Beyond the APY: An In-Depth Look into Stablecoin Yield Generation

Introduction

Stablecoins have taken center stage in the current cryptocurrency cycle, driven by growing regulatory frameworks such as the U.S. Genius Act, the EU’s Markets in Crypto-Assets (MiCA) regulation, and the Hong Kong Stablecoins Act. Like traditional finance (TradFi) investors, stablecoin holders seek yield to maximize capital efficiency. In this article, CoinEx Research provides a comprehensive overview of the stablecoin yield landscape, detailing the mechanisms behind yield generation, leading products, indicative yield ranges, and associated risks. By understanding the “backend” of stablecoin yields, investors can better assess the risk-reward profiles of various stablecoin “Earn” products.

Stablecoin Yield Mechanisms: A Taxonomy

Stablecoin yields are generated through diverse strategies, each with unique mechanics, platforms, and risk profiles. Below, we categorize and analyze the primary yield sources, their leading implementations, and key considerations for investors.

i) Lending and Borrowing

Yield Source: The interest paid by borrowers to lenders.

Mechanism: Lending and borrowing is the most established stablecoin yield model. Decentralized finance (DeFi) protocols like Aave and Sky Protocol accept stablecoin deposits, akin to bank deposits, and lend them to borrowers, generating interest income. Centralized exchanges (CEXes) mirror this model with “Flexible Savings” or “Fixed Savings” products. Yields fluctuate based on loan supply and demand dynamics. Notably, CEXes often impose fund caps or tiered models, where headline yields (e.g., high APYs advertised) may apply only to limited deposit amounts or specific tiers, reducing the effective yield for larger investments or higher tiers.

Key Players: Aave, Sky Protocol, CEXes

Yield Range: 4–10% APY, driven by market conditions and platform-specific terms.

Risks:

• Counterparty Risk: Borrower defaults in DeFi or CEX insolvency.
• Smart Contract Risk: Vulnerabilities in DeFi protocols.
• Liquidity Risk: Reduced loan demand can lower yields.
• Tiering/Cap Risk: CEX fund caps or tiered models may limit access to advertised high yields, reducing returns for larger deposits.

ii) Yield Farming

Yield Source: Transaction fees paid to liquidity providers (LPs) and protocol token rewards.

Mechanism: Yield farming involves providing liquidity to automated market makers (AMMs), earning rewards through transaction fees and protocol token incentives. Curve Finance, a leader in stablecoin-focused yield farming, offers low-risk opportunities but has seen its stablecoin pool (DAI-USDC-USDT) total value locked (TVL) decline to below $200 million due to reduced yields in the current market cycle.

Key Players: Curve Finance

Yield Range: 0–3% APY

Risks:

• Impermanent Loss: Price divergence between paired assets in liquidity pools.
• Token Risk: Depreciation of reward tokens.
• Protocol Risk: Smart contract vulnerabilities or governance issues.

iii) Funding Rate Arbitrage

Yield Source: Yields generated from delta-neutral strategies, primarily perpetual futures funding rates.

Mechanism: Market-neutral arbitrage is a traditional TradFi strategy adapted for the crypto space. It involves opening both long and short positions to maintain a delta-neutral or market-agnostic stance.

In crypto, funding rate arbitrage is a primary example. Perpetual futures contracts lack an expiration date, using a funding rate mechanism to keep their price anchored to the spot price.

When the perpetual contract price is higher than the spot price, long positions pay short positions, and the funding rate is positive.

When the perpetual contract price is lower than the spot price, short positions pay long positions, and the funding rate is negative.

Historically, the funding rate has been positive more often than negative. The strategy involves buying the spot asset and short-selling the perpetual futures contract, collecting the positive funding rate payments.

Ethena's USDe is a leading product in this category. Its yield is sourced from the funding rates earned from short ETH perpetuals, complemented by the staking rewards from its long spot ETH holdings. 

Source: Ethena; Data as of 16 Sep 2025

Key Players: Ethena (USDe).

Yield Range: 5–10% APY, depending on funding rates and staking yields.

Risks:

• Funding Rate Volatility: Negative rates can erode yields.
• Counterparty Risk: Exposure to derivatives exchanges.
• Market Risk: Partial exposure to Ethereum price movements.

iv) Real-World Assets (RWAs) – U.S. Treasury Bills

Yield Source: Interest income from off-chain financial instruments, particularly U.S. Treasury bills.

Mechanism: A major development in this cycle is the tokenization of RWAs. Stablecoin yields in this category are directly linked to the interest earned on underlying assets like U.S. Treasury bills. The yield for this type of stablecoin closely tracks short-term U.S. government rates.

Ondo Finance is a key player in this space with products like its USDY (for non-U.S. retail investors) and OUSG (for U.S. institutional investors). These protocols often offer enhanced transparency through on-chain attestation and third-party audits, providing a verifiable link between the token and the underlying assets.

