The Current State of Stablecoin Yields: A Comprehensive Overview

Stablecoins are a unique class of cryptocurrencies that have become a key component of the digital asset ecosystem, building a bridge between the traditional financial world and the innovative field of decentralized finance (DeFi). These digital assets are designed to minimize price volatility by being pegged to an asset reserve, typically a fiat currency like the U.S. dollar or other stable assets like gold. This stability makes them an attractive option for investors and traders who often want to escape the wild price swings associated with cryptocurrencies such as Bitcoin and Ethereum.

Stablecoins have found their niche in the DeFi space as a reliable medium of exchange, store of value, and unit of account. They have become the backbone of many DeFi applications, supporting activities such as lending and liquidity mining. However, the yields on these stablecoins have been relatively low recently, especially since the Terra incident, with yields generally hovering below 3-5%. This article aims to provide a comprehensive overview of the current state of stablecoin yields, the sources of these yields, and future opportunities.

The Current State of Stablecoin Yields

After the Terra incident, yields across the stablecoin space were generally low, well below the 3-5% range. This trend was evident in top money markets, including AAVE, Compound, Dai Savings Rate (DSR), Spark, the DAI/USDC Uniswap liquidity pool, and the Curve 3crv pool.

Data from leading DeFi TVL aggregator DeFiLlama provides a snapshot of each platform's current rates. For example, Compound has a total value locked (TVL) of $142.11 million and an annual percentage yield (APY) of 2.90%. This yield is divided into a base annual yield of 2.10% and a reward annual yield of 0.80%. Similarly, AAVE V2 has a TVL of $107 million and an APY of 2.59%, while Morpho Aave has a TVL of $72.66 million and an APY of 2.96%. The Dai Savings Rate offers the closest APY to a high-yield savings account, currently at 3.49%.

However, it’s not all doom and gloom. Some platforms offer higher yields. For example, Yearn Finance, with a TVL of $107.57 million, offers an impressive 5.45% APY (however, you’re taking on considerable smart contract risk). Similarly, Conic Finance, with a TVL of $34.58 million, offers an APY of 11.61%, a base APY of 0.62%, and a reward APY of 10.99% (it’s worth noting that some Conic mining pools recently suffered an exploit, further highlighting the risks associated with the higher yield options currently available in DeFi).

These figures highlight the current low-yield environment in the stablecoin space. However, they also highlight the diversity of the market and potential opportunities, depending on the level of smart contract risk that investors are willing to take. Different platforms offer different yields, and savvy investors can take advantage of these differences to maximize returns.

It’s also worth noting that these yields are not static. They can fluctuate based on a variety of factors, including market conditions, user demand, and changes in the underlying protocol. Therefore, it’s critical for investors to stay up to date and track the latest developments in the stablecoin yield space.

In the next section, we’ll take a closer look at the sources of these yields and explore how they contribute to the overall yield landscape in the DeFi space.

Uncovering the source of stablecoin returns

In the DeFi space, stablecoin yields mainly come from two key sources: lending and liquidity provision from automated market makers (AMMs) such as Uniswap. However, a new category of yield sources, called real world assets (RWAs), has recently emerged and is reshaping the yield landscape.

Lending platforms such as AAVE and Compound have been the traditional go-to source of stablecoin yields. These platforms allow users to earn interest by lending stablecoins to other users, who in turn pay interest for the borrowed coins. Interest rates are determined by supply and demand dynamics, with increased demand for lending causing lenders’ interest rates to rise. As of now, lending yields hover around 3%.

On the other hand, AMMs like Uniswap provide another way to earn yield. In AMMs, users can provide liquidity for trading pairs and earn fees from transactions that occur in their liquidity pools. The yield of AMMs is usually around 2%, but it may fluctuate depending on the trading volume and liquidity pool size.

This new thing, RWA, represents an exciting development in the DeFi space. RWAs are tokenized versions of real-world assets, such as real estate or company stocks that have been put on-chain. They provide stablecoin holders with a unique opportunity to earn yield from off-chain assets. Currently, the yield on RWAs is estimated to be around 5-7%, which is an attractive option for stablecoin holders seeking yield.

