In early 2024, yield-bearing stablecoins held about $1.5 billion in total supply. By mid-2025, that figure had exploded past $11 billion—a 7x increase that represents the fastest-growing segment of the entire stablecoin market.
The appeal is obvious: why hold dollars that earn nothing when you could hold dollars that earn 7%, or 15%, or even 20%? But the mechanisms generating these yields are anything but simple. They involve derivatives strategies, perpetual futures funding rates, Treasury bills, and complex smart contract systems that even experienced DeFi users struggle to fully understand.
And just as this new category gained momentum, regulators stepped in. The GENIUS Act, signed into law in July 2025, explicitly prohibits stablecoin issuers from offering yield to retail customers. Yet instead of killing yield-bearing stablecoins, the regulation triggered a flood of capital into protocols that found ways to stay compliant—or operate outside U.S. jurisdiction entirely.
This is the story of how stablecoins evolved from simple dollar pegs into sophisticated yield-generating instruments, who's winning the battle for $310 billion in stablecoin capital, and what risks investors face in this new paradigm.
The Market Landscape: $33 Trillion in Motion
Before diving into yield mechanisms, the scale of the stablecoin market deserves attention.
Stablecoin transaction volumes soared 72% to hit $33 trillion in 2025, according to Artemis Analytics. Total supply reached nearly $310 billion by mid-December—up more than 50% from $205 billion at the start of the year. Bloomberg Intelligence projects stablecoin payment flows could reach $56.6 trillion by 2030.
The market remains dominated by two giants. Tether's USDT holds about 60% market share with $186.6 billion in circulation. Circle's USDC commands roughly 25% with $75.12 billion. Together they control 85% of the market.
But here's the interesting twist: USDC led transaction volume with $18.3 trillion, beating USDT's $13.3 trillion despite having a smaller market cap. This higher velocity reflects USDC's deeper DeFi integration and regulatory compliance positioning.
Neither USDT nor USDC offers yield. They're the stable, boring bedrock of the ecosystem. The action—and the risk—lives in the next generation of stablecoins.
How Ethena's USDe Actually Works
Ethena's USDe emerged as the dominant yield-bearing stablecoin, reaching over $9.5 billion in circulation by mid-2025. Understanding how it generates yield requires understanding a concept called delta-neutral hedging.
The Delta-Neutral Strategy
When you mint USDe, Ethena doesn't just hold your collateral. The protocol takes your ETH or BTC, holds it as the "long" position, and simultaneously opens a short perpetual futures position of the same size.
If ETH rises 10%, the spot holdings gain value, but the short futures position loses an equivalent amount. If ETH falls 10%, the spot holdings lose value, but the short futures position gains. The result is delta-neutral—price movements in either direction cancel out, maintaining the dollar peg.
This is clever, but it raises an obvious question: if price movements net to zero, where does the yield come from?
The Funding Rate Engine
Perpetual futures contracts use a mechanism called funding rates to keep their prices aligned with spot markets. When the market is bullish and more traders are long than short, longs pay shorts a funding fee. When the market is bearish, shorts pay longs.
Historically, crypto markets trend bullish, meaning funding rates are positive more often than negative. Ethena's strategy collects these funding payments continuously. In 2024, sUSDe—the staked version of USDe—delivered an average APY of 18%, with peaks touching 55.9% during the March 2024 rally.
The protocol adds additional yield from staking a portion of its ETH collateral (earning Ethereum's native staking yield) and from interest on liquid stablecoin reserves held in instruments like BlackRock's BUIDL tokenized Treasury fund.
The Risks Nobody Wants to Discuss
The delta-neutral strategy sounds elegant, but it carries specific risks.
Funding Rate Reversal: During sustained bear markets, funding rates can turn negative for extended periods. When this happens, Ethena's short positions pay longs instead of receiving payments. The protocol maintains a reserve fund to cover these periods, but a prolonged downturn could drain reserves and force yield rates to zero—or worse.
Exchange Risk: Ethena holds its futures positions on centralized exchanges like Binance, Bybit, and OKX. While collateral is held with off-exchange custodians, the counterparty risk of exchange insolvency remains. An exchange failure during volatile markets could leave the protocol unable to close positions or access funds.
