What Are Yield-Bearing Stablecoins and How Do They Work?

What if you could earn passive income while maintaining the stability of your crypto assets? Yield-bearing stable coins offer just that. 

These innovative digital assets combine the security of stablecoins assets pegged to stable values like the U.S. dollar with the opportunity to generate yield through mechanisms such as decentralized finance (DeFi) lending, staking, and real-world asset backing. 

In this article, we will examine how yield-bearing stable coins work, the various mechanisms used to generate yield, the benefits they offer to investors, and the potential risks involved. 

Whether you’re new to crypto or an experienced investor, you’ll learn popular yield-bearing stablecoins and the risk considerations to help you grow your portfolio without the market volatility typically seen in cryptocurrencies.

Key Takeaways 

• Yield-bearing stable coins combine stability and passive income generation, making them a unique option in the crypto market.
• These stablecoins maintain a stable value, typically pegged to the U.S. dollar, while offering returns to holders.
• Yield is generated through mechanisms like DeFi lending, staking, and real-world asset backing.
• Popular examples of yield-bearing stable coins include USDe, USDY, and sDAI.
• Yield-bearing stable coins carry risks such as platform vulnerabilities and regulatory uncertainty.

What Are Yield-Bearing Stablecoins?

Yield-bearing stablecoins are a new type of cryptocurrency that combine the stability of traditional stablecoins with the ability to earn passive income. Think of them as digital dollars that not only hold their value but also generate interest over time. 

Unlike regular stablecoins like USDT or USDC, which maintain a 1:1 peg to the US dollar without offering any yield, yield-bearing stablecoins provide holders with returns simply by holding them in their wallets.​

These stablecoins achieve this by using various mechanisms such as decentralized finance (DeFi) lending, staking rewards, or backing by real-world assets like U.S. Treasury bills. 

For instance, USDe by Ethena Finance employs a delta-neutral strategy by holding cryptocurrencies like BTC, ETH, and SOL, while simultaneously shorting equal amounts of perpetual futures to earn yield from funding rates. 

Similarly, USDY by Ondo Finance derives its yield from short-term U.S. Treasuries and bank demand deposits.​

Yield-Bearing Stablecoins marketcap surges 225% since November 2024

How Yield-Bearing Stablecoins Differ from Traditional Stablecoins

This section examines how yield-bearing stablecoins offer greater earning potential while maintaining the price stability of traditional stablecoins.

1. Yield Generation

Traditional stablecoins like USDT, USDC, and DAI are designed to maintain a stable value, typically pegged to the US dollar, but they do not generate yield or interest for holders. They serve primarily as a stable medium of exchange or store of value within the cryptocurrency ecosystem.

In contrast, yield-bearing stablecoins are designed to not only maintain a stable value but also generate passive income for holders. They achieve this by leveraging various mechanisms such as decentralized finance (DeFi) lending, staking rewards, or backing by real-world assets like U.S. Treasury bills. 

For example, USDe by Ethena Finance employs a delta-neutral strategy by holding cryptocurrencies like BTC, ETH, and SOL, while simultaneously shorting equal amounts of perpetual futures to earn yield from funding rates. 

Similarly, USDY by Ondo Finance derives its yield from short-term U.S. Treasuries and bank demand deposits, offering a more traditional investment approach within the crypto ecosystem.

2. Risk Profiles

Traditional stablecoins are generally considered low-risk assets due to their backing by reserves and their widespread use in the crypto market. However, they are not immune to risks such as regulatory scrutiny, counterparty risk, and potential de-pegging events.

Yield-bearing stablecoins introduce additional risks due to their reliance on yield-generating mechanisms. These risks include fluctuations in yield rates, exposure to DeFi protocol vulnerabilities, and potential regulatory challenges. 

For instance, the collapse of the TerraUSD (UST) algorithmic stablecoin in 2022 shows the risks associated with yield-bearing mechanisms that are not backed by real-world assets. 

Therefore, while yield-bearing stablecoins offer the potential for higher returns, they also come with increased risk profiles that investors should carefully consider.

3. Use Cases

Traditional stablecoins are widely used in the crypto market for purposes such as trading, remittances, and as collateral in lending protocols. They provide a stable and liquid asset that facilitates transactions and financial activities within the digital asset space.

Yield-bearing stablecoins, on the other hand, are primarily used by investors seeking to earn passive income while maintaining exposure to stable assets. They are utilized in DeFi protocols, staking platforms, and treasury management strategies to generate returns. 

