This article is authorized to be reprinted from Automatic Insight Beating, author: Rhythm Editorial Department, copyright belongs to the original author.
If you have 1 million idle funds, where would you store it?
The interest from a one-year bank fixed deposit is just over 20,000, barely enough to keep up with inflation.
However, when you open the financial pages of major cryptocurrency exchanges, you often see annualized returns of 8%, 10%, or even higher, with these products often labeled as "stable" and "capital-protected."
Do you wonder if these products are really reliable? How can stable high returns, which traditional financial management cannot provide, be realized in the crypto space?
The answer lies in the unique market mechanisms and technological innovations of blockchain.
The stable high returns in the crypto space are not just a gimmick; they have clear sources and operational mechanisms: the mapping of real-world assets on the blockchain, strategic subsidies from platform providers, and arbitrage from market speculation.
APY 5%: The Hauler of Real-World Returns
The first source of stable high returns in the crypto space is quite simple: transporting real-world returns onto the blockchain.
This process seems straightforward but is the result of a deep integration of traditional finance and decentralized finance.
When the Federal Reserve began raising interest rates in 2022, U.S. Treasury yields grew from near-zero levels to 4%-5%, becoming a recognized low-risk, inflation-resistant investment tool.
However, not all investors in every country can directly purchase U.S. Treasuries; some can only obtain about 3% returns through corresponding bank financial products.
This presents an unprecedented opportunity for the crypto world. Some stablecoins allocate funds to traditional financial assets like U.S. Treasuries and then distribute the returns to users in the form of stablecoin interest, providing holders with a stable annualized return of 4%-5%.
Binance offered this return to retail investors by launching RWUSD as a U.S. Treasury-like financial product.
After users subscribe to RWUSD with other stablecoins at a 1:1 ratio, Binance invests the funds in low-risk assets like U.S. Treasuries and amplifies the returns through liquidity pools and DeFi protocols, ultimately providing holders with a stable annualized return of around 4.2%.
Similar stablecoins include the BUIDL token launched by BlackRock. BUIDL invests 100% of its assets in U.S. Treasuries, repurchase agreements, and cash equivalents. Its returns closely track the rates of short-term U.S. Treasuries, reaching 4.5% - 5%.
By mid-2025, BUIDL's asset scale had surpassed $2.3 billion, becoming the largest institutional U.S. Treasury product on-chain.
MakerDAO is a decentralized experiment of this model. It initially relied entirely on crypto asset collateral to generate the stablecoin DAI, with meager income. When the Federal Reserve announced interest rate hikes in 2022, it began to focus on the returns from U.S. Treasuries and other RWAs (real-world assets).
Thanks to the allocation of U.S. Treasury assets, MakerDAO's income significantly increased in 2023, but as a decentralized organization, its distribution method differs from Circle.
Circle retains all interest, while MakerDAO distributes part of the income to DAI holders through a mechanism called EDSR (Enhanced DAI Staking Rate).
This mechanism is straightforward: RWA returns are placed in a fund pool; the fewer people participating, the higher the interest rate; as more people join, the interest rate naturally declines.
In the early stages, when only a few people deposited DAI, the annualized return once reached as high as 8%.
These three products represent different ways decentralized communities, traditional institutions, and centralized exchanges adopt U.S. Treasury-like stablecoins, but they share the commonality of connecting real-world returns to the blockchain.
Blockchain leverages its decentralized technological advantages to provide new distribution channels for traditional assets. At the same time, it saves crypto users from the cumbersome procedures of off-chain purchasing of U.S. Treasuries, offering stable returns without intermediary fees.
APY 10%: The Subsidy War in the Crypto Space
If 4%-5% annualized returns are not attractive enough, the crypto space also offers opportunities for annualized returns exceeding 10%, often stemming from project parties' "wool."
In cases where project parties provide strategic subsidies, the returns on stablecoins can exceed 10%. Stablecoin issuers artificially inflate the annualized yield to attract funds to exchange for their stablecoins, then use network effects and ecosystem depth to retain them.
In this subsidy war, Circle, the first stablecoin, is the most typical example. Faced with the massive Tether, what truly supports Circle's rapid market share expansion is not entirely its compliance advantages but its cash-burning subsidies.
As the issuer of USDC, Circle's total revenue in 2024 is approximately $1.68 billion, and it chooses to allocate 60% of this revenue to channel partners and end users.
In the early days, Circle treated trading platforms as core distribution channels. It launched a campaign on Coinbase stating, "Hold USDC to enjoy returns," with a regular interest rate of about 4%, which peaked at 12% during the promotional period.
On the other hand, it supported a financial product with an annualized return of 12% by paying $60.25 million in distribution fees to Binance.
Through this subsidy-based cooperation, USDC rapidly expanded its reach in a short time.
As the issuer of PYUSD, PayPal also spent heavily on subsidies to increase its total circulation.
By mid-2024, PayPal's monthly subsidies on PYUSD exceeded $6.5 million, directly raising the annualized yield to over 18%.
The effects of the subsidies are significant. The circulation of PYUSD grew from only $230 million at the beginning of 2024 to $1 billion by the end of August.
Even Tether, the "old hegemon" of stablecoins, was forced to join this subsidy war, collaborating with Binance on a project that launched an on-chain financial activity with an annualized return of up to 45% for USDT.
