Forward the Original Title‘Stablecoin Earnings Guide’

The recent crypto market has been lackluster, and conservative and stable returns have once again become a market demand. Therefore, based on my investment experience in recent years and the concentrated research results on the field of stablecoins at the end of last year, I’d like to discuss the classic yet evergreen topic of stablecoin yields.

The current stablecoin categories in the crypto market mainly fall into the following categories:

• USDT: Conditionally compliant but with the highest market share. Widely used in various scenarios (crypto trading pairs on exchanges, payroll for crypto-related companies, real-world trade and offline payments). Users rely on Tether’s scale and its perceived ability to backstop redemption.
• Fiat-collateralized and 1:1 compliant stablecoins. USDC is supported across most chains and applications, making it a truly on-chain dollar. Others like PayPal USD and BlackRock’s USD have limited use cases.
• Overcollateralized stablecoins: Mainly DAI from MakerDAO, which evolved into USDS under Sky Protocol. Liquity’s LUSD is also a competitor, offering zero-interest loans with a low 110% collateral ratio as a key innovation.
• Synthetic asset-backed stablecoins: In this cycle, Ethena’s USDe is the most prominent example. Its yield model—arbitraging funding rates—will be a key focus later in this article.
• Stablecoins backed by U.S. Treasuries via RWA projects: Usual’s USD0 and Ondo’s USDY are the most notable in this cycle. Usual’s USD0++ innovatively provides liquidity for U.S. Treasuries, similar to what Lido does for ETH staking.
• Algorithmic stablecoins: This track was largely discredited after the collapse of Terra’s UST. Luna lacked intrinsic value and experienced a death spiral of volatility and mass sell-offs. FRAX, which combines algorithmic and overcollateralized models, still sees some usage, but most algorithmic stablecoins have lost relevance.
• Non-USD stablecoins: Euro stablecoins (like Circle’s EURC and Tether’s EURT) and other fiat-based stablecoins (BRZ, ZCHF, HKDR, etc.) currently have little impact on the USD-dominated market. Their only viable path lies in regulated payment systems, not in the native crypto ecosystem.

Stablecoin market capitalization rankings source: https://defillama.com/stablecoins

Currently, the primary categories of stablecoin yield generation include the following. This article will analyze each type in more detail:

Stablecoin Yield Models

1. Stablecoin Lending & Borrowing：

Lending is the most traditional financial yield model. Returns essentially come from the interest paid by borrowers. Important considerations include the platform’s or protocol’s security, borrower default risk, and income stability. Current lending products include:

• CeFi platforms: Primarily flexible savings products from top exchanges (Binance, Coinbase, OKX, Bybit).
• Top DeFi protocols: Aave, Sky Protocol (MakerDAO rebrand), Morpho Blue, etc.

These leading exchanges and DeFi protocols have proven to be secure through various market cycles. In bull markets, borrowing demand surges and flexible savings yields (e.g., USDT, USDC) can spike above 20%. In quiet markets, returns typically fall to around 2–4%. Therefore, flexible lending interest rates are a direct indicator of market activity. Fixed interest lending, though less liquid, often yields higher returns during calm periods, though it cannot capture spikes during bull runs.

In addition, there are some micro-innovations in the overall stablecoin lending market, including:

• Fixed-rate DeFi lending protocols: Pendle is a standout this cycle. It started with fixed-rate lending and evolved into yield tokenization. Other early projects like Notional Finance and Element Finance didn’t take off but had insightful design concepts.
• Interest rate tranching and subordination models within lending.
• Leveraged lending mechanisms in DeFi.
• Institutional DeFi lending platforms, such as Maple Finance, where its “Syrup” product sources yields from institutional borrowing.
• RWA-based lending, where yields from real-world loans are brought on-chain—e.g., Huma Finance’s on-chain supply chain finance products.

In short, lending remains the most straightforward and capital-intensive yield model in the stablecoin space, and will likely continue to dominate as a major avenue for returns.