For example, sDAI, a yield-bearing version of DAI, allows holders to earn interest through the Dai Savings Rate (DSR) within the MakerDAO protocol. 

This makes yield-bearing stablecoins attractive to users looking to maximize the utility of their holdings beyond mere price stability.

4. Regulatory Considerations

Traditional stablecoins operate within a more established regulatory framework, particularly in jurisdictions like the United States and the European Union. 

They are subject to regulations that govern their issuance, reserve backing, and redemption processes, providing a level of oversight and consumer protection.

Yield-bearing stablecoins, however, often operate in a more ambiguous regulatory environment. Their mechanisms for generating yield may not align with existing financial regulations, leading to potential legal and compliance challenges. 

For instance, the U.S. Securities and Exchange Commission (SEC) has indicated that certain yield-bearing stablecoins may be subject to securities laws, depending on their structure and the nature of their yield generation mechanisms. This regulatory uncertainty can impact the adoption and development of yield-bearing stablecoins.

5. Market Adoption and Liquidity

Traditional stablecoins benefit from widespread adoption and liquidity across various cryptocurrency exchanges, DeFi platforms, and financial services. 

Their established presence in the market ensures that they are easily accessible and can be traded or utilized in numerous applications.

Yield-bearing stablecoins, while gaining traction, have more limited adoption and liquidity. Their use is often confined to specific DeFi ecosystems or platforms that support their unique features. 

For example, yield-bearing stablecoins like sDAI are primarily used within the MakerDAO ecosystem, and their liquidity may be restricted to platforms that integrate with MakerDAO’s protocols. 

This limited adoption can affect the ease with which users can enter or exit positions in yield-bearing stablecoins.

Benefits of Yield-Bearing Stablecoins

In this section, we’ll look into the key benefits that make yield-bearing stablecoins an attractive option for many investors.

1. Earn Passive Income

Yield-bearing stablecoins allow you to earn interest on your holdings without actively managing them. For instance, USDe by Ethena Finance generates yield through decentralized finance (DeFi) lending protocols like Aave and Compound. 

Similarly, USDY by Ondo Finance derives its yield from short-term U.S. Treasuries . This means your assets can grow over time, providing a source of passive income.

2. Maintain Stability

These stablecoins are pegged to the U.S. dollar, ensuring that their value remains relatively constant. This stability makes them suitable for users who want to protect their assets from market volatility while still earning a return. 

For example, sDAI, a yield-bearing version of DAI, maintains its peg through the Dai Savings Rate (DSR) within the MakerDAO protocol .​

3. Enhance Capital Efficiency

Yield-bearing stablecoins can make your capital work harder for you by earning yield on your holdings. 

Instead of letting your assets sit idle, they generate returns that can be reinvested or used for other purposes. 

This is particularly beneficial for businesses and investors looking to maximize the utility of their funds.

4. Access to Traditional Finance Yields

Some yield-bearing stablecoins are backed by real-world assets like U.S. Treasuries, providing a source of yield similar to traditional savings accounts or money market funds. 

For example, USDY offers a yield of 3.85% through its backing by short-term U.S. Treasuries . This allows users to benefit from traditional finance yields within the crypto ecosystem.​

5. Global Accessibility

Yield-bearing stablecoins can be accessed by anyone with an internet connection, regardless of their location. This democratizes access to financial products that were previously limited to certain regions or institutions. 

For instance, YLDS is SEC-registered and offers a yield of 3.85% via real-world asset backing . This global accessibility opens up new opportunities for individuals and businesses worldwide.​

Mechanisms of Yield Generation in Yield-Bearing Stablecoins

Yield-bearing stablecoins combine the stability of traditional stablecoins with the ability to generate passive income for their holders. 

These stablecoins achieve this by using various mechanisms to earn yield, providing a way for investors to grow their assets without actively managing them. 

Below are the key mechanisms through which yield-bearing stablecoins generate returns:

1. DeFi Lending Protocols

One of the most common and popular mechanisms for generating yield in the crypto space is through decentralized finance (DeFi) lending platforms. 

These platforms allow holders of yield-bearing stablecoins to deposit their assets into liquidity pools or lending protocols. The funds are then lent to borrowers, who pay interest on their loans, and that interest is shared with the depositors.

For example, MakerDAO’s Dai Savings Rate (DSR) allows users to earn interest on their DAI holdings by simply depositing them into the DSR contract. 

Similarly, platforms like Aave, Compound, and Uniswap let users deposit their stablecoins into pools, where they can earn yield from borrowers who use these stablecoins for leverage or liquidity. 

