Stablecoin yield: where does the 5-8% actually come from?

A traditional savings account pays 0.01% to 0.5% annually. Stablecoin platforms advertise 5%, 8%, sometimes 20% or more. The spread between these numbers raises an obvious question: who is paying for this yield, and can they keep paying?

Key takeaways

Four yield sources: T-bill returns, lending spreads, token incentives, liquidity provision fees
Yields exceeding T-bill rates (4.5-5.5%) require additional risk or unsustainable subsidies
The Terra/UST collapse demonstrated catastrophic failure when yields depend on circular economics
Evaluate sustainability by asking: who pays this yield, and can they continue paying?
Risk categories include smart contract, counterparty, regulatory, and de-peg risk

Risk Disclosure: Stablecoin investments carry the risk of total loss. Historical returns do not predict future performance. This content provides education, not financial advice. Consult qualified professionals before making investment decisions.

Basic economics of stablecoin yield

Yield exists when someone values temporary access to capital more than the cost of paying interest. Stablecoin yields emerge from the same economic forces that drive traditional finance. Borrowers need capital. Lenders provide it. The interest rate reflects the balance between supply and demand, adjusted for risk.

When you deposit USDC into a lending protocol, you receive a share of interest paid by borrowers. The protocol takes a small cut, typically 10-20% of interest revenue, and distributes the remainder to depositors.

Source 1: Treasury bills

Circle, the issuer of USDC, maintains reserves backing each token in circulation. These reserves sit in cash and short-term US Treasury bills. Treasury bills currently yield between 4.5% and 5.5% annually.

When Circle holds $24 billion in T-bills earning 5%, that generates roughly $1.2 billion in annual interest revenue. Historically, Circle retained all reserve yield as corporate profit. Newer products now share portions with users.

This yield source carries the lowest risk profile. The underlying return derives from US government debt obligations. Any platform offering significantly more than prevailing Treasury rates must derive the excess from other sources.

Source 2: Lending market spreads

Decentralized lending protocols connect borrowers directly with lenders. Aave, the largest by deposits, held over $20 billion in assets across multiple chains as of late 2024. These protocols set interest rates algorithmically based on supply and demand.

USDC yields on major lending protocols typically range from 3% to 12%, fluctuating with market conditions. Three primary borrower categories exist: leveraged traders who borrow to increase exposure, arbitrageurs who borrow for short periods, and institutions maintaining liquidity across venues.

Overcollateralized lending provides a safety buffer. A borrower posting $150 in ETH collateral to borrow $100 USDC creates a 50% buffer before insolvency. Liquidation systems can fail during extreme volatility, creating bad debt.

Source 3: Token emissions

Many DeFi protocols boost advertised yields by distributing governance tokens. A lending pool paying 4% in stablecoin interest might add 6% in token rewards, advertising "10% APY" in marketing materials.

When protocols distribute tokens faster than value accumulates, each token becomes worth less over time. The bonus yield might translate to 3% or 1% or zero in actual realized value, depending on token price trajectory.

The Terra/UST collapse

Terra's Anchor protocol offered 19.5% yield on UST deposits. At its peak, Anchor held over $14 billion. Anchor's borrowing demand generated only 2-3% in genuine interest revenue. The remaining 16-17% came from "yield reserves" subsidized by LUNA token sales.

When confidence wavered in May 2022, withdrawals exceeded the system's ability to defend the peg. UST collapsed from $1 to under $0.10. LUNA collapsed from $80 to fractions of a penny. $40 billion in value evaporated within days.

Source 4: Liquidity provision

Automated market makers like Uniswap and Curve allow users to deposit assets into trading pools. Stablecoin pools generate yields from trading volume. Curve stablecoin pools typically yield 1-5% from trading fees.

Liquidity provision introduces impermanent loss risk. When one stablecoin temporarily depegs, liquidity providers experience losses as the AMM rebalances their positions.

Risk categories

Smart contract risk

Stablecoin yield products operate through smart contracts that can contain bugs. Major exploits have extracted billions from DeFi protocols. The Euler Finance hack drained $197 million. No protocol possesses perfect security.

Counterparty risk

Centralized yield products introduce counterparty exposure. The collapse of Celsius, Voyager, and BlockFi in 2022 demonstrated this risk. Users discovered deposits locked in bankruptcy proceedings.

Regulatory risk

Regulatory treatment of stablecoin yields remains uncertain. The SEC has argued certain yield products constitute securities. Regulatory action can freeze withdrawals or force product shutdown.

De-peg risk

Stablecoins can lose their dollar peg. USDC dropped to $0.87 during the SVB crisis. UST collapsed to near zero. A 10% yield becomes meaningless if the underlying stablecoin loses 50% of its value.

Evaluation framework

Step 1: Identify the exact yield source. Read documentation until you can trace cash flows from origin to your wallet.

Step 2: Compare against risk-free benchmarks. Returns modestly above Treasury rates (1-4% premium) can derive from lending spreads. Returns dramatically above (10%+) require extraordinary justification.

Step 3: Assess the risk stack. List every failure point: smart contract bugs, oracle failures, counterparty insolvency, regulatory action, de-peg events.

Step 4: Size positions appropriately. Capital allocated should represent money whose complete loss would not compromise financial stability.

Step 5: Monitor ongoing conditions. Yield sources can change. Protocols can suffer exploits. Active monitoring protects against slow-moving risks.

See live data

Links open DefiLlama or other external sources.

Related Concepts

Real yield vs ponzinomics: Distinguishing sustainable from unsustainable returns
What is RWA: How Treasury-backed yields connect to stablecoins
RWA finance: How real world assets integrate with DeFi
Cost of funds in DeFi: Understanding lending economics

FAQ

Where does stablecoin yield come from?

Four sources: Treasury bill returns on issuer reserves, lending market interest spreads (borrowers pay to access capital), protocol token incentives, and liquidity provision fees from trading activity.

Is stablecoin yield safe?

No yield is completely safe. Risks include smart contract bugs, counterparty insolvency, regulatory action, and stablecoin de-pegging. Higher yields typically involve higher risks or unsustainable subsidies.

What yield rate should raise red flags?

Yields significantly exceeding Treasury bill rates (currently 4.5-5.5%) without clear revenue sources warrant skepticism. Sustainable DeFi yields typically range from 3-15% depending on risk level.

How do I verify yield sustainability?

Calculate whether protocol revenue covers distributed rewards. If yields depend on token emissions or require continuous new deposits, they're likely unsustainable.

What happened with Terra/UST?

Terra's Anchor offered 19.5% yield funded by reserves and token sales rather than genuine revenue. When confidence broke, $40 billion evaporated as UST de-pegged and LUNA hyperinflated.

Cite this definition

Stablecoin yields derive from Treasury bill returns, lending market interest spreads, protocol token incentives, and liquidity provision fees. Sustainable yields come from real economic activity where borrowers pay for capital access. Yields significantly exceeding Treasury rates require scrutiny, as demonstrated by the Terra/UST collapse where unsustainable 19.5% yields led to $40 billion in losses.