Written by: Caesar

Compiled by: TechFlow

Yield-bearing stablecoins are considered the next revolution in the ever-evolving stablecoin ecosystem. Over the past year, numerous projects have emerged, dedicated to developing yield-generating stablecoin products.

In this article, I will provide a comprehensive overview of yield-bearing stablecoins, highlighting the main categories in this space: LSD-backed stablecoins, Treasuries-backed stablecoins, and other types of yield-generating stablecoins. After that, I will conduct a user analysis, focusing on identifying which types of users may or may not find yield-bearing stablecoins attractive.

I will perform a SWOT analysis of yield-bearing stablecoins, clarifying potential risk areas and opportunities for improvement within this space. Finally, I will share my thoughts on whether yield-bearing stablecoins achieve product-market fit.

Overview of Yield-Bearing Stablecoins

Yield-bearing stablecoins are a class of stablecoins that offer investment returns simply through holding the asset.

The emergence of several stablecoins focused on delivering predictable and sustainable yields has generated significant optimism within the crypto ecosystem. Many view these yield-bearing stablecoins as nearly risk-free investments with the potential to capture a notable niche in the stablecoin market. Prominent figures such as Nic Carter are particularly optimistic, projecting that yield-bearing stablecoins could capture 20–30% of the stablecoin market share in the coming years.

However, skeptics—including myself—question the long-term viability and potential of these yield-bearing stablecoins.

"The key issue with APR-stablecoins: While interesting, their inherently growth-oriented monetary policy risks slowing down the velocity of money—a condition that often leads to economic slowdowns. In short: If your money might be worth more tomorrow, why spend it today? And if everyone thinks this way, can the economy truly thrive?"

Let us analyze these protocols one by one to gain a better understanding of the current state of yield-bearing stablecoins. To do so, we will examine LSD-backed, Treasuries-backed, and yield-generating stablecoins separately.

a) LSD-Backed Stablecoins

LSD-backed stablecoins are CDP-model stablecoins that require over-collateralization with liquid staking derivatives and carry liquidation risk. They allow holders to earn yield while retaining key properties of crypto-collateralized stablecoins.

Key characteristics of LSD-backed stablecoins can be summarized as follows:

• Utilize LSD derivatives;

• Rely on Ethereum staking rewards;

• Require over-collateralization and carry liquidation risk;

• Unlock liquidity from staked Ethereum.

Recently, as the amount of staked Ethereum has grown, investors have recognized the potential of LSD-backed stablecoins, making them a trending category. As staked Ethereum increases, the market share of LSD-backed stablecoins may also grow.

The first wave of LSD-backed stablecoins like $GRAI, $R, and $eUSD demonstrated demand for stablecoins leveraging LSD derivatives. However, existing flaws in these stablecoins may pose challenges in the future. On the other hand, newer LSD-backed stablecoins such as $mkUSD and $crvUSD have introduced improvements to the existing model, which could represent an exciting development. It should be noted that Ethena Labs’ $eUSD represents a completely new model that may inspire other developers to build similar systems.

I believe LSD-backed stablecoins can serve as effective leverage primitives for Ethereum investors. However, due to capital inefficiency caused by over-collateralization requirements and liquidation risks, they fail to fulfill core stablecoin functions. Moreover, LSD-backed stablecoins are inherently non-monetary because their primary purpose is to generate yield for holders, meaning they cannot function as a medium of exchange.

b) Treasuries-Backed Stablecoins

Treasuries-backed stablecoins represent the latest innovation in the ecosystem. With rising U.S. interest rates, some have realized this presents an excellent opportunity to offer investors risk-free interest. Ondo Finance’s $USDY and Mountain Protocol’s $USDM are two leading examples in this category.

Key characteristics of Treasuries-backed stablecoins can be summarized as follows:

• Permissioned/KYC required;

• Yields depend on U.S. interest rates;

• Yield sources are less volatile than those in DeFi.

While $USDM is a rebasing token, $USDY is non-rebasing. Therefore, integrating $USDM into DeFi protocols will be challenging, while $USDY will inevitably face user experience issues.

In my view, from the perspective of exchange rate stability and risk-free yield, Treasuries-backed stablecoins offer the best solution. However, their growth depends on U.S. interest rates—something beyond their control. Thus, external factors will play a critical role in the future development of this category.