Source: Ondo Finance; Data as of 15 Sep 2025

CEXs are also launching similar RWA or Treasury-backed "Earn" products. However, the transparency of these products often remains limited, requiring investors to place trust in the centralized entity rather than an on-chain verification mechanism.

Key Players: Ondo Finance, BlackRock’s BUIDL, CEXes 

Yield Range: 4–5% APY, aligned with short-term treasury yields.

Risks:

• Custodial Risk: Reliance on third-party custodians.
• Regulatory Risk: Evolving regulations for tokenized RWAs.
• Transparency Risk: Limited disclosure in some CEX products.

v) Structured Products

Yield Source: Premiums from selling options strategies.

Mechanism: Structured products, primarily offered by CEXes, use options strategies to deliver tailored yields. Popular products include dual-currency investments, Shark Fin, and Snowball strategies. For example, dual-currency products involve selling put options (“buy low”) or call options (“sell high”), while other products come with varying tenors and principal protection levels.

Key Players: CEXes.

Yield Range: Variable APY (double-digit is common), depending on strategy and market volatility.

Risks:

• Complexity Risk: Payoff structures can confuse retail investors.
• Principal at Risk: Many structured products are not principal-protected. Investors can suffer a capital loss if the market moves unfavorably and their assets are converted at an unfavorable strike price.
• Liquidity Risk: These products are often illiquid and cannot be exited before maturity.
• Forced Conversion: At maturity, the investor may be forced to receive a different currency or asset from their initial investment, potentially at a significant loss if the spot price has moved against their position.
• Counterparty Risk: Dependence on CEX solvency.

vi) Yield Tokenization

Yield Source: The ability to trade, enhance, or hedge the future yield of an asset.

Mechanism: Pendle Protocol is an innovative project that has popularized yield tokenization. It splits a yield-bearing token (e.g., stETH) into two components: the principal token (PT) and the yield token (YT).

Principal Token (PT): Represents the underlying asset that can be redeemed for its principal value at maturity. It is typically bought at a discount, offering a fixed, predictable yield.

Yield Token (YT): Represents the variable yield stream of the asset. Investors can buy YT to speculate on future yield or sell it to lock in a fixed yield.

This model allows for sophisticated yield management strategies, such as locking in a fixed rate for a future period, enhancing capital efficiency, and hedging against yield fluctuations.

Key Players: Pendle Protocol.

Yield Range: 5–20% APY, highly variable based on strategy and market conditions.

Risks:

• Smart Contract Risk: Vulnerabilities in tokenization protocols.
• Market Risk: Volatility in underlying yield-bearing assets.
• Complexity Risk: Steep learning curve for retail investors.

vii) Subsidies

Yield Source: Promotional funds from exchanges or stablecoin issuers.

Mechanism: Some CEXs boost their "Earn" product yields by offering subsidies from their own funds, often as a user acquisition or marketing cost. For example, a stablecoin issuer like Circle might partner with CEXes to subsidize the yield on its stablecoin (USDC) to increase adoption and liquidity.

A notable trend is the blurring line between trading and wealth management. Some CEXs might provide tiered stablecoin subsidies based on a user's contract trading position, allowing users to earn interest on their funds even while actively trading, setting a new standard for capital efficiency.

Key Players: Stablecoin issuers, CEXes.

Yield Range: Depending on subsidy terms (double-digit APY is often seen).

Risks:

• Sustainability Risk: Subsidies may be reduced or discontinued.
• Counterparty Risk: Reliance on platform financial health.

Conclusion

The stablecoin yield landscape is evolving rapidly on the back of positive regulatory developments and the convergence of tradfi and crypto. CEXs, DeFi protocols, and stablecoin issuers are all competing fiercely for stablecoin assets under management (AUM).

In our view, the ultimate beneficiary of this competition is the crypto user, who will have access to a wider array of products offering greater capital efficiency and diverse risk profiles. As the market matures, understanding the underlying sources of yield—whether it's from on-chain lending, exotic options strategies, or institutional RWA products—will be the key to navigating the opportunities and risks that lie ahead.

Disclaimer

The content provided in this report is for illustrative purposes only and is intended to offer insights into the cryptocurrency market. It is not, and should not be interpreted as, investment advice or recommendations. The information contained herein is based on sources believed to be reliable; however, we do not guarantee its accuracy, completeness, or suitability for any purpose, and it should not be relied upon as such. Any opinions expressed reflect a judgment at the date of publication and are subject to change without notice. Readers are advised to conduct their own research and due diligence and, where appropriate, seek professional advice before making any investment decisions. The authors and publishers of this report accept no liability for any loss or damage arising from the use of the information provided.

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