Yield Bearing Stables Are Just a Fad
Stablecoins have been all the rage. And while the total stablecoin market cap is only up around 30% from the 2022 peak, yield-bearing stablecoins have dominated the narrative with 300% growth over the last year. Check out the chart of the market cap of yield-bearing stables:
And yet, while I love the experimentation, I think DeFi as a whole is overlooking a fundamental problem with these products that will throttle their adoption in the long-term.
The Disconnect
The typical yield-bearing stablecoin design pattern embraces a two-token model where one token is pegged to the US dollar, while the second token accrues a yield and rebases.
Using market leader Ethena as example, the USDe stablecoin can be staked into sUSDe to earn a portion of the basis trade yield earned by the Ethena protocol, currently earning about 6% APY.
The total supply of USDe is about 5.5 billion. However, the vast majority of this is locked in the sUSDe contract. If we look at the supply of USDe being held in wallets, available to be borrowed on lending protocols, and so on, it becomes evident that USDe has not yet begun to eat into the payment stablecoin market share. In fact, it probably only accounts for around 1% of this market.
sUSDe is a great savings product, and a great yield-generating collateral to borrow against.
But this raises an interesting dilemma: to take over market share from the major payment stablecoins, Ethena must find a way to incentivize broader usage of its USDe. Ethereal is obviously an attempt to grow USDe usage, but entrenching USDe as a major liquid DeFi token will be a challenge.
To me, the playbook is not easy to pull off. Yield-bearing stablecoin protocols must first attract interest for their yield-bearing stablecoin by providing high, sustainable yield. They must then use this interest and traction to raise awareness for their dollar-pegged stablecoin. Points and token equity must be paid out to liquidity providers to make it worth it for them to forego more liquid markets (or the staking yield) to build the payment stablecoin liquidity. The project must be successful at doing so before token equity dries up, otherwise they are left with just another savings product. Which brings me to another point…
Yield-Bearing Stablecoins Are Really Just Fund Shares
There is no inherent difference between a share of a vault, an on-chain delta-neutral fund, and a yield-bearing stablecoin. All of these simply represent a share in a trading strategy.
It would look silly if this model was applied in Tradfi. Imagine a money market fund, say SWVXX ($360B) issued a “swvUSD” that anyone could use wherever it was accepted for payment or exchange. Most people would prefer to keep trading against USD, and it likely would not compete with the USD on tradfi rails. Now imagine that every delta-neutral fund in Tradfi issued one of these. Investors would quickly get annoyed, as there’s no real reason to use them instead of the dollar.
A Contentious Conclusion
Logically, this dual-token model must be an attempt at gaining market share from payment stablecoins, but very few, if any, will be able to pull it off given that most of the incentives are directed towards growing the yield-bearing product. Any claims that these will be able to outscale USDC are simply not relevant at the time being as USDC dominates in liquidity and demand.
The only way I see the pegged token from these models finding product-market fit (without incentives) is if they embrace privacy, censorship resistance, or transparency in a way that regulated payment tokens cannot. So far, we haven’t seen much of this.
So, in summary, while the innovation is exciting and fund structure makes its way on-chain, I think we will eventually see a reversion to the concept of “fund shares” or “vault shares” in place of “ybStables” as the market consolidates and as reality puts pressure on the current narratives.