Additionally, it should be noted that Treasuries-backed stablecoins do not present a strong value proposition to the broader crypto community, as they are permissioned—meaning not everyone can mint or use them—and their ~5% interest rate is uncompetitive compared to other protocols. These protocols may target users in developing countries, but due to lack of liquidity and anticipated yield declines, they are at a disadvantage when competing against USDC and USDT. Furthermore, Treasuries-backed stablecoins are not inherently monetary, as their primary utility is yield generation rather than serving as a medium of exchange.

c) Yield-Generating Stablecoins

Yield-generating stablecoins provide automated DeFi yields to holders by deploying collateral across multiple protocols. To mint these stablecoins, users must collateralize with USDC or other stablecoins. Sperax and Overnight are examples of this category.

Many consider yield-generating stablecoins to be true stablecoins, but I disagree. These stablecoins do not act as money; instead, they function as LP tokens. This means yield-generating stablecoins do not serve a monetary role but rather act as LP tokens that allow users to earn yield simply by holding. While this critique applies to all yield-bearing stablecoins, it is clear that yield-generating stablecoins like $USDs and $USD+ do not even attempt to add any functionality beyond being LP tokens.

Key characteristics of yield-generating stablecoins include:

• Not a medium of exchange;

• Counterparty risk exists;

• USDC-wrapped;

• DeFi yield generation.

Many see yield-generating stablecoins as an exciting move, but I do not view them as stablecoins—rather, as USDC-backed yield providers. Therefore, they lack a unique value proposition within the ecosystem. For this reason, I am bearish on the future of this category, as their products can easily be replicated or adopted by existing projects with lower risk.

The Market for Yield-Bearing Stablecoins: User Analysis

To determine whether a protocol achieves product-market fit, we need to examine its potential customers/users and how they would perceive/use the protocol.

For stablecoins, I believe we can analyze three main user categories:

a) Institutions

Treasuries-backed stablecoins could serve as an excellent gateway for new institutions exploring DeFi. Since these platforms require KYC/AML compliance and permissions, institutions will not face regulatory or security hurdles while still benefiting from Treasuries-backed stablecoins.

For institutions in developing countries with limited access to the U.S. dollar, these stablecoins could be highly effective.

Moreover, LSD-backed stablecoins could become excellent tools for institutions familiar with the Ethereum and DeFi ecosystems to increase exposure to Ethereum or the broader ecosystem.

b) Whales / Liquidity Providers (LPs)

I believe whales and LPs are the most exciting user group for yield-bearing stablecoins, as these users possess sufficient knowledge, experience, and capital to develop leveraged trading strategies that extract high yields from these instruments.

Most yield-bearing stablecoins can be used in several ways:

1. Collateralized debt positions;

2. Yield generation;

3. Internet bonds;

4. Leveraged liquidity mining.

Due to these use cases, whales and LPs can effectively design trading/mining strategies and benefit significantly from yield-bearing stablecoins.

LSD-backed and yield-generating stablecoins can become excellent tools for whales and LPs to leverage, diversify, or increase exposure to certain assets. Although the number of such users may not be large, I believe the TVL of these stablecoins could reach significant levels.

c) Retail Users

Yield-bearing assets fail to meet the functional requirements of stablecoins. In short, according to the concept of stablecoin functionality, a stablecoin must fulfill specific roles to function as money in digital spaces, such as:

• Medium of exchange;

• Store of value;

• Capital efficiency;

• Fiat on/off ramps;

• Censorship resistance.

I believe that if a stablecoin fails to meet these criteria, it cannot scale and therefore will not become a major player in the stablecoin market.

For yield-bearing stablecoins, I believe none fulfill stablecoin functionality because they are not viable as a medium of exchange nor capital-efficient. These limitations restrict their usability in trading or buying/selling crypto assets. Since retail traders primarily use stablecoins for these purposes, yield-bearing stablecoins face significant adoption barriers among this group. Additionally, lack of liquidity and limited use cases further hinder retail adoption.

Furthermore, considering that most retail users employ stablecoins for trading, while the primary use case of yield-bearing stablecoins is holding to earn yield, there is a fundamental mismatch between user incentives and protocol design. Therefore, I believe any stablecoin not serving as a medium of exchange will not see widespread adoption among retail users.

SWOT Analysis of Yield-Bearing Stablecoins

Strengths

• Dollarization: The U.S. dollar is a highly recognized asset in the developing world. Yield-bearing stablecoins extend the reach of the dollar into regions where hyperinflation and currency devaluation erode purchasing power.

• Sharing intrinsic yield: Circle and Tether do not share the inherent yield from deposited dollars with users. In contrast, yield-bearing stablecoin protocols distribute these returns to holders, empowering users financially.

