How Yield-Bearing Stablecoins are Reviving DeFi: do RWAs and Real Yield have the potential to fuel the next cycle?
YBS and their impact on liquidity
(Any views expressed below are the personal views of the author and should not form the basis for making investment decisions, nor be construed as a recommendation or advice to engage in investment transactions.)
Yield-bearing stablecoins pay interest to holders. In essence, this is what the fuzz is all about. They are typically backed by either a basket of assets, including other stablecoins, fiat currencies, and government bonds or simply emit off-chain yield to on-chain token holders. In many cases, the backing helps to maintain the stablecoin’s peg to the US dollar, if it isn’t maintained algorithmically.
Some yield-bearing stablecoins also work by lending out the underlying assets to borrowers. Borrowers may use these assets for a variety of purposes, such as margin trading or yield farming. In return for lending out their assets, stablecoin holders earn interest. In that case, the ‘revenue’ generated by the liquidity is usually sent back to the supplier in the form of rebates. Some more recently developed yield-bearing stablecoins also source their yield from Liquid Staking Derivatives, which we touched upon in the last article, such as $DUSD.
Notable names in the #YBS space include $sDAI, $USDM, $CASH, $eUSD, and many others. Each ecosystem/chain usually has at least one yield-bearing stable, earning native yield on that chain for its token holders, although the biggest concentration of YBS is on Ethereum Mainnet (where most DeFi activity and liquidity is found).
In this post, we will review the concepts behind #YBSs and see how they may fuel the growth of DeFi and potentially even be the root of the next bull run’s ignition. But how do YBS work and what are their benefits? Let's dive in.
What are Yield BEAR-ing Stablecoins?
There are a few different ways that yield-bearing stablecoins can work. One common approach is to use a decentralized or even centralized lending protocol. In this case, stablecoin holders deposit their coins into a smart contract or custodial account, which then lends out the coins to borrowers. Borrowers pay interest on the loans, which is then distributed to the stablecoin holders.
A second approach will collateralize other yield-bearing assets, ie. Liquid Staking Derivatives, to issue a stablecoin that distributes the underlying yield to the holders either through rebates or airdrops. This approach enables the holder to leverage the asset further on DeFi protocols to loop or ‘compound’ the yield of the principal in a Delta Neutral Strategy.
The third approach is to bring off-chain yield onto a blockchain and simply distribute that yield to holders. This approach has recently gained a lot of traction and interest from the TradFi community. It is one of the main arguments around the RWA narrative, and some even go as far as calling it the engine that will ‘take DeFi to a Trillion Dollar Marketcap’.
Are they a better 2.0 version of ‘Stablecoins’?
Yield-bearing stablecoins offer a number of benefits over traditional stablecoins. First, they allow holders to earn interest on their holdings. This can be a valuable source of passive income, especially in a low-interest environment.
Second, yield-bearing stablecoins can be used to hedge against inflation. When inflation is rising, the value of fiat currencies is eroded. However, yield-bearing stablecoins can help to protect against this erosion by providing holders with a return on their investment. This is very important in places like Argentina where the fiat-dollar hyperinflates regularly.
Third, yield-bearing stablecoins can be used to invest in other DeFi protocols, to compound yield, and to run ‘strategies’ — used to maximize capital efficiency. For example, stablecoin holders can use their coins as collateral on decentralized lending protocols, and loop their yield many times over.
Risks of yield-bearing stablecoins
Yield-bearing stablecoins also come with some risks. One risk is that the underlying backing of the stablecoin may not be sufficient. If the backing assets lose value, the stablecoin may lose its peg to the US dollar. This recently happened to Terra’s $TUSD, one of the biggest implosions in recent crypto/DeFi history; as well as $USDR — Tangible’s YBS, backed by a combination of things (including Real Estate).
Another risk is that the lending platform or decentralized lending protocol may be hacked or exploited. This could lead to the loss of stablecoin holders’ funds. Ultimately the smart contract risk and counterparty risk play a large role here — with regular exploits plaguing the vertical regularly.
Finally, yield-bearing stablecoins are typically more complex than traditional stablecoins. This can make them more difficult to understand and use — so they are usually not a good fit for noobs or for users who want to hold large sums of money in a stable asset. Some protocols even require KYC and are non-permissionless so users may end up with funds locked or frozen.
The YBS Players to date
The biggest yield-bearing stablecoin player to date is undoubtedly MakerDAO with $DAI — $sDAI (sprakprotocol.io). MakerDAO is a decentralized lending protocol that allows users to mint DAI, a USD-pegged stablecoin. DAI is backed by a basket of assets, including other stablecoins, fiat currencies, and government bonds. MakerDAO users can earn interest on their DAI by depositing them into the Dai Savings Rate (DSR). The DSR is a smart contract that lends out DAI to borrowers. Borrowers pay interest on the loans, which is then distributed to the DAI depositors. Sparkprotocol.io also lets you borrow DAI against your LSDs.