With decentralized protocols, these yield-bearing stablecoins are typically secured through smart contracts, reducing the need for intermediaries and making the lending process more efficient and transparent.

Ethena Finance’s USDe is an example of a yield-bearing stablecoin that generates yield by lending assets through DeFi protocols. 

USDe holders can earn rewards without needing to directly engage in the lending process themselves by using the open-source nature of DeFi lending. This passive earning potential makes DeFi lending a popular method for stablecoin yield generation.

2. Staking and Derivatives

Staking is another widely used method of yield generation. This process involves locking up your stablecoins (or other tokens) in a blockchain network to help secure and validate transactions. In return for their contribution to the network, stakers earn rewards in the form of additional tokens or interest.

Yield-bearing stablecoins like USDe by Ethena Finance incorporate innovative staking mechanisms and derivatives. For instance, USDe employs a delta-neutral strategy, where it holds cryptocurrencies such as BTC, ETH, and SOL and simultaneously shortens equivalent amounts of perpetual futures to generate yield from funding rates. 

This allows the stablecoin to maintain a stable value while providing holders with consistent returns, making it less susceptible to the volatility of the underlying assets.

This mechanism combines the benefits of traditional staking with more advanced financial strategies, such as derivatives trading, to ensure that investors can still generate yield while avoiding exposure to large price swings. 

The use of staking and derivatives creates a more stable and dynamic yield generation mechanism compared to traditional methods.

3. Real-World Asset (RWA) Integration

Some yield-bearing stablecoins are backed by real-world assets (RWAs), such as government bonds, real estate, or short-term Treasury bills. These stablecoins bridge the gap between the cryptocurrency world and traditional finance by incorporating tangible assets that provide consistent and low-risk returns.

For example, USDY by Ondo Finance is a yield-bearing stablecoin backed by short-term U.S. Treasuries and bank demand deposits. 

The backing from these stable and secure real-world assets enables USDY to offer consistent yield to holders, making it an attractive option for users who prefer lower-risk, traditional investment strategies within the crypto ecosystem.

Similarly, Figure’s YLDS stablecoin is backed by a portfolio of real-world assets, including prime money market fund securities and private assets such as asset-backed securities. 

This integration with traditional financial assets offers yield-bearing stablecoin holders exposure to both the crypto market and real-world investment returns.

4. Automated Market Making (AMM) and Liquidity Pools

Another popular method for generating yield is through participation in Automated Market Making (AMM) protocols and liquidity pools. AMMs are decentralized exchanges (DEXs) that allow users to provide liquidity to the platform in exchange for transaction fees and rewards.

When you deposit your yield-bearing stablecoins into a liquidity pool on platforms like Uniswap or Balancer, the stablecoins are used for trading pairs, and in return, you receive a portion of the transaction fees that the platform collects. 

These pools generally consist of stablecoins paired with other assets (e.g., ETH or BTC), and participants earn a share of the fees every time a trade occurs within the pool.

The benefit of this mechanism is that it allows stablecoin holders to earn yield in addition to the liquidity they provide to the market. 

This creates a dual-income stream: one from transaction fees and another from the yield generated by the underlying stablecoin. This model is widely used in DeFi ecosystems and offers flexibility to liquidity providers.

5. Tokenized Real-World Assets

Some yield-bearing stablecoins are backed by tokenized versions of traditional financial assets, such as real estate, corporate bonds, or commodities. 

These tokenized assets generate yield through their respective investments and pass those returns on to holders of the stablecoin.

For instance, BlackRock’s BUIDL stablecoin is backed by tokenized money market funds and other traditional assets, offering users a stable, yield-bearing product. 

These tokenized RWAs offer stablecoin holders the benefits of traditional finance investments while still participating in the blockchain ecosystem.

Yield-bearing stablecoins provide users with access to a wider range of investment opportunities, including assets that were previously difficult to invest in through digital means by tokenizing real-world assets. 

This not only enhances the yield potential of stablecoins but also bridges the gap between the traditional financial world and decentralized finance.

Popular Yield-Bearing Stablecoins in 2025

As of April 2025, several yield-bearing stablecoins have emerged, offering investors the dual benefits of price stability and passive income. 

These stablecoins generate yield through mechanisms such as decentralized finance (DeFi) lending, staking, and backing by real-world assets. Here’s an overview of some notable yield-bearing stablecoins:​

1. Ethena USDe

Ethena’s USDe is a synthetic dollar protocol that generates yield through delta-neutral strategies. This approach involves holding cryptocurrencies such as Bitcoin (BTC), Ethereum (ETH), and Solana (SOL), while simultaneously shorting equivalent amounts of perpetual futures to earn yield from funding rates.