This level of subsidy led to the entire $250 million activity quota being sold out in less than an hour after launch, with some whales even splitting into 100 accounts to grab the activity quota.
In the current fiercely competitive stablecoin market, this strategy of "burning money" to gain market share is fundamentally no different from the food delivery subsidy wars.
Since the exchange between stablecoins incurs almost no cost, high APY has become an important means for issuers to attract users and funds, as well as a tangible benefit provided to users in the crypto space.
However, since these subsidies come out of the issuers' pockets, the duration of the activities and the subscription quotas often have certain limitations.
Even so, from a more macro perspective, this subsidy competition rewrites the rules of profit distribution in the traditional financial system, distributing the interest earned from stablecoin issuance to users.
APY 10%–90%: The Speculation Emotion Capturer
The third source of high returns in the cryptocurrency market is not limited by time or quota.
It originates from the unique market-making mechanism of the crypto market, transforming the high volatility of cryptocurrencies and traders' speculative demands into stable returns for investors.
In a bull market, investors often mortgage mainstream assets like BTC to borrow stablecoins to continue purchasing other tokens, amplifying leverage.
At this time, the borrowing rates for stablecoins can skyrocket due to high demand, driving the annualized returns on deposits to soar.
On July 12 of this year, when Bitcoin broke a new high of $123,000, the yield on USDT's spot financial products soared to over 40%.
A month later, when BTC reached another new high, the interest rate for USDT again broke through 40%.
Veteran traders regard this surge in interest rates as an indicator of overheated sentiment.
Some innovative projects, however, began to leverage the fluctuations in interest rates brought about by this market game, attempting to lock them in as long-term stable returns.
Ethena's USDe is the most representative case among such products. After users deposit ETH into the protocol, Ethena buys an equivalent amount of ETH in the spot market while opening a short position of the same value in the contract market, creating a delta-neutral hedging portfolio.
This way, the total value of the positions remains unchanged, allowing them to net the funding rate fees from perpetual contracts.
The funding rate is a unique mechanism in the crypto perpetual contract market. Since perpetual contracts have no expiration date, the contract price can easily deviate from the spot price, so exchanges set up a funding rate mechanism:
When the contract price is higher than the spot price, longs pay shorts; when it is lower, shorts pay longs. This keeps the contract price close to the spot price.
So how does USDe specifically utilize the funding rate?
Assuming a user deposits 100 ETH into Ethena, it will buy 100 ETH in the spot market while shorting 100 ETH in the perpetual contract. This way, regardless of whether ETH rises or falls, the overall position value remains unchanged.
At this point, the short position held by Ethena can steadily receive the funding rate paid by longs, ultimately converting these fees into returns for USDe holders.
During the bull market in 2024, due to the hot market conditions, the long funding rate remained high, and USDe's annualized yield once exceeded 30%. Even after the market cooled down, USDe still maintained an annualized return of around 10%, creating significant market demand for USDe.
Recently, Ethena further collaborated with on-chain lending platform Aave and yield trading platform Pendle, using a yield amplification mechanism to push APY close to 90%. As a result, USDe's circulating market value rapidly grew to over $5 billion, even attracting some players from Wall Street.
Binance's BFUSD product employs a logic similar to USDe, hedging funds in the perpetual contract markets for BTC and ETH. Users only need to subscribe and hold on the platform to achieve target annualized returns of over 10% during bull markets.
However, the funding rate is not always positive. To mitigate the impact of negative interest rates, both Ethena and Binance have established reserve funds and hedging mechanisms, which can effectively prevent returns from dropping to zero during bear markets.
This source of stable returns can be said to be a unique financial engineering of the crypto space. The traditional financial system does not have perpetual contracts; only professional hedge funds and trading institutions can execute such hedging strategies.
Through this innovative mechanism, the crypto space transforms risks that belong to market volatility into stable returns that ordinary investors can also share.
A New Balance of Returns and Risks
Returning to the initial question: where do the stable high returns in the crypto space come from? The answer reveals not just three mechanisms.
It is also a financial architecture reshaped by technological innovation and a new distribution of traditional wealth rules.
In the traditional financial system, banks act as intermediaries to earn interest spreads, and users can only passively accept low-interest deposits. In these three models, we see a new distribution logic.
The RWA model bypasses bank intermediaries, directly distributing treasury bond yields to users; the subsidy model allows platform providers to actively cede profits to compete for users; innovations in market mechanisms and smart contracts democratize stable returns that originally belonged to professional institutions.
The deeper implication of this reconstruction is that technology is redefining the boundaries of financial services and the methods of profit distribution. When smart contracts can automatically execute complex financial strategies, and tokenization can subdivide and circulate any asset, many intermediary links in traditional finance begin to become redundant.
However, this reconstruction also brings new problems. As the sources of returns become complex and diversified, the identification and pricing of risks require a deeper understanding.
Investors need to comprehend not just a single bank credit risk, but a composite of technological risk, regulatory risk, and market risk.
The choice of where to place 1 million idle funds is not truly about selecting which product to choose, but about understanding the logic and costs behind each type of return.
In this new financial world, higher returns often mean taking on more complex risk combinations.
This may be the most thought-provoking aspect of this round of financial innovation; it not only changes the way we obtain returns but also alters our framework for understanding risk.
Related: Google launches an open-source protocol for AI payments supporting stablecoins.
Original text: “Where Do Stablecoin Yields Come From?”
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