In addition to $sDAI, there are a number of other yield-bearing stablecoins available. Some popular options include:
- sUSDT (USDT Savings) and eUSDC (USDC Earn) — the two staples by Tether and Circle.
- mkUSD, DUSD, eUSD, and R and CASH — mostly backed by LSDs or, in fact staked ETH.
- USDM, USDY, and USDR — backed by Real World Assets such as Treasury Bills and Real Estate.
So what's next? Where are the next big innovations in this space going to come from? If you listen to the X DeFi degens: ‘RWAs!’ seems to be the answer everyone agrees with.
BREAKING NEWS: ‘RWAs are Reviving DeFi and Fueling the Crypto Bull Run!’
In the ever-evolving world of stablecoins, innovation continues to drive the industry forward. DeFi has been a transformative force and its evolution has led to the emergence of real-world assets (RWA) packaged as yield-bearing stablecoins. According to many, these new developments have the potential to not only revive DeFi but also fuel the next crypto bull run.
DeFi represents a shift from traditional financial systems to decentralized, blockchain-based alternatives. The beauty of DeFi applications is to enable users to access a wide range of financial services, without the need for traditional intermediaries like banks, often referred to as “money legos.” In 2022 and 2023 the DeFi space matured, and the need to bridge the gap between TradFi and the crypto became evident: this is where Real-World Assets (RWA) come into play.
Real-World Assets (RWA)
RWA refers to off-chain assets that are tokenized and brought onto the blockchain for use in DeFi applications. Tokenization involves converting real-world assets, such as treasury bills, real estate, commodities, or even debt, into digital tokens. These tokens represent ownership and value, allowing them to be traded and used in blockchain-based financial applications. Tokenization simplifies the transfer of ownership, provides transparency, and enables fractional ownership, making it possible for a broader range of investors to participate — it democratizes access while making transactions more capital-efficient.
RWA tokens come in various forms, including equity-based, real asset-based, and fixed income-based. These tokens have the potential to significantly expand the range of assets available for DeFi use. Notable examples include Goldfinch, Centrifuge, and Maple Finance, each offering unique approaches to RWA in DeFi. The best resource for RWAs at the moment is rwa.xyz.
The Promise of YBS
While RWA represents a bridge between traditional assets and DeFi, yield-bearing stablecoins add an exciting layer to the DeFi ecosystem. Yield-bearing stablecoins play a crucial role in DeFi for several reasons:
They can be generating Passive Income, while contributing to the liquidity of DeFi platforms by incentivizing users to supply their assets to lending pools, thus facilitating borrowing and lending within the ecosystem.
Yield-bearing stablecoins also provide a way to manage risk in DeFi. They offer a stable value, which can be used to hedge against the volatility of other cryptocurrencies and help diversify a user’s portfolios by holding a stable asset with exposure to traditional assets (while staying within the DeFi ecosystem).
The stability of YBSs and the inclusion of real-world assets in DeFi expands its utility. This stability is essential for attracting institutional investors who seek a broader range of investment options. As DeFi and stables mature, they can provide solutions for traditional financial needs, including asset-backed loans and investments in tangible assets like real estate.
Yield Attractiveness for Liquidity
Yield-bearing stablecoins introduce a new dimension of attractiveness to DeFi. As interest rates in the traditional financial sector fluctuate, the appeal of yield-bearing stablecoins can increase. For instance, during periods of rising interest rates, these stablecoins can offer competitive yields, making them an enticing option for investors looking for passive income.
The addition of yield-bearing stablecoins also enhances liquidity within the DeFi ecosystem. Liquidity is the lifeblood of financial markets, and stablecoins encourage users to provide their assets for lending or staking, which, in turn, supports borrowing and trading activities. This increased liquidity and capital inflow can be a driving force behind the growth of DeFi in the future.
As real-world assets are integrated into DeFi, we witness the potential for crypto to drive positive change in traditional finance. These developments showcase the industry’s ability to adapt and create innovative solutions that transcend the limitations of traditional systems.
Finally, the convergence of RWA and yield-bearing stablecoins in the DeFi ecosystem signifies a significant leap forward in the crypto industry. A leap that makes the benefits of DeFi clear and obvious to all — even TradFi! The inclusion of Yield Bearing Stablecoins expands the possibilities for investment while offering attractive yields, new primitives, and even new composability with DeFi 1.0.
Undoubtedly, yield-bearing stablecoins offer a number of benefits over traditional stablecoins and volatile tokens and usher in a new age of blockchain finance. They allow holders to earn interest on their holdings, hedge against inflation, and bring new RWA yields on-chain in a stable and easily accessible, permissionless way. However, yield-bearing stablecoins also come with some risks, such as the risk of hacking and the risk of the stablecoin losing its peg to the US dollar.
So far however, the benefits far outweigh the risks, and once mainstream TradFi catches up with that point of view we could see an unseen amount of liquidity being poured back into the DeFi and crypto ecosystem-potentially reigniting interest in blockchain and thus the next cycle’s bull run.
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