The Rise of Yield-Bearing Stablecoins: A Game-Changer for DeFi and Traditional Finance

In the fast-changing sphere of decentralized finance (DeFi), yield-bearing stablecoins are one of the most exciting new developments.

Stablecoins have for a long time been held up as the solution to the crypto market’s volatility problem, and rightfully so. They are required by DeFi protocols like Aave and Compound. But while we have seen incredible growth in the issuance of stablecoins over the past couple of years, that has also been accompanied by a troubling insight: Stablecoins generate *absolutely no yield*.

Among the first to lead this new push are crvUSD from Curve Finance, frxUSD from Frax Finance, and the inventive ideas behind scrvUSD and sfrxUSD. Far from your grandfather’s savings account, these yield-bearing stablecoins are attracting new enthusiasm for their capital-efficient, risk-reduced, and passive income generating potential in an increasingly decentralized financial ecosystem.

CrvUSD is an innovative stablecoin that works in a decentralized way through Curve Finance’s liquidity pools. The way crvUSD operates is interesting—it allows users to mint the stablecoin by overcollateralizing with various crypto assets such as Ethereum or wrapped Bitcoin. This mechanism calls to mind other well-known stablecoins like DAI, which also use this method of operating. However, Curve has set up crvUSD to be an efficient stablecoin in terms of collateral use, which makes it a rather curious and intriguing product in the DeFi space.

One of the most interesting aspects of crvUSD is its connection to LLAMMA, an auto-adjusting collateral management system designed to reduce liquidation risk. LLAMMA is an intelligent smart contract that performs two essential functions: 1) It calculates the amount of collateral needed to back crvUSD and keeps that amount reasonably constant over time. 2) When the price of collateralized assets fluctuates (and they always do), LLAMMA automatically adjusts the crvUSD position to maintain the same level of safety and stability as before the price change.

Besides stability, crvUSD holders can reap the benefits of its collateral system, which is flexible and aims to provide a streamlined experience for the DeFi participants. Its design is to cut the friction that usually comes with CDP stablecoins, and makes crvUSD a viable and possibly efficient option for DeFi risk managers.

At Curve Finance, the foundation laid by crvUSD has been taken to the next level with scrvUSD, a yield-bearing variant. What this means is that when a user locks their crvUSD into Curve’s Savings Vault, they receive scrvUSD in return—no crvUSD is going to waste on Curve’s watch. More importantly, the scrvUSD is working for you.

Besides providing passive income opportunities and holding scrvUSD, stabilizing the crvUSD peg ensures that the value of crvUSD remains tightly coupled to the US dollar. Moreover, scrvUSD reduces borrowing rates for users, further enhancing the appeal of the Curve Finance ecosystem. The ability to hold a stablecoin like scrvUSD and earn yield on it represents a unique and attractive proposition for DeFi users. It allows them to maximize their returns while minimizing risk exposure.

Another chief participant in the yield-bearing stablecoin arena is Frax Finance, which has created frxUSD, a completely collateralized, fiat-redeemable stablecoin. In contrast to standard stablecoins, frxUSD is issued using a peculiarly hybrid method that integrates on-chain with off-chain technology and, more notably, blends on-chain decentralization with the security and reliability of real-world custodians. Those custodians include not just off-chain technology, but reputable entities like BlackRock, which issue the stablecoin in conjunction with Frax’s decentralized protocol.

A remarkable aspect of frxUSD is its 1:1 minting and burning process with reserves that can be verified to be both permissionless and compliant. This means that institutions can mint and burn frxUSD with their verified reserves in a way that is totally auditable and almost as good as in-person verification during a bank run. It also means that when we issue frxUSD, it is backed 1:1 by fiat currency in a way that is totally transparent, as per the lighthouse we use in the DeFi ecosystem. That’s pretty cool.

FrxUSD’s evolution goes beyond minting and burning to encompass a version called sfrxUSD, which is staked frxUSD. Staking frxUSD generates yield, which the network then allocates to a set of yield-generating strategies. The network’s default mode of allocation corresponds to the Benchmark Yield Strategy (BYS). BYS apportion yields from sfrxUSD to a collection of opportunities yielding interest, a basket of yield strategies that spans from safe to risky ones. These yield strategies can be roughly classified as follows:

#1: Safe strategies, which involve a variety of medium- to long-term securities. Examples include T-bills, which yield interest at a rate comparable to that of the interest rate on reserves (IORB) held at the central bank.

#2: Risky strategies, which involve using frxUSD or sfrxUSD in DeFi markets to generate higher returns.

sfrxUSD is a potent instrument for investors wanting to wring the most risk-adjusted yield out of their portfolios, with the least manual labor. Users earn passive income: the stablecoin “sfrxUSD” is only sighted as a decent option for anyone to invest in and earn relatively safe yield—because “sfrxUSD” is a stablecoin. If you prefer more active management of your yield-seeking portfolio, then maybe you should look elsewhere.

Stablecoins that offer yields, such as crvUSD, scrvUSD, frxUSD, and sfrxUSD, represent new opportunities in decentralized finance (DeFi) and traditional finance. They provide what users of digital assets really want: something stable that not just stays put but also earns a little money on the side. This is a game changer, because previous generations of stablecoins, like USDC, USDT, and DAI, are essentially just cash in a bank — digital cash that has no hope of accruing yield when the Federal Reserve interest rate is close to zero and the banking system is flush with money. Yielding stablecoins promise to be something different.

The user base of these new stablecoins keeps growing, and so does their appeal to both the DeFi and TradFi sectors. Innovative stablecoins have a much broader reach than the way traditional stablecoins were viewed in the past. They now present opportunities that truly make them unique and set them far apart from the traditional stablecoins and the financial instruments pegged to them.

Reduced borrowing rates!

Providing seamless passive income!

These two opportunities are among the many forming the new niche for stablecoins in the fast-evolving financial landscape. They are rapidly changing our thinking about stablecoins and the financial instruments tied to them.

Disclosure: This is not trading or investment advice. Always do your research before buying any cryptocurrency or investing in any services.

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