Key takeaways
- Stablecoins come in multiple forms — fiat-backed, crypto-collateralized, algorithmic and yield-bearing — each with different risk and return profiles.
- Yield-bearing stablecoins generate passive income through DeFi lending, staking or real-world assets like US Treasurys.
- Top examples include USDY, USDM and OUSD, each using different models to deliver onchain yield without requiring staking.
- Risks include smart contract vulnerabilities, platform exposure and regulatory uncertainty, making due diligence essential before use.
If you’ve spent time in crypto, chances are you’ve encountered stablecoins. They’re the quiet workhorses of the digital asset space, not as flashy as Bitcoin (BTC) or as complex as DeFi protocols, but essential. So, what exactly are they?
At their core, stablecoins are cryptocurrencies designed to hold a steady value, usually pegged to something familiar like the US dollar, the euro or even gold. While most crypto assets swing wildly in price, stablecoins stay (mostly) grounded, which makes them incredibly useful.
Why does this matter?
Because price stability is something crypto has historically lacked. Traders, investors and everyday users need a reliable way to move value around without worrying about losing 10% overnight. That’s where stablecoins come in. They’re used for payments, as collateral, for yield farming and as a hedge during market dips. You’ll see them everywhere, from centralized exchanges to DeFi protocols.
Traditional stablecoins: What are they?
Not all stablecoins are built the same way. Here are the most common types:
- Fiat-collateralized stablecoins (USDC or USDT): These are backed 1:1 by fiat currency reserves, usually stored in a bank account. They're the most straightforward and widely used.
- Crypto-collateralized stablecoins (like DAI): These are backed by other cryptocurrencies rather than fiat. They tend to be more decentralized but require overcollateralization to manage risk.
- Algorithmic stablecoins (like the now-infamous UST): These rely on code and market incentives to maintain their peg, with no backing assets involved. Some have worked temporarily, but many have failed dramatically.
- Commodity-backed stablecoins (like PAX Gold): Pegged to real-world assets such as gold, these offer an interesting hybrid of crypto convenience and tangible value.
Each type comes with trade-offs in terms of transparency, risk, and decentralization – and understanding those differences is key, especially as we head into a world where yield-bearing stablecoins are starting to take center stage.
What are yield-bearing stablecoins?
Stablecoins have already proven themselves to be essential tools in crypto. They offer the stability traders need without leaving the onchain world. But what if those stablecoins could also earn you passive income? That’s exactly what yield-bearing stablecoins aim to do.
Stablecoins with interest
In short, yield-bearing stablecoins are stablecoins that not only hold a steady value (usually pegged to the US dollar) but also generate yield while you hold them. Think of them as stablecoins with APY. Your balance can grow over time, often without needing to stake, lock up or move your tokens.
It’s a simple idea, but it unlocks a powerful use case: earning yield on stablecoins while staying stable.
How stablecoins generate yield
There’s no one-size-fits-all model, but here are a few common stablecoin income strategies:
- DeFi lending protocols: Your stablecoins get lent out on platforms like Aave or Compound, and the interest earned gets passed back to you.
- Liquidity provision and staking: Some projects deploy the funds into DEX pools or staking systems to earn trading fees and incentives.
- Traditional asset yield: Others back their stablecoins with real-world assets like US Treasury bills and share the interest with holders.
Real-world examples of stablecoins with yield
USDY by Ondo Finance
USDY is backed by short-term US Treasurys and bank deposits. You hold it, and it automatically accrues yield, no staking, no clicking, no friction. The yield is built into the token. It’s available on Ethereum, Solana and Arbitrum and is mainly geared toward non-US investors — a great example of real yield crypto.
USDM by Mountain Protocol
USDM is also backed by US Treasury bills but takes a different approach; it uses a rebasing model. That means the number of tokens in your wallet increases daily to reflect the yield earned. It’s fully regulated in Bermuda and offers a compliant path to crypto savings stablecoins.
OUSD by Origin Protocol
OUSD is a DeFi-native stablecoin backed by Tether USDt (USDT), USDC (USDC) and Dai (DAI). It puts those assets to work in platforms like Aave and Convex and then distributes the yield to holders automatically. No staking or locking is needed. Your balance just goes up over time. It’s simple, composable and made for the Ethereum ecosystem.
Did you know? USDM’s rebasing model distributes yield automatically and makes the token compatible with certain auto-compounding DeFi vaults, creating layered earning potential.
Difference between stablecoins
Risks and challenges of yield-bearing stablecoins
Yield-generating crypto is a clever innovation — stablecoins that don’t just sit there but actually grow. With any new tool in crypto, it’s worth understanding the trade-offs. These tokens might look like safe parking spots for your capital, but they come with a few strings attached.
1. Smart contract risks
Many of these stablecoins rely on smart contracts to generate and distribute yield. That opens the door to potential bugs or exploits. It’s not theoretical. OUSD was hacked in 2020 due to a vulnerability in its contracts. While the team has since beefed up security, it's a reminder that “set and forget” in DeFi can come with hidden risks.
2. Exposure to underlying platforms
OUSD, for example, earns yield by deploying funds into DeFi lending platforms like Aave and Convex. That means your returns depend on those platforms functioning properly. If one fails or a liquidity crunch hits, it could impact your holdings.
3. Regulatory uncertainty
Some stablecoins are fully regulated (like USDM in Bermuda), while others operate in a gray area. If regulators classify certain yield-bearing tokens as securities, they could face restrictions or be pulled from certain markets.
4. Yield isn’t guaranteed
These coins offer yield, but that yield can fluctuate. If DeFi lending rates drop (OUSD) or Treasury yields fall (USDY, USDM), your passive income could shrink. You’re not locked in like a bond, which means returns can vary with the market.
5. Centralization and governance
Tokens like USDM and USDY are managed by centralized teams that control how the assets are invested and how yields are distributed. That’s not inherently bad, but it does mean you’re trusting someone to manage risk responsibly.
6. Liquidity and adoption
Yield-bearing stablecoins are still a niche. You won’t find them accepted on every DeFi protocol or exchange. If you need to exit quickly, available liquidity might be limited, especially during market stress.
Did you know? Projects like OpenEden and Matrixdock are pioneering tokenized repo markets, where stablecoins fund fully collateralized short-term loans backed by US Treasurys, giving holders exposure to real-world repo yields directly onchain.
What’s next for passive income stablecoins?
Stablecoins already play a critical role in the crypto ecosystem, primarily as a stable medium of exchange and store of value. With the emergence of yield-bearing stablecoins, their utility is expanding into passive income and decentralized finance. The key question now is where is this trend heading next?
Projects like USDY and USDM, backed by US Treasurys, are bridging traditional finance and crypto. These tokenized yield products look and behave like money market funds, making them appealing to institutions and fintech platforms exploring crypto interest-bearing assets.
Meanwhile, innovation is just getting started. Future stablecoins might allow users to pick their own crypto yield strategies or blend risk profiles in a single token.
Of course, regulation will play a key role. Projects prioritizing transparency, compliance and strong backing will likely thrive, especially those distinguishing fiat-backed vs crypto-yield stablecoins.
Stablecoins with yields are evolving into powerful financial instruments that combine safety with return. Whether you're comparing USDC vs yield stablecoins or exploring the difference between stablecoins, the shift is clear: The future of crypto will be defined by sustainable, smart income tools.
And yield-bearing stablecoins are at the heart of it