The advantage of this strategy is that it allows USDe to stay stable and minimize risk while still generating passive income for holders. 

Unlike traditional stablecoins, USDe takes advantage of the volatility in cryptocurrency markets to provide returns to its users without compromising its 1:1 peg to the U.S. dollar.

• How It Works: USDe generates yield by interacting with DeFi lending protocols such as Aave and Compound.
• Income Source: Yield is earned through trading fees, lending interest, and short positions.
• Stability Mechanism: The use of a delta-neutral strategy helps ensure stability and reduces exposure to price swings.

2. Ondo USDY

USDY, developed by Ondo Finance, is a yield-bearing stablecoin backed by short-term U.S. Treasuries and demand deposits held by banks. 

This stablecoin was designed with the goal of providing a safer and more traditional method of earning yield, making it appealing to conservative investors seeking reliable income.

Unlike most crypto-native stablecoins that rely on DeFi strategies, USDY uses real-world assets to generate yield. USDY can offer an attractive yield without taking on the volatility typically associated with cryptocurrencies by investing in low-risk, short-term government securities.

• How It Works: USDY’s yield comes from the interest generated by U.S. Treasuries and bank demand deposits.
• Income Source: The yield is sourced from the secure, low-risk assets backing the stablecoin, making it highly reliable.
• Stability Mechanism: USDY maintains its peg to the dollar through a combination of Treasuries and bank-backed assets, which provides inherent stability.

3. BlackRock BUIDL

BUIDL, developed by BlackRock, is a tokenized money market fund that is backed by real-world assets. It’s designed to bridge the gap between traditional finance (TradFi) and decentralized finance (DeFi). Through its backing by highly liquid, short-term investment-grade assets, BUIDL is able to offer yield while maintaining stability.

This stablecoin offers a unique approach, using a traditional money market fund structure and offering liquidity and yield without the volatility that typically comes with cryptocurrencies. 

BUIDL aims to be a bridge for institutional investors who want to access DeFi-like returns while minimizing risk.

• How It Works: BUIDL generates yield by investing in a diversified portfolio of real-world assets, such as short-term corporate bonds and government securities.
• Income Source: The yield is derived from interest payments on short-term bonds and high-quality debt instruments.
• Stability Mechanism: BUIDL’s stability comes from its investment in real-world assets, which are liquid and conservative, providing consistent returns.

4. MakerDAO sDAI

sDAI is a yield-bearing version of DAI, one of the most popular decentralized stablecoins. It allows users to earn interest through the Dai Savings Rate (DSR), a feature available within the MakerDAO protocol. 

DSR works by allowing users to lock their DAI into a smart contract, which then earns interest based on the rate set by the MakerDAO governance.

The advantage of sDAI is that it combines the decentralized nature of DAI with the opportunity for holders to earn a return. As the DeFi ecosystem grows, DAI holders who use sDAI can benefit from their holdings in ways that weren’t possible with traditional stablecoins.

• How It Works: Users lock their DAI in the DSR smart contract to earn interest.
• Income Source: The yield is generated from the interest paid by borrowers within the MakerDAO ecosystem, who take out loans using DAI as collateral.
• Stability Mechanism: Since DAI is backed by over-collateralized assets, the system remains stable even as it generates yield.

5. YLDS by Figure

YLDS, created by Figure Technologies, is the first yield-bearing stablecoin registered as a public security with the U.S. Securities and Exchange Commission (SEC). 

YLDS offers a yield of about 3.85%, which is determined by the Secured Overnight Financing Rate (SOFR), minus a small fee.

YLDS is backed by a range of real-world assets, including prime money market fund securities and private assets like asset-backed securities. 

The goal of YLDS is to combine the benefits of traditional finance such as access to stable, low-risk investments with the flexibility and ease of digital assets. 

It offers monthly interest payments and provides holders the option to receive payouts in either U.S. dollars or additional YLDS tokens.

• How It Works: YLDS generates yield by holding real-world assets such as U.S. Treasuries and asset-backed securities.
• Income Source: The yield is earned through the SOFR, which reflects the overnight borrowing cost in the U.S. financial market.
• Stability Mechanism: YLDS maintains its peg to the dollar through a combination of real-world assets and money market securities, offering predictable returns.