However, it is worth noting that each source of yield comes with its own risks and considerations. For example, lending and AMM yields are subject to smart contract risk and potential impermanent loss, while RWA yields depend on the performance of the underlying real-world asset. Since the yield is generated off-chain, RWA on-chain yields generally carry much less smart contract risk, but may also carry other risks. Overall, risk-weighted assets in the current context appear to be underutilized when comparing the risk to the yield provided.

In the next section, we’ll take a deeper look at RWA opportunities in DeFi and discuss some of the key players in the space.

Exploring Real World Asset (RWA) Opportunities in DeFi

As we transition away from traditional sources of yield, it’s worth taking a deeper look at the emerging world of real-world assets (RWAs) in DeFi. RWAs are tokenized versions of real-world assets, such as real estate or company shares, that are on-chain. They offer stablecoin holders a unique opportunity to earn yield from off-chain assets.

Major players in the T Bills space include Ondo Finance, MatrixDock, RealT Tokens, Tangible, and Maple RWA. These platforms allow users to invest in tokenized versions of traditional financial instruments and earn stablecoin yields in the process.

Ondo Finance’s total locked value (TVL) is $160.31 million, up 7.10% over the past week, indicating growing interest in its products. MatrixDock’s TVL is $99.15 million, also up slightly by 0.38% over the same period. RealT tokens and tangible assets also saw positive growth with TVLs of $82.35 million and $70.53 million, respectively, with tangible assets seeing a significant increase of 12.71% over the past week.

These platforms offer new ways for stablecoin holders to earn yield. However, an important limitation is that all of these platforms require Know Your Customer (KYC) procedures. This requirement introduces a barrier to entry and limits the accessibility of these platforms, in stark contrast to the spirit of financial inclusion that DeFi aims to promote.

KYC requirements also make these platforms incompatible with the decentralized nature of DeFi. This incompatibility raises important questions about the future of DeFi and the integration of real-world assets. How can DeFi platforms balance the need for regulatory compliance with the desire for decentralization and financial inclusion? How can they ensure that the benefits of DeFi, such as accessibility and financial inclusion, are not compromised?

These are some of the challenges that the DeFi community needs to address as it continues to explore the potential of RWAs. Despite these challenges, the emergence of RWAs represents an exciting development in the DeFi space, providing new opportunities for generating yield and potentially bridging the gap between the world of traditional finance and the world of DeFi.

Overlay the yield with the Bloom Term-Bound Yield (TBY)

Composable Corp’s new product Bloom is the first opportunity on the market to offer yields close to US Treasuries (~5%), but with a fully compliant non-KYC product, introducing true composability. TBY’s yield is typically around 5%, which is already attractive in the current low yield environment. This yield can be “stacked” with other DeFi protocols, and we will have more to say about this soon. We have a lot more to say about Bloom in the upcoming “Introduction to Bloom” blog post. Stay tuned.

The Dawn of a New Era of Stablecoin Innovation

As we navigate the intricacies of the DeFi world, it becomes increasingly clear that we are standing on the precipice of a new era of stablecoin innovation. The emergence of new sources of yield such as real world assets (RWA) and tokenized bond yields (TBY), coupled with the potential for yield stacking, has transformed the stablecoin space into a vibrant landscape, providing opportunities for experienced investors and newcomers alike.

While the current low-yield environment presents its own set of challenges, it has also ignited innovation and experimentation in the search for higher returns. The DeFi community has risen to the challenge, developing groundbreaking protocols, platforms, and financial tools that redefine the boundaries of what is possible in the stablecoin yield space.

Looking ahead, the DeFi landscape will continue to evolve and grow. It’s an exciting prospect to consider how stablecoin yields will adapt and innovate to respond to this dynamic environment. Will we witness the emergence of more innovative sources of yield? How will the intricate dance between traditional financial instruments and DeFi continue to unfold? How can regulatory compliance be balanced with the ethos of decentralization and financial inclusion?

We believe TBY will play a key role. You can imagine a future of yield-generating stablecoins backed by TBY, which can then be paired with AMMs to earn transaction fees and rewards, ushering in a new era of sustainable high yields across the stablecoin space.

One thing is certain: with the relentless pace of DeFi innovation, the future of stablecoin yields is not only promising, but exciting. We are more than just observers of this evolution; we are also observers of this evolution. We are undeniably active participants in this exciting time for stablecoin innovation. The future is bright, and it’s happening now.