2. Yield Farming Returns:

Represented by Curve, yield farming returns are derived from AMM trading fees shared with liquidity providers (LPs) and token rewards. As the gold standard for stablecoin DEX platforms, Curve plays a pivotal role—being listed in Curve Pools is seen as a major benchmark for a new stablecoin’s adoption within the industry. The advantage of Curve yield farming lies in its very high security, but its drawback is the relatively low returns (0–2%), which lack appeal. For smaller or short-term funds, participating in Curve’s liquidity mining may not even yield enough to cover transaction gas fees.

Uniswap’s stablecoin trading pairs face similar issues. For non-stablecoin pairs on Uniswap, liquidity farming may incur losses due to impermanent loss. Meanwhile, stablecoin pools on smaller DEX platforms, although offering higher yields, carry rug pull risks, which violates the prudent and stable nature required for stablecoin-focused financial strategies. Currently, we observe that DeFi stablecoin pools still lean heavily on lending models. Even Curve’s iconic 3Pool (DAI, USDT, USDC) only ranks within the top 20 in terms of TVL, indicating that yield farming is not the dominant approach for stablecoin returns.

Stablecoin pool TVL ranking source: https://defillama.com/yields?token=ALL_USD_STABLES

3. Market Neutral Arbitrage Returns:

The market-neutral arbitrage strategy has been widely used in professional trading institutions for a long time. By simultaneously holding long and short positions, these strategies aim to reduce net market exposure to nearly zero. In the context of crypto, the main types include:

• Funding Rate Arbitrage: Perpetual futures contracts do not have an expiration date. Their prices are kept in line with spot prices via a funding rate mechanism. This rate is paid periodically and narrows short-term spreads between spot and perpetual prices.
  • When the perpetual price is above the spot (premium), longs pay shorts, and the funding rate is positive.
  • When the perpetual price is below the spot (discount), shorts pay longs, and the funding rate is negative.
  • Historical data shows that positive funding rates occur more frequently than negative ones. Therefore, the typical strategy is to buy spot and short perpetuals, earning the positive funding paid by long positions.

Ethena’s historical funding rate statistics confirm that positive funding rates dominate over time.

• Cash-and-Carry Arbitrage: This arbitrage exploits price differences between the spot market and futures markets. Traders hedge positions to lock in profits, based on the basis—the difference between futures and spot prices. This strategy is typically used in contango (futures price > spot) or backwardation (futures price < spot) markets. It is more suitable for large capital, patient investors, and those confident in basis convergence, often reflecting a traditional finance mindset.

• Cross-exchange arbitrage: This involves exploiting price discrepancies between different exchanges by building neutral positions. It was once a mainstream arbitrage method in early crypto markets. However, price gaps for mainstream pairs across major exchanges have largely disappeared. Now, this strategy requires automated bots and is better suited to volatile markets or small-cap tokens. The barrier to entry for retail users is high—tools like Hummingbot are often used.
• Other forms like triangular arbitrage, cross-chain arbitrage, and cross-pool arbitrage exist but will not be elaborated upon in this article.

Market-neutral arbitrage strategies, due to their high professionalism, are mostly limited to professional investors. However, in the current cycle, Ethena has brought “Funding Rate Arbitrage” on-chain, making it accessible to regular retail users.

In Ethena, users deposit stETH into the protocol and receive USDe stablecoins in return. Simultaneously, the protocol opens equivalent short positions on centralized exchanges, earning the positive funding rate. According to historical data, funding rates are positive over 80% of the time. During negative funding periods, Ethena covers the shortfall using reserve funds. Ethena Protocol allocates 65% of protocol revenue to hedge funding rates. The remaining 35% comes from Ethereum staking, on-chain and CEX lending income. User assets are custodied by a third-party OES (Off Exchange Settlement) provider, with monthly audit reports, effectively isolating exchange platform risks.

Ethena Protocol Flow Diagram

Beyond risks like centralized exchange failures, custodial mishaps, smart contract vulnerabilities, or depegging of collateral assets—which are generally outside the team’s control—the core risk lies in the scenario of prolonged negative funding rates that exceed the protocol’s reserve coverage. Based on historical drawdown data, this scenario appears unlikely. Even if it does occur, it would imply that the widely adopted funding rate arbitrage model across the industry is no longer valid. As long as the Ethena team acts responsibly, the protocol is unlikely to suffer a “death spiral” like Terra’s algorithmic stablecoin. Instead, a gradual decline in token-subsidized high yields toward more normalized arbitrage-level returns is the more probable scenario.