Risks and Considerations of Yield-Bearing Stablecoins

While yield-bearing stablecoins offer attractive passive income opportunities, they come with certain risks and considerations that investors should be aware of. Here’s a breakdown of the key factors to consider:​

1. Smart Contract Vulnerabilities

Yield-bearing stablecoins often operate on decentralized platforms powered by smart contracts. These contracts are susceptible to bugs, coding errors, or exploits that can lead to loss of funds. 

For instance, vulnerabilities in DeFi protocols have previously led to significant financial losses. It’s essential to ensure that the protocols you engage with have undergone thorough audits and have a history of secure operations.​

2. Platform Risk and Liquidity Concerns

The platforms facilitating yield generation for stablecoins can face operational issues, such as downtime, insolvency, or mismanagement. 

Also, liquidity risks arise if there’s insufficient demand for borrowing, leading to reduced yields or potential loss of principal. 

For example, during market downturns, some platforms have experienced liquidity crises, affecting users’ ability to withdraw funds.​

3. Regulatory Uncertainty

The regulatory landscape for yield-bearing stablecoins is still developing. In some jurisdictions, there are discussions about classifying these assets as securities, which could impose stricter regulations on their use and issuance. 

For instance, U.S. regulators have indicated that certain yield-bearing tokens might be subject to securities laws, depending on their structure and yield mechanisms. This uncertainty can impact the stability and legality of such investments.​

4. Yield Fluctuations and Market Volatility

The yields offered by yield-bearing stablecoins are not fixed and can fluctuate based on market conditions, demand for borrowing, and the performance of underlying assets. 

During periods of high volatility or market stress, yields can decrease, and the value of underlying assets can drop, affecting the stability of the stablecoin. 

For example, during the 2022 crypto market downturn, many DeFi platforms saw a significant reduction in yields due to decreased borrowing activity.

5. Counterparty and Credit Risk

Some yield-bearing stablecoins are backed by real-world assets or issued by centralized entities. This introduces counterparty risk, where the issuer or underlying asset may default or face financial difficulties. 

For example, if an issuer holds U.S. Treasuries and the value of these assets declines or the issuer faces insolvency, the value of the stablecoin could be affected. 

It’s very important to assess the creditworthiness of the issuer and the quality of the underlying assets.​

Future Outlook of Yield-Bearing Stablecoins

Yield-bearing stablecoins are gaining momentum in the cryptocurrency landscape. These digital assets combine the stability of traditional stablecoins with the ability to earn passive income, making them attractive to both individual and institutional investors. 

1. Projected Market Growth

Analysts at JPMorgan forecast that yield-bearing stablecoins could grow from constituting 6% to as much as 50% of the stablecoin market share in the coming years. 

This growth is attributed to their appeal as low-risk, yield-generating assets that offer a stable value, similar to traditional money market funds. 

2. Regulatory Developments

The regulatory landscape for yield-bearing stablecoins is developing. In the United States, the introduction of bills like the STABLE Act and the GENIUS Act aims to establish a federal framework for stablecoin regulation, including provisions for interest-bearing stablecoins. These developments could provide clarity and foster growth in the sector. 

3. Institutional Adoption

Major financial institutions are increasingly exploring the potential of yield-bearing stablecoins. For instance, companies like Circle, BitGo, and Coinbase are seeking bank charters to issue stablecoins and offer related services. This trend indicates a move towards integrating stablecoins into mainstream finance. 

4. Technological Innovations

Advancements in blockchain technology are enhancing the functionality of yield-bearing stablecoins. 

The adoption of tokenized U.S. Treasuries and other real-world assets as collateral is enabling these stablecoins to offer competitive yields while maintaining stability. 

5. Market Dynamics

The increasing demand for yield-bearing stablecoins is influencing market dynamics. As more investors seek passive income opportunities, traditional stablecoins may face competition from their yield-bearing counterparts. This shift could lead to a reevaluation of asset allocation strategies within the cryptocurrency market.​

Conclusion 

Yield-bearing stablecoins present an innovative and promising opportunity within the cryptocurrency ecosystem, combining the stability of traditional stablecoins with the potential for earning passive income. 

They allow investors to generate returns by leveraging mechanisms such as DeFi lending, staking, or backing from real-world assets. 

While they offer several benefits, such as passive income and global accessibility, they also come with inherent risks including smart contract vulnerabilities, regulatory uncertainty, and market volatility. 

As the space continues to evolve, yield-bearing stablecoins could become a significant part of both digital finance and traditional investment portfolios, offering new ways for users to maximize their assets. 

However, as with any financial product, it’s important for you as an investors to conduct thorough research and remain informed about the risks involved to make educated and secure investment decisions.

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