Liquidity and Depeg Risk: If confidence in USDe falters, a wave of redemptions could force the protocol to unwind positions rapidly in illiquid markets, potentially breaking the peg.
During August 2024, when funding rates compressed, sUSDe yields dropped to about 4.3%—still positive, but far from the double-digit returns that attracted initial capital. Recent yields have ranged between 7% and 30% depending on market conditions.
Sky's USDS: The MakerDAO Evolution
While Ethena bet on derivatives, MakerDAO (now rebranded as Sky) took a different path for its yield-bearing stablecoin.
From DAI to USDS
In May 2025, MakerDAO completed its "Endgame" transformation, retiring the MKR governance token, launching SKY at a 24,000:1 conversion ratio, and introducing USDS as the successor to DAI.
USDS supply surged from 98.5 million to 2.32 billion in just five months—a 135% increase. The Sky Savings Rate platform reached $4 billion in TVL, growing 60% in 30 days.
Unlike Ethena's derivatives strategy, Sky generates yield through more traditional means: lending revenue from the protocol's credit facilities, fees from the stablecoin operations, and interest from real-world asset investments.
The Sky Savings Rate
When you hold sUSDS (the yield-bearing wrapped version), you automatically earn the Sky Savings Rate—currently around 4.5% APY. Your balance increases over time without needing to lock, stake, or take any action.
This is lower than Ethena's typical yields, but it's also more predictable. Sky's yield comes from lending activity and Treasury exposure rather than volatile funding rates.
Sky activated USDS rewards for SKY stakers in May 2025, distributing over $1.6 million in the first week. The protocol now allocates 50% of revenue to stakers, and spent $96 million in 2025 on buybacks that reduced SKY's circulating supply by 5.55%.
The $2.5 Billion Institutional Bet
In a significant move, Sky approved a $2.5 billion USDS allocation to Obex, an incubator led by Framework Ventures targeting institutional-grade DeFi yield projects. This signals Sky's ambition to compete for institutional capital—the largest untapped pool of potential stablecoin demand.
The Frax Alternative: Chasing the Fed
Frax Finance represents perhaps the most ambitious regulatory strategy in yield-bearing stablecoins.
Treasury-Backed Yield
Frax's sFRAX and sfrxUSD stablecoins are backed by short-term U.S. Treasuries, purchased through a lead bank brokerage relationship with a Kansas City bank. The yield tracks the Federal Reserve's rates, currently delivering around 4.8% APY.
Over 60 million sFRAX are currently staked. While yields are lower than Ethena's peaks, they're backed by the U.S. government's credit rather than crypto derivatives—a fundamentally different risk profile.
The Fed Master Account Gambit
Frax is actively pursuing a Federal Reserve master account—the same type of account that banks use for direct access to Fed payment systems. If successful, this would represent unprecedented integration between DeFi and traditional banking infrastructure.
The strategy positions Frax as the most regulation-compliant yield-bearing stablecoin, potentially appealing to institutional investors who can't touch Ethena's derivatives exposure.
The GENIUS Act: Regulation Arrives
The Guiding and Establishing National Innovation for US Stablecoins Act (GENIUS Act), signed in July 2025, brought the first comprehensive federal framework for stablecoins—and immediate controversy.
The Yield Prohibition
The act explicitly prohibits stablecoin issuers from paying interest or yield to holders. The intent is clear: prevent stablecoins from competing with bank deposits and FDIC-insured accounts.
Banks lobbied hard for this provision, warning that yield-bearing stablecoins could drain $6.6 trillion from the traditional banking system. The concern isn't abstract: when you can earn 7% on a stablecoin versus 0.5% in a savings account, the incentive to move money is overwhelming.
The Loophole Problem
However, the act doesn't explicitly prohibit affiliated third parties or exchanges from offering yield-bearing products. This loophole allows protocols to restructure so that the stablecoin issuer doesn't directly pay yield, but an affiliated entity does.
Banking groups are now lobbying to close this loophole before implementation deadlines in January 2027. The Bank Policy Institute and 52 state banking associations sent a letter to Congress arguing that exchange-offered yield programs create "high-yield shadow banks" without consumer protections.
