Yield-bearing stablecoins: how they pay interest and what risks they carry

Yield-bearing stablecoins: how they pay interest and what risks they carry

A regular stablecoin holds the dollar price and pays the holder nothing. A yield-bearing stablecoin also aims for the dollar but accrues interest on top.

The source of this interest differs from model to model, and the risks depend on it. Let's look at where the yield comes from and why it is tied to what arbitrage traders do.

What a yield-bearing stablecoin is

It is a dollar-pegged token that passes part of the earnings on its reserves or strategy to the holder. Accrual happens either through the token's price rising against the dollar or through new tokens issued to the wallet.

With classic USDT and USDC, the issuer holds reserves in bonds and deposits but keeps the income. Yield-bearing models share it with the holder.

Where yield-bearing stablecoins get their interest

Treasury bonds in reserves

The most straightforward model. The issuer buys short-term US Treasury bonds, receives the coupon on them and passes it on to holders minus its fee.

This includes Treasury-backed tokens - USDY from Ondo and similar products. The yield here tracks short-term bond rates and changes along with them.

Basis trade and synthetic dollars

A synthetic dollar holds its price not with reserves in a bank but with a delta-neutral position. The best-known example is USDe from Ethena: the protocol holds cryptocurrency and simultaneously shorts perpetual futures for the same amount.

The coin's price does not matter in such a position: the profit of one leg offsets the loss of the other. The income comes from the funding that longs pay shorts and from staking the collateral.

In essence, it is the same "spot plus perp short" trade that arbitrage traders use, just packaged into a token.

Lending

The stablecoin is placed in a lending protocol or on a platform, and borrowers pay interest. The rate depends on loan demand and fluctuates a lot.

Comparing yield-bearing stablecoin models

In our view, the first question to ask about any yield-bearing stablecoin is "where does the money come from". If the answer is vague, a high number in the interface means nothing.

What risks yield-bearing stablecoins carry

• depeg: the token may drop below the dollar temporarily or for a long time, especially during mass redemptions
• negative funding: for synthetic dollars, income falls and can even turn negative when shorts start paying longs
• counterparty: synthetic dollar positions are open on centralized exchanges, and Treasury reserves sit with custodians
• smart contract: a bug or hack in the protocol hits all holders
• restrictions: many Treasury-backed tokens are not available to everyone or in every country

From what we see, synthetic dollars do best in a rising market with greed and positive funding. In a prolonged correction, their yield is the first to shrink.

How stablecoin yield is linked to arbitrage

A yield-bearing stablecoin sets the bar. If a stablecoin pays a certain rate with almost no effort, a neutral trade has to deliver more, or there is little point to it.

Let's take a hypothetical example with illustrative numbers. Suppose a yield-bearing stablecoin pays 4.3% per year, while a funding trade gives 7.6% per year after fees on the same capital.

We believe the 3.3-point difference is payment for manual work, margin risk and time. If it shrinks to almost zero, it makes more sense to keep capital in a simpler instrument.

There is also a feedback loop. When funding on perps is high, the yield on synthetic dollars rises, and some capital that could have gone into manual trades flows into such tokens.

Our tools

The yield of synthetic dollars and manual trades comes down to funding, so it is easier to see perp rates on all exchanges at once. Our arbitrage screener keeps dozens of venues in one window, refreshes quotes every second and shows each gap together with the volume actually behind it. The spread calculator helps you check what survives fees, network costs and slippage at your size. The bot is fully manual. It never connects to your exchange API keys.

To test the tools on a live market, ArbitrageScanner offers one day of free access to the whole ecosystem.

FAQ (Frequently Asked Questions)

1. What is a yield-bearing stablecoin?

It is a dollar-pegged token that passes to the holder part of the earnings on its reserves or strategy. Accrual comes through the token's price rising or through new tokens.

2. Where does USDe get its yield?

Ethena's USDe is a synthetic dollar. The protocol holds cryptocurrency and shorts perps for the same amount, and income comes from funding and staking the collateral.

3. What risks do yield-bearing stablecoins carry?

Depeg, negative funding for synthetic models, the reliability of the custodian and counterparty exchanges, as well as smart contract bugs.

4. Do USDT and USDC pay interest?

The issuer itself does not pay interest to holders. Income on these coins can only be earned through third-party platforms and lending protocols.

5. Which is better: a yield-bearing stablecoin or funding arbitrage?

They serve different purposes. A yield-bearing stablecoin is simpler, while a funding trade requires work and margin, so it makes sense to compare its result against the stablecoin's rate as a benchmark.

Conclusion

Yield-bearing stablecoins pay interest from three main sources: the coupon on bonds in reserves, funding and staking for synthetic dollars, and borrowers' interest. The risks depend on the source as well.

For an arbitrage trader, such tokens are a benchmark for comparison. If a manual funding trade, after all costs, delivers no more than a yield-bearing stablecoin, it is worth asking whether the extra work is justified.

IMPORTANT! We are software developers. We do not give recommendations or promises of earnings and we do not advise you to invest your money anywhere. Our software is fully manual, all your money stays under your own control. We show examples of how our clients have earned on arbitrage in the past, but we do not advise repeating those actions one to one. Your earnings depend solely on your own actions and on market factors.