At the same time, it is worth acknowledging that Ethena offers exceptional transparency. On its official site, users can clearly view historical yields, funding rates, positions across exchanges, and monthly custodial audit reports—a level of disclosure that outperforms similar funding rate arbitrage products in the market.

Apart from Ethena’s funding rate arbitrage model, the Pionex exchange also offers a fixed-term arbitrage-based stablecoin investment product. Unfortunately, besides Ethena, there are currently few market-neutral arbitrage products with low entry barriers available to retail investors.

4. US Treasury Bills RWA project

The Federal Reserve’s rate-hiking cycle from 2022 to 2023 pushed U.S. dollar interest rates above 5%. Although the policy has since shifted toward gradual rate cuts, a yield of over 4% on dollar-denominated assets still represents a rare balance of high safety and decent returns in traditional finance. The RWA businesses are subject to high compliance requirements and are operationally intensive. Among various asset types, U.S. Treasuries—as standardized, high-liquidity instruments—are one of the few viable underlying assets for sound RWA logic.

Growth trend of U.S. Treasury RWA: Data source: https://app.rwa.xyz/treasuries

Ondo, which uses U.S. Treasury bonds as its underlying assets, offers USDY for non-U.S. general retail users and OUSG for qualified U.S. institutional investors, both yielding 4.25%. It leads the RWA sector in terms of multi-chain support and ecosystem integration, although it falls slightly short on regulatory compliance compared to Franklin Templeton’s FOBXX and BlackRock’s BUIDL. Meanwhile, the emerging Usual Protocol has gained traction this cycle by building USD0 on a basket of U.S. Treasuries and introducing USD0++, a liquid token similar to Lido’s solution for Ethereum staking, which brings liquidity to 4-year locked Treasuries and allows users to earn additional returns through stablecoin liquidity mining or lending pools.

Usual protocol’s USD0 and USD0++ yield diagram

It’s important to note that most U.S. Treasury RWA projects offer stable yields around 4%. The higher yields in Usual’s stablecoin pools are largely driven by speculative incentives such as Usual token subsidies, Pills (Point) rewards, and liquidity mining bonuses are not sustainable in the long run. As the RWA project with the most integrated DeFi ecosystem, Usual still faces the risk of gradually declining yields, though not to the extent of systemic collapse.

Although early 2025 saw a depegging and sell-off event triggered by changes to USD0++’s redemption mechanism, the root cause was a mismatch between its bond-like nature and market expectations, compounded by governance missteps. Nevertheless, the liquidity mechanism design of USD0++ remains an innovative model worth emulating for other U.S. Treasury-backed RWA projects.

5. Structured Products Based on Options

Currently, structured products and dual-currency strategies popular on major centralized exchanges are largely derived from options trading strategies, specifically the “selling options to earn premiums” approach—namely, Sell Put or Sell Call strategies. For USD-denominated stablecoin investments, the Sell Put strategy is more common. Returns come from collecting premiums paid by option buyers, meaning the investor earns stable USDT-denominated income or potentially acquires BTC or ETH at a lower target price.

In practice, option selling strategies are best suited for sideways or range-bound markets: a Sell Put strike price typically aligns with the lower end of the price range, while a Sell Call aligns with the upper end. In a bull market, Sell Put strategies risk missing upside opportunities, making Buy Call more appropriate. In a bear market, Sell Put strategies can lead to sustained losses, essentially “buying too early” as the market keeps falling. For beginners, it’s easy to fall into the trap of chasing short-term “high premium returns” while underestimating the exposure to significant price drops. However, setting a strike price too conservatively (too low) can result in premiums that are not attractive enough. Based on the author’s years of options trading experience, the optimal time to use Sell Put strategies is when market fear is high, setting a low target price to earn higher premiums, while in bullish markets, flexible lending rates on exchanges tend to be more lucrative.