• New yield sources: While Ethereum-staking-based yield-bearing stablecoins introduce ETH yield to institutions, Treasuries-backed stablecoins bring U.S. Treasury yields into DeFi—both creating new opportunities for investors.

• Store of value: Yield-bearing stablecoins can hedge against inflation by offering users approximately 5–8% USD-denominated yields—an attractive option for many.

Weaknesses

• Medium of exchange: Yield-bearing stablecoins are inherently limited in their use as a medium of exchange due to capital inefficiency, limited or permissioned use cases, and poor liquidity. Most critically, since these stablecoins generate yield simply by being held, no one wants to spend them, as doing so forfeits yield. Hence, there is little incentive to use yield-bearing stablecoins as money.

• Permissioned/subject to censorship: Treasuries-backed stablecoins require KYC and exclude certain users (e.g., U.S. citizens). This limits adoption. Additionally, because protocols must comply with regulators, censorship risks exist.

• Lack of use cases / lack of liquidity: Due to various issues—including scalability, liquidation risk, capital inefficiency, or permissioned use cases—yield-bearing stablecoins suffer from insufficient liquidity and use cases, limiting growth potential.

Opportunities

• Unique value proposition vs. fiat-backed stablecoins: As awareness grows about how traditional stablecoin issuers withhold intrinsic yield from users, yield-bearing stablecoins have a chance to differentiate themselves by sharing returns.

• Institutional adoption: Treasuries-backed stablecoins could serve as an ideal entry point for institutions outside the U.S., bringing fresh capital into DeFi.

Threats

• Competition: Most projects lack competitive advantages over others. Given the current environment, lack of innovation and differentiation may cause some protocols to disappear within a few years.

• Protocol profitability: Competitive dynamics force protocols to offer higher yields to users, which reduces their own profitability. As a result, these projects may burn through capital and fail to survive long-term.

• Liquidity fragmentation: Due to intense competition, the ecosystem may face fragmented liquidity, reducing capital efficiency across yield-bearing stablecoins.

• Sustainability of yields: Some yield-bearing stablecoins rely on Treasury yields, while others follow Ethereum staking yields. The problem is that Treasury yields will likely decline in the future, and business sustainability is questionable—low yields may not attract users. Conversely, as Ethereum staking ratios rise, staking yields will fall, posing a future challenge: lower yields may become unattractive.

Do These Yield-Bearing Stablecoins Achieve Product-Market Fit?

The various types of yield-bearing stablecoins discussed in this article each target different markets. Rather than analyzing them as a single category, it is more beneficial to rank them by product-market fit and then assess the reasoning behind the ranking.

Ranking yield-bearing stablecoins by product-market fit:

1. Treasuries-backed stablecoins: With rising U.S. interest rates coinciding with the emergence of stablecoin builders who recognize that Treasuries-backed stablecoins can be powerful tools for users. While it is clear that ordinary DeFi users will not adopt Treasuries-backed stablecoins due to privacy, censorship, limited use cases, and liquidity constraints, institutional investors outside the U.S. may eagerly adopt them. However, I must note that when yields decline, these stablecoins will lose further utility relative to fiat-backed stablecoins. Therefore, I believe Treasuries-backed stablecoins can serve as excellent tools for institutions or accredited investors to access U.S. dollars globally, but the market may not be as large as many assume.

2. LSD-backed stablecoins: I am skeptical that LSD-backed stablecoins will realize the potential many envision, as their designs contain numerous flaws—capital inefficiency, liquidation risk, replicability, lack of true innovation—that limit their ability to grow, scale, or function as a medium of exchange. Nevertheless, they are solid financial primitives for Ethereum leverage, so while LSD-backed stablecoins will have a place in the market, it will likely be smaller than anticipated. On the other hand, new protocols like Ethena utilize LSTs to create models that eliminate many of these issues.

3. Yield-generating stablecoins: I do not believe yield-generating stablecoins offer a compelling or differentiated value proposition in the stablecoin market. I view these products merely as wrapped USDC or LP tokens that allow users to earn interest on stablecoins while assuming counterparty risks. Moreover, other stablecoins could easily replicate this business model by launching liquid, yield-bearing versions to compete directly. Therefore, I believe yield-generating stablecoins have the weakest product-market fit.

The stablecoin market is still in its early stages, with several upcoming projects aiming to challenge existing models. Let us observe how the landscape of yield-bearing stablecoins evolves in the near future. However, it should be noted that we still have time to discover true product-market fit within this niche.