Yield-Bearing Stablecoins: How They Work and Their Risks

Stablecoins hold a dollar peg, but most pay nothing to the people who hold them. The issuer earns interest on reserve assets while holders receive zero yield. Yield-bearing stablecoins attempt to close that gap by passing some portion of the underlying return back to token holders. The market for these instruments has grown from under $1.5 billion in early 2024 to over $19 billion by late 2025, reflecting demand for on-chain savings products that combine dollar stability with passive income.

But yield always comes from somewhere, and each source carries distinct risks. This article breaks down how yield-bearing stablecoins generate returns, compares the major designs in production today, and examines the regulatory questions that will shape their future.

Where Does the Yield Come From?

Every yield-bearing stablecoin traces its returns to one or more underlying income sources. These generally fall into three categories: government securities, DeFi lending, and derivatives-based strategies.

Treasury bills and real-world assets

The simplest model invests reserve assets into short-duration U.S. Treasury bills, overnight repos, and bank deposits. By June 2025, T-bills and reverse repos comprised roughly 42% each of major stablecoin reserve holdings. The income from these positions funds the yield distributed to holders. This is the same mechanism that powers traditional money market funds, tokenized and made available on-chain.

Circle's S-1 filing revealed that interest earned on USDC reserve assets accounted for 95 to 99% of the company's total revenue from 2022 to 2024. Standard USDC holders see none of that yield: it flows entirely to the issuer. Yield-bearing designs redirect some portion of this income to the token holder.

DeFi lending protocols

Lending platforms like Aave generate yield by matching depositors with borrowers. When you supply USDC to Aave, borrowers pay variable interest rates driven by pool utilization. The protocol issues receipt tokens (aUSDC) that represent your deposit plus accrued interest. Rates fluctuate with demand: high borrowing activity means higher yields, while low utilization compresses returns.

Derivatives and funding rate strategies

The most complex yield source involves perpetual futures markets. Protocols like Ethena construct delta-neutral positions: they hold spot crypto assets while simultaneously shorting equivalent perpetual futures contracts. The short side typically earns funding rate payments from leveraged long traders. In 2024, BTC funding rates averaged around 11% annualized. By 2025, that figure dropped to approximately 5% as market conditions shifted.

Key distinction: T-bill yields are driven by central bank interest rates and have near-zero credit risk. DeFi lending yields depend on borrower demand and protocol solvency. Funding rate yields depend on market structure and can turn negative during downturns. The yield source determines the risk profile.

Major Yield-Bearing Stablecoins Compared

The yield-bearing stablecoin landscape includes tokens backed by government debt, DeFi lending markets, and synthetic strategies. Each makes fundamentally different tradeoffs between yield, risk, and accessibility.

sDAI and the Dai Savings Rate

sDAI is an ERC-4626 tokenized vault that wraps DAI deposited into Sky's (formerly MakerDAO) Dai Savings Rate module. When you deposit DAI, the contract mints sDAI. Interest accrues continuously through an on-chain rate set by MKR governance. sDAI is a value-accruing token: its DAI-denominated price increases over time while the balance in your wallet stays constant.

The DSR is funded by Sky's protocol revenue, which includes fees from overcollateralized crypto loans, investments in U.S. Treasury bills, and liquidity provisioning through SparkLend. The rate has fluctuated significantly: from over 11% in early 2025 down to 3.5% by November 2025, reflecting governance adjustments to changing market conditions and protocol revenue.

Ethena sUSDe

Ethena's USDe is a synthetic dollar backed by crypto collateral hedged with perpetual futures short positions. Users stake USDe to receive sUSDe, which accumulates yield from three sources: perpetual futures funding rates, ETH staking yield from liquid staking tokens, and interest on stablecoin reserves (including exposure to BlackRock's BUIDL fund).

The protocol earns revenue when funding rates are positive, which historically occurs on roughly 82-85% of days. During negative funding periods, Ethena maintains a reserve fund to absorb losses rather than passing them to sUSDe holders. The protocol also dynamically shifts collateral into stablecoins earning Treasury-rate returns when futures market conditions are unfavorable.

Ondo USDY

USDY takes the most conservative approach: it tokenizes a portfolio of short-term U.S. Treasuries and bank deposits, distributing yield as token price appreciation. The product functions like a tokenized money market fund. However, USDY uses an allowlist model restricted to non-U.S. persons, reflecting the regulatory uncertainty around offering yield-bearing tokens to American investors.

Figure YLDS

Launched in February 2025, YLDS is the first yield-bearing stablecoin registered with the U.S. SEC as a public security. Issued by Figure Certificate Company (registered under the Investment Company Act of 1940), it pays interest at the Secured Overnight Financing Rate (SOFR) minus 50 basis points. Interest accrues daily and is paid monthly. YLDS is backed by the same securities that prime money market funds hold: short-dated Treasuries and overnight Treasury repos.

By embracing securities registration rather than avoiding it, YLDS represents a different regulatory strategy. It trades freely on multiple chains but carries the compliance overhead of a registered security, including KYC requirements and transfer restrictions.