Recently popular on exchanges like OKX, the Shark Fin principal-protected strategy combines a Bear Call Spread (selling a Call to earn premium + buying a Call at a higher strike to cap upside) and a Bull Put Spread (selling a Put to earn premium + buying a Put at a lower strike to limit downside). This structured option setup allows the investor to earn premiums within a defined price range, while losses and gains outside that range are hedged against each other, resulting in no additional profit or loss. It is a suitable USDT-based investment strategy for users who prioritize capital preservation over maximizing premium income or crypto-denominated returns.

OKX Shark Fin structured product diagram

On-chain options infrastructure is still in early development. In the previous cycle, Ribbon Finance was a leading options vault protocol. Other platforms like Opyn and Lyra Finance also allowed manual execution of premium-earning strategies, but their popularity has faded in the current cycle.

6. Yield Tokenization

A standout project in this cycle, Pendle Protocol began with fixed-rate lending in 2020 and evolved into full-fledged yield tokenization by 2024. It enables users to split yield-bearing assets into different components, allowing them to lock in fixed returns, speculate on future yield, or hedge against yield volatility.

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

Pendle supports several trading strategies:

• Fixed Income: Holding PT until maturity to secure a fixed return, suitable for risk-averse investors.
• Yield Speculation: Buying YT to bet on rising future yields, ideal for risk-tolerant users.
• Risk Hedging: Selling YT to lock in current yields and protect against market downturns.
• Liquidity Provision: Users can supply PT and YT into liquidity pools to earn trading fees and PENDLE token rewards.

Pendle’s stablecoin pools currently offer attractive overall returns by combining base asset yields with speculative YT gains, LP fees, Pendle token incentives, and points-based rewards. One downside, however, is that most high-yield pools are short- to medium-term, requiring frequent on-chain actions to rotate positions, unlike staking or lending protocols that are more “set and forget.”

7. Basket-Style Stablecoin Yield Products

Ether.Fi, a leading protocol in the liquid restaking space, proactively embraced product transformation as the restaking sector entered a saturation and downtrend phase. It has since expanded into a wide range of yield-generating products involving BTC, ETH, and stablecoins, maintaining its leadership position across the DeFi ecosystem.

In its Market-Neutral USD pool, Ether.Fi offers users a basket of stablecoin yield strategies through an actively managed fund format. These include lending income (Syrup, Morpho, Aave), liquidity mining (Curve), funding rate arbitrage (Ethena), and yield tokenization (Pendle). This diversified structure is an effective way to earn high yields while mitigating risk, particularly for users seeking stable on-chain income, managing smaller capital, and preferring low-maintenance investment options.

Ether.Fi Market-Neutral USD Asset Allocation

Ether.Fi Market-Neutral USD Participation Agreement

8. Stablecoin Staking Yields

While stablecoins like DAI lack the inherent staking properties of PoS tokens such as ETH, the AO network, launched by the Arweave team, introduced an innovative model. It supports on-chain staking of stETH and DAI as part of its Fair Launch token distribution. Among them, DAI staking offers the highest capital efficiency for earning AO token rewards. This model represents an alternative form of stablecoin yield, enabling users to earn AO rewards on top of secure DAI holdings—a high-risk, high-reward strategy. The main risk lies in the uncertainty of AO network development and its token price volatility.

In conclusion, this article summarizes the main stablecoin yield models currently available in the crypto market. While stablecoins are among the most familiar assets for crypto participants, they are often overlooked in portfolio strategy. A clear understanding of their yield mechanisms and proper allocation can help build a solid financial foundation, enabling market participants to better navigate the uncertainties of the crypto landscape.

Disclaimer:

1. This article is reproduced from [JacobZhao]. Forward the Original Title‘Stablecoin Earnings Guide’. The copyright belongs to the original author [JacobZhao], if you have any objections to the reprint, please contact the Gate Learn team, and the team will handle it as soon as possible according to relevant procedures.

2. Disclaimer: The views and opinions expressed in this article represent only the author’s personal views and do not constitute any investment advice.

3. Other language versions of the article are translated by the Gate Learn team and are not mentioned in Gate.io, the translated article may not be reproduced, distributed or plagiarized.