Ethena's Response: USDtb
Rather than fight regulators, Ethena launched USDtb—a U.S.-regulated variant backed by tokenized money-market funds rather than crypto derivatives. This makes USDtb compliant with GENIUS Act requirements while preserving Ethena's infrastructure for institutional customers.
The strategy reflects a broader pattern: yield-bearing protocols are forking into compliant (lower yield) and non-compliant (higher yield) versions, with the latter increasingly serving non-U.S. markets.
Comparing the Options
For investors navigating this landscape, here's how the major yield-bearing stablecoins stack up:
sUSDe (Ethena): Highest potential yields (7-30% depending on market conditions), but exposed to funding rate reversals and exchange counterparty risk. Largest market cap among yield-bearing options. Best for crypto-native users comfortable with derivatives exposure.
sUSDS (Sky): Lower but more stable yields (~4.5%), backed by lending revenue and RWAs. Strong institutional positioning with the $2.5B Obex allocation. Best for users seeking predictable returns with lower volatility.
sFRAX/sfrxUSD (Frax): Treasury-backed yields (~4.8%), most regulatory compliant approach. Pursuing Fed master account. Best for users prioritizing regulatory safety and traditional finance integration.
sDAI (Sky/Maker): The original yield-bearing stablecoin, still functional alongside USDS with 4-8% yields through the Dynamic Savings Rate. Best for users already in the Maker ecosystem.
The Risks That Keep Me Up at Night
Every yield-bearing stablecoin carries risks beyond what their marketing materials suggest.
Smart Contract Risk: Every yield mechanism involves complex smart contracts that could contain undiscovered vulnerabilities. The more sophisticated the strategy, the larger the attack surface.
Regulatory Risk: The GENIUS Act loophole may close. International regulators may follow the U.S. lead. Protocols may be forced to restructure or cease operations entirely.
Systemic Risk: If multiple yield-bearing stablecoins face redemption pressure simultaneously—during a market crash, regulatory crackdown, or confidence crisis—the resulting liquidations could cascade across DeFi.
Yield Sustainability: High yields attract capital until competition compresses returns. What happens to USDe's TVL when yields drop to 3% and stay there?
Where This Goes Next
The yield-bearing stablecoin category has grown from novelty to $11 billion in assets remarkably quickly. Several trends will shape its evolution.
Institutional Entry: As Sky's Obex allocation demonstrates, protocols are positioning for institutional capital. This will likely drive more conservative, Treasury-backed products rather than derivatives-based high yields.
Regulatory Arbitrage: Expect continued geographic fragmentation, with higher-yield products serving non-U.S. markets while compliant versions target regulated institutions.
Competition Compression: As more protocols enter the yield-bearing space, yields will compress toward traditional money market rates plus a DeFi risk premium. The 20%+ yields of early 2024 are unlikely to return sustainably.
Infrastructure Integration: Yield-bearing stablecoins will increasingly become the default settlement layer for DeFi, replacing traditional stablecoins in lending protocols, DEX pairs, and collateral systems.
The Bottom Line
Yield-bearing stablecoins represent a genuine innovation in how digital dollars work. Instead of idle capital, stablecoin holdings can now earn returns that range from Treasury-rate equivalents to double-digit yields.
But these yields come from somewhere. Ethena's returns come from derivatives funding rates that can reverse. Sky's yields come from lending activity that carries credit risk. Frax's yields come from Treasuries, but require trusting the protocol's banking relationships.
The GENIUS Act's yield prohibition reflects regulators' understanding that yield-bearing stablecoins compete directly with bank deposits. Whether current loopholes survive through 2027 implementation remains uncertain.
For users, the calculus is straightforward: higher yields mean higher risks. sUSDe's 15%+ returns during bull markets require accepting exchange counterparty risk and funding rate volatility. sUSDS's 4.5% offers more stability but less upside. Treasury-backed options like sFRAX provide government-backed yield but minimal premium over traditional finance.
The yield stablecoin wars have just begun. With $310 billion in stablecoin capital up for grabs, protocols that find the right balance of yield, risk, and regulatory compliance will capture enormous value. Those that miscalculate will join the crypto graveyard.
Choose your risks accordingly.
This article is for educational purposes only and should not be considered financial advice. Yield-bearing stablecoins carry risks including but not limited to smart contract vulnerabilities, regulatory changes, and collateral devaluation.
