Stablecoins have been around for about a decade, dominated by heavyweights like Tether's USDT and Circle's USDC — which do not pay yield to users and keep all income for themselves. But a new buzz around yield-bearing stablecoins is gaining steam, especially on the back of elevated interest rates.
Earlier this year, Ethena Labs launched a yield-bearing token, sUSDe (a staked version of its USDe "synthetic dollar"), which uses a "delta-neutral" trading strategy involving long and short positions to generate yield. Since then, sUSDe has quickly grown in popularity.
Then last week, Mountain Protocol, the issuer of the yield-bearing USDM stablecoin, raised $8 million in a Series A funding round led by Multicoin Capital. Around the same time, Paxos International launched its own yield-bearing stablecoin, USDL, with Argentina as its first market.
USDM and USDL provide users with daily yield by holding assets such as U.S. Treasuries and currently offer about a 5% annual yield, similar to current high-yield savings account offerings in the U.S. Both the stablecoins provide yield through auto-rebasing, meaning users' stablecoin holdings increase automatically each day without any extra effort on their part. USDM and USDL are regulated in Bermuda and Abu Dhabi, respectively, and both are backed one-to-one with the U.S. dollar.
The big question is whether these latter yield-bearing stablecoins can sustain their appeal if interest rates decline.
Mountain's co-founder and CEO, Martin Carrica, reckons they can. He points out that high-yield checking accounts have been successful even with interest rates at 1.5%. If rates drop to zero again, there would be minimal yield differentiation during that period, he tells me, adding that by then, yield-bearing stablecoins should have established enough distribution and ecosystem to survive. But he doesn't expect a zero-interest-rate policy again "for the next couple of years, so the window to build that is open."
Natively yield-bearing stablecoins are also restricted in most major markets, such as the U.S., potentially because they are seen as a security product. But Carrica said demand for such products comes from emerging markets — where rules [can] differ. Meanwhile, Paxos' Charles "Chad" Cascarilla recently told me such products are helpful for people anywhere who don't have access to U.S. dollars and stable and safe yield-bearing products.
As for regulatory restrictions, Carrica said jurisdictions that restrict such products will have to either pull back their regulations or risk harming their local populations.
Despite existing restrictions, yield-bearing products have experienced significant growth, according to Dennis Dinkelmeyer, founder of Midas — which also offers a yield-bearing token called mTBILL that currently has about $8 million in assets under management. He noted a 180% year-over-year increase in tokenized treasuries, now totaling $1.5 billion in locked value. He said this growth reflects strong demand for such products.
Dinkelmeyer, a former Goldman Sachs employee, said new products need time to grow, noting the gradual rise of USDT and USDC. "USDT took around five years to reach $10 billion in market cap and only four months to double to $20 billion," he said.
Yield-bearing stablecoins also need strong distribution channels for growth. Dinkelmeyer pointed out that "Coinbase hugely contributed to USDC's success, and BitMEX was a key factor in the success of Tether." Similarly, issuers of yield-bearing products will need such avenues to gain popularity, he said.
While issuers and advocates of yield-bearing stablecoins are optimistic, these products will need to navigate regulatory challenges, secure strong partnerships and establish a solid presence in both centralized and decentralized finance platforms to achieve widespread adoption quickly.
Market cap of yield-bearing tokens
According to a fresh chart on The Block’s Data Dashboard, created by my research and data analyst colleagues Mohamed Ayadi and Rebecca Stevens, Ethena Labs’ sUSDe leads the yield-bearing tokens category, followed by MakerDAO’s sDAI and BlackRock’s BUIDL.
'The future of yield-bearing stablecoins'
While BlockTower Capital is an investor in both Ethena Labs and Midas, the firm’s general partner and head of venture, Thomas Klocanas, acknowledges that the yield-bearing products category will need more innovation to achieve a sustainable future, especially as interest rates start to decline in the coming years.
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Klocanas told me that while U.S. Treasuries-backed yield-bearing stablecoins are one iteration and crypto-native versions like Ethena are another, there could be more.
"There will be many other versions on the spectrum across both digital and TradFi [traditional finance] assets in the future," he said. "For example, on the real-world asset end of the spectrum, perhaps baskets of other investment-grade assets, such as but not limited to corporate bonds, as a substitute or complement for Treasuries someday."
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