-standard "funding rate arbitrage" trading strategy has failed. Therefore, assuming no malicious intent, the Ethena protocol is unlikely to experience Terra's algorithmic stablecoin death spiral, but may see high yields gradually decline to normal arbitrage returns due to token subsidies.
Simultaneously, we must acknowledge Ethena's maximum **data transparency**, with clear historical earnings, funding rates, positions across exchanges, and monthly custody audit reports on their website, surpassing other funding rate arbitrage products in the market.
Besides Ethena's "funding rate arbitrage" model, **Pionex exchange** also offers a "**term arbitrage**" stablecoin financial product. Unfortunately, apart from Ethena, few low-barrier market-neutral arbitrage products exist for retail clients.In practical implementation, selling options strategy is more suitable for range-bound market, with Sell Put target price at the lower bound of the oscillation range and Sell Call target price at the upper bound; for unilateral rising market, option premium income is limited and easy to miss the pump, so choosing Buy Call is more appropriate; for unilateral falling market, Sell Put tends to become a state of continuous loss after buying at mid-point. For option trading beginners, they are easily trapped by the pursuit of short-term "high option premium income" while ignoring the risk exposure caused by significant price drops, but setting the target price too low lacks sufficient attractiveness for option premium returns. Based on the author's years of option trading experience, the Sell Put strategy is mainly implemented with lower purchase target prices during market panic to earn high option premium income, while choosing exchange lending rates is more attractive during market uptrends.
Regarding the recent Shark Fin principal protection strategy popular on exchanges like OKX, it adopts a Bear Call Spread strategy (Sell Call to collect option premium + higher strike price Buy Call to limit upside) + Bull Put Spread (Sell Put to collect option premium + lower strike price Buy Put to limit downside), allowing the entire option portfolio to earn option premium income within the range, with no additional returns outside the range as buy and sell options offset each other. For users who prioritize principal safety and do not pursue maximum option premium or token-based returns, this is a suitable USDT-based financial solution.
The maturity of on-chain options is yet to be developed. Ribbon Finance was once the top option vault protocol in the previous cycle, and top on-chain option trading platforms like Opyn and Lyra Finance also allow manual option premium strategy trading, but they have lost their former glory.
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Disclaimer: The content above is only the author's opinion which does not represent any position of Followin, and is not intended as, and shall not be understood or construed as, investment advice from Followin.