Rebase vs. Value-Accruing Mechanisms

Yield-bearing stablecoins distribute returns using one of two mechanisms, and the choice affects everything from DeFi composability to tax treatment.

Rebase tokens

Rebase tokens maintain a price near $1 while increasing the number of tokens in your wallet. Aave's aUSDC is the canonical example: deposit 1,000 USDC and receive 1,000 aUSDC. At 5% APY, after one year your balance reads approximately 1,050 aUSDC, each still worth ~$1. The token supply is elastic, expanding as interest accrues.

Rebase mechanics create complications for DeFi integration. Protocols that track fixed balances (lending markets, AMM pools, bridges) may not correctly account for balance changes. Many DeFi protocols require wrapped versions of rebase tokens to function correctly.

Value-accruing tokens

Value-accruing tokens keep a fixed balance while the token's redemption value increases. sDAI, sUSDe, and USDY all use this model. You hold the same number of tokens, but each token is redeemable for progressively more of the underlying asset. This design is simpler for smart contract integration because balances do not change unexpectedly.

Design trend: The market is converging on value-accruing models. Newer yield-bearing stablecoins almost exclusively use this pattern because it avoids the DeFi integration headaches of rebasing and simplifies accounting for holders.

The Risk Spectrum

Not all yield-bearing stablecoins carry the same risk. The yield source is the primary risk determinant, but smart contract risk, governance risk, and counterparty risk layer on top.

T-bill backed: lowest risk, lowest yield

Tokens backed by U.S. Treasuries (USDY, YLDS) carry minimal credit risk because the underlying assets are obligations of the U.S. government. The primary risks are operational: custodian failure, smart contract bugs, and issuer mismanagement. Yields track the federal funds rate and currently sit in the 3.5-4.5% range. When rates fall, so do returns.

Mixed collateral: moderate risk

sDAI occupies a middle position. Sky's reserves include both T-bills and crypto-backed loans, meaning the DSR rate partially depends on DeFi lending demand. Governance decisions by MKR holders directly affect the rate, and the protocol has adjusted the DSR multiple times in a single year. The smart contract risk is mitigated by years of production usage and extensive auditing, but the yield source is more complex than pure T-bill exposure.

Derivatives-based: highest risk, highest yield

Ethena's sUSDe offers the highest yields but depends on perpetual futures market structure. The risks include: funding rates turning negative during depeg events or bear markets; counterparty risk with centralized exchanges that custody the hedging positions; and liquidation cascade scenarios where forced selling amplifies losses.

The October 2025 episode illustrates these risks: Bitcoin fell 16.5% in a flash crash, USDe briefly depegged, and analysis pointed to a leverage loop where exchange-offered yield programs on USDe had created dangerous circular collateral dependencies. The protocol's reserve fund absorbed the impact and sUSDe holders were not directly affected, but the event demonstrated that derivatives-based yield is fundamentally different from T-bill interest.

DeFi lending: variable and utilization-dependent

Lending receipt tokens like aUSDC carry smart contract risk from the lending protocol itself, plus the risk that borrower demand evaporates. High utilization rates generate attractive yields but also signal that the lending pool has limited withdrawal liquidity. During market stress, a rush to withdraw can temporarily create illiquidity even if the underlying loans are solvent.

Are Yield-Bearing Stablecoins Securities?

The regulatory classification of yield-bearing stablecoins is one of the most consequential open questions in crypto regulation. The answer determines who can issue them, who can hold them, and how they can be traded.

The SEC's position

In April 2025, the SEC's Division of Corporation Finance published guidance clarifying that dollar-backed, non-yield-bearing stablecoins are not securities under federal law. The statement explicitly excluded yield-bearing stablecoins from this safe harbor. Tokens that provide holders with "yield, interest or other passive income, whether in the form of regular payments or rewards, or in the form of re-basing" remain potentially subject to securities registration requirements.

The GENIUS Act framework

The GENIUS Act, signed into law in July 2025, established the first comprehensive U.S. regulatory framework for payment stablecoins. A critical provision: payment stablecoin issuers are prohibited from paying "any form of interest or yield" to holders. Payment stablecoins under the Act are explicitly excluded from the definition of securities and commodities.

This creates a binary classification. Non-yield stablecoins are payment instruments with a clear regulatory path. Yield-bearing stablecoins exist outside this framework and may need to register as securities, comply with investment company regulations, or find alternative legal structures.

The third-party yield loophole

The GENIUS Act prohibits issuers from paying yield, but does not explicitly prohibit third parties from offering yield on stablecoins. This has created a legal gray area. Exchanges and platforms may offer "rewards" or "interest" programs on stablecoin deposits without the issuer technically distributing yield. Whether this distinction survives regulatory scrutiny remains to be seen: the Treasury Department has solicited public comment on how to interpret the prohibition, including whether indirect payments should be covered.

Regulatory divergence: Different jurisdictions are taking different approaches. The EU's MiCA framework classifies yield-bearing tokens as e-money tokens or asset-referenced tokens depending on their structure, each with distinct licensing requirements. Singapore, Hong Kong, and the UAE have their own emerging frameworks. Global issuers must navigate multiple overlapping regimes.

