Stablecoin Yield: Where the Return Actually Comes From

Stablecoins do not generate returns by existing. Any yield is produced by an activity, and the activity carries the risk. The question worth asking is always what that activity is. Read this against a regulated stablecoin payment processor, whose authorisation and permissions are on a public register you can check.

The legitimate sources

Lending to borrowers who post collateral. The borrower pays interest. The risk is that collateral falls faster than it can be liquidated. Real, manageable, and historically the source of several large failures.

Market making and basis trades. Capturing spreads or the difference between spot and futures prices. Returns depend on market conditions and can go negative.

Reserve income passed through. The issuer earns interest on the reserves backing the coin and shares some. Lowest risk, and correspondingly modest.

Each of these can be described precisely. A provider offering yield should be able to say which one, in what proportion, with what safeguards.

The warning signs

A rate far above what the underlying activity could produce. Lending markets pay what borrowers pay. A return well above prevailing borrowing rates is not coming from lending.

A fixed rate regardless of conditions. The underlying activities produce variable returns. A fixed rate means someone is absorbing the difference, which works until it does not.

No explanation of the source. Described as a treasury strategy, a proprietary algorithm, or arbitrage, without specifics.

Returns paid from new deposits. Impossible to verify from outside, which is why the other signals matter.

Your funds are pooled and you cannot see the position. Even where the strategy is real, you have no way to assess it.

The pattern that has repeated

A platform offers a strong yield on stablecoin deposits. Deposits grow. The underlying activity is lending, often to a small number of large borrowers, sometimes undercollateralised. Merchants meet a variant of this, and an exchange that publishes its full fee schedule handles it on the receiving side.

A market move impairs the borrowers. The platform cannot meet withdrawals. