Yield Stablecoin: A New Chapter in Cryptocurrency Issuance

Stablecoins are becoming a market consensus. From Stripe's acquisition of Bridge, to Huma using stablecoins to replace the intermediary role of banks, and then to a certain trading platform becoming a new favorite with USDC, these are all imitations of USDT.

Ethena takes the lead, MakerDAO rebranded to Sky to shift towards earning stablecoins, and certain DEXs and lending platforms are quickly transitioning to USDC--PT/YT--USDe. This is the recent story of on-chain stablecoins.

Currently, interest-bearing stablecoin ( YBS ) still belongs to the concept of stablecoins, making it difficult for the public to understand the essential differences between USDe and USDT. The YBS project attracts users through interest-bearing features, distributing a portion of asset earnings to users, and after completing the asset accumulation, continues to earn asset profits.

The issuance of USDT has created a new asset, with its reserves managed by regulators or project parties, unrelated to users. Users can only passively accept that USDT represents 1 dollar and expect others to recognize its value.

YBS follows the on-chain banking logic of deposit-lending, deconstructing the power of asset issuance. Creating USDC requires cooperation between government and business and support from exchanges, but YBS has already shown explosive growth.

The history of the encryption industry is a history of innovation in asset issuance models. This time, in the name of stability, it is milder than the on-chain PVP of ERC-20, NFTs, and Meme Coins.

Taking the f(x) Protocol as an example, there are at least 5 types of stablecoins, including rUSD, fxUSD, $btcUSD, $cvxUSD, and even fETH is considered a stablecoin because it captures some of ETH's volatility to maintain price peg.

Stability derives from volatility, and volatility creates stablecoins.

Setting Sail from the Old World to the New World

Interest-bearing stablecoins and StableFi are new expressions of stablecoins. Stablecoins originated from Bitcoin, as a peer-to-peer electronic cash payment system. However, Bitcoin is not stable, as it is essentially an unanchored currency system, and its fair price still fluctuates around value.

USDT was first attempted to develop within the Bitcoin ecosystem and later shifted to the exchange pricing field. The combination of a certain trading platform and Tether provided a home for stablecoin, similar to the current combination of a certain trading platform and Circle.

Fiat stablecoins were born from this, and the mechanism is not complicated. You only need to trust Tether and everyone recognizes the market trading stability of USDT. The first-mover advantage has allowed Tether to create extremely high profit margins.

The DAI issued by MakerDAO follows closely, with an over-collateralization mechanism ( CDP ) being the only option for on-chain stablecoin issuance for a long time. The 1.5 times collateralized assets suppress capital efficiency but provide higher credibility to market participants.

The history of cryptocurrency from an on-chain perspective is a story of how to reduce the staking rate. Financial alchemy works both ways; a certain platform can amplify asset trading leverage, but there is no good way to leverage asset creation.

Regarding asset creation, UST is a sad chapter, and classic algorithm stablecoins have since struggled. Frax can be considered at most a semi-algorithm, or more appropriately called a hybrid mechanism, and it has already become a skin suit of USDC.

Mechanically, interest-bearing stablecoins require an interest-bearing mechanism and a stablecoin mechanism. They can be based on other three types, such as the CDP mechanism of a certain DeFi giant, or Ethena's delta-neutral mechanism, as long as stability can be ensured. A certain project is committed by the project party to maintain stability, as long as everyone recognizes it.

The real distinction lies in the interest generation and profit-sharing mechanisms, depending on the source of interest-generating assets. There are two simplest methods: using staking assets like stETH on-chain, and using yield-bearing assets like US Treasury bonds off-chain, both of which can be used in combination.

Ethena's USDe is quite unique, using stETH for yield while employing a centralized exchange hedging method to maintain coin price stability, requiring compliance through off-chain entities, and also using USDC as part of the reserve. Everything can be mixed, regardless of mechanism and assets.

Ideally, if Ethena only uses ETH assets to hedge on a perpetual contract platform and fully distributes profits on-chain, it would be the most ideal on-chain native yield stablecoin. Unfortunately, such a project does not strictly exist.

Currently, there are about 90 active mainstream yield stablecoin projects in the market. They are sorted by the first letter of the protocol, focusing more on the protocol rather than the stablecoin. Strictly speaking, USDe is not a yield stablecoin; sUSDe is the one that meets the definition.

A complete token economics for a yield-bearing stablecoin protocol should include:

1. Stablecoin and its staked version, such as USDS and sUSDS
2. Protocol main coin and its staking version, such as ENA and sENA

Focusing on the agreement better reflects the relationship that "the agreement in profit distribution, stablecoins are the proof of profit distribution." Referring to the historical innovation of asset issuance, there will not be more than 5 high-potential projects in any track; this is true for public chains, DeFi, L2, wallets, inscriptions, runes, and Meme Coins.

Yield stablecoins occupy a complex intersection, with DeFi, RWA, and stablecoins influencing each other. The GHO and sGHO from a lending platform, and the crvUSD and scrvUSD from a DEX merely strengthen their own protocols and will not fully counter the market share of USDe or USDS.

The real question is, outside of USDS and USDe, how much room is left for emerging yield stablecoin protocols in the market.

After screening, there are currently about 50 projects competing for the remaining positions in the yield stablecoin sector. These projects need to be evaluated from three aspects: fundamentals, yield methods, and APY:

• Fundamentals: official website, social media, smart contract address
• Earning method: strategies and specific operations, sources of income, income distribution methods, reward mechanisms
• APY Calculation Method

Taking Avalon as an example, its stablecoin is USDa, and its yield-bearing stablecoin is sUSDa:

• Source of income: USDa loan interest income + USDa Lend business revenue
• Strategy: Stake USDa/sUSDa group LP in a certain ecosystem

Avalon also involves a certain yield platform, which, combined with a certain lending platform, is currently the largest yield generator in the YBS ecosystem, surpassing the peak period of a certain DEX.

DeFi Lego to YBS Blocks

After further screening, we have selected 12 promising YBS protocols. These projects mainly compete in the retail market for interest calculation, pricing, and payment scenarios, and are also the most challenging and potentially profitable tracks.

A certain protocol, backed by government bond yields and the existing market for DAI, combined with interest-bearing assets and stablecoins, has become Ethena's strongest competitor.

Other projects are constantly combining other protocols; multi-chain, multi-protocol, and multi-pool are standard configurations. The organizational structure of each YBS and each user focusing on YBS ultimately contribute to the TVL and income of a certain yield platform.

These projects still face numerous challenges. In order to distribute profits to users, a certain protocol allocated $5 million in earnings to stablecoin holders, resulting in the protocol being nearly unprofitable. Most YBS protocols will also issue the main token of the protocol, the price of which needs to be supported by the protocol's revenue and profit-sharing ability. Once the coin price declines, it may negatively impact the interest-bearing stablecoins issued by the protocol.

Therefore, it is essential to focus on the ongoing profitability of the protocol. As a cryptocurrency bank, the security of the principal is crucial for the YBS project. We need to continuously monitor the security of each protocol and the profit-sharing ratio.

Apart from two major projects, several potential new opportunities from the YBS new protocol include: Resolv, Avalon, Falcon, Level, and Noon Capital. These choices are based on subjective judgment, similar to an intuitive feel for the projects.

It is worth noting that the YBS project requires secondary market liquidity for its main token. Taking Ethena as an example, it introduces mainstream exchange-affiliated VCs to form a de facto利益联盟, essentially relinquishing the issuance rights of USDe. However, the issuance rights of USDe are represented by ENA, and major institutions aiming for profit will not crash USDe, but may instead gradually sell ENA or stake to earn returns. This is Ethena's successful and clever strategy.

Conclusion

YBS is not a new Meme Coin; it requires a high level of credibility and capital reserves. YBS is also a type of coin, especially the real YBS that does not rely on government bonds or the US dollar, and the establishment of its recognition is no easier than BTC/ETH. In the future, we will delve deeper into the issuance guidelines of interest-bearing stablecoin, clarifying the mechanisms and details that this article has not elaborated on.