Sustainability of Yields

A critical question for any yield-bearing stablecoin: can the returns last? The answer depends entirely on the yield source and macroeconomic conditions.

Interest rate dependency

T-bill-backed yields are directly tied to central bank policy. When the Federal Reserve cuts rates, every T-bill-backed stablecoin sees its yield compress proportionally. In a low-rate environment like 2020-2021, these products would offer near-zero returns, making them indistinguishable from standard stablecoins.

DeFi yield compression

Lending yields depend on borrower demand, which correlates with market activity. During bear markets, fewer traders borrow, utilization drops, and lending rates fall. The DSR's journey from 11% to 3.5% within a single year demonstrates how quickly DeFi yields can compress. Funding rates show similar cyclicality: the drop from 11% average in 2024 to ~5% in 2025 reflects cooling speculative demand.

Incentive-driven yields are temporary

Some yield-bearing stablecoins supplement organic returns with token incentives or promotional rates. These are inherently unsustainable. When incentives end, yields drop to the organic rate, which may be significantly lower than what attracted initial deposits. This pattern has repeated across DeFi: protocols offer high initial yields to bootstrap liquidity, then rates normalize as incentives expire.

What Yield-Bearing Stablecoins Are Not

The framing matters. Yield-bearing stablecoins are investment products, not payment instruments. This distinction has practical consequences.

Not optimized for payments

A token whose price appreciates over time creates friction in payment contexts. Merchants need to know that $100 received today is $100 spent tomorrow. Value-accruing tokens require constant price feeds to determine current redemption values. Rebase tokens create accounting complexity when balances change between sending and receiving. Neither model is ideal for point-of-sale transactions or dollar-denominated payments.

Not risk-free savings accounts

Yield-bearing stablecoins are not FDIC-insured bank deposits. They carry smart contract risk, governance risk, and varying degrees of counterparty risk. Even T-bill-backed tokens depend on the operational integrity of the issuer, custodian, and smart contract infrastructure. The yield is compensation for bearing these risks, not a free lunch.

Not immune to death spirals

Yield-bearing stablecoins that depend on protocol revenue face reflexivity risks. If confidence drops and holders redeem, protocol revenue may decline (fewer loans, lower TVL), reducing the yield available, which triggers more redemptions. This feedback loop is particularly acute for algorithmic designs but can affect any yield source that depends on active DeFi participation.

Stability-First Design: A Different Approach

Not every stablecoin needs to generate yield. Some are designed exclusively for payments, prioritizing reliability, speed, and simplicity over investment returns.

USDB, the dollar stablecoin on Spark, takes this approach. It is a fiat-backed stablecoin issued by Brale, backed 1:1 by reserves held in regulated financial institutions. USDB does not offer yield to holders. This is a deliberate design choice: by not distributing interest, USDB avoids the securities classification questions that complicate yield-bearing designs and can focus on being a reliable payment rail.

On Spark, USDB transfers settle instantly with self-custody preserved. The goal is enabling dollar-denominated Bitcoin payments, not competing with money market funds. Wallets like General Bread use Spark to offer users fast, low-cost stablecoin transfers without the complexity or risk profile of yield-generating products.

For users who want to hold dollars and use them for payments, a stability-first stablecoin with clear regulatory standing may be more appropriate than chasing yield. For users who want passive income on idle dollars and accept the associated risks, yield-bearing stablecoins offer a growing set of options. The two categories serve different needs and should be evaluated on different criteria. For a broader overview of the stablecoin landscape on Bitcoin, see our complete landscape analysis.

What to Evaluate Before Holding Yield-Bearing Stablecoins

If you are considering yield-bearing stablecoins, the following questions help differentiate between well-designed products and hidden risk.

1. Where does the yield come from? If you cannot trace returns to a specific income source (T-bills, lending interest, funding rates), the yield may be subsidized by token emissions or unsustainable incentives.
2. What happens when the yield source underperforms? Does the protocol have a reserve fund? Can yields go negative? How has the token performed during past stress events?
3. What is the redemption mechanism? Can you exit to USD or a base stablecoin at any time, or are there withdrawal queues, lockup periods, or liquidity constraints?
4. What is the regulatory status? Is the token a registered security, a payment stablecoin under the GENIUS Act, or operating without clear classification? The answer affects your legal protections and tax obligations.
5. Who controls the smart contracts? Are there admin keys, upgrade proxies, or governance mechanisms that can change the rules? Permissionless redemption through immutable contracts offers the strongest guarantees.
6. What is the audit history? Has the protocol undergone multiple independent security audits? Are the reserve proofs verifiable on-chain?

The yield-bearing stablecoin market will continue to evolve as interest rates change, regulations solidify, and new designs emerge. Understanding the mechanics and risks behind each model is essential for making informed decisions about which tokens to hold and which to avoid.

This article is for educational purposes only. It does not constitute financial or investment advice. Bitcoin and Layer 2 protocols involve technical and financial risk. Always do your own research and understand the tradeoffs before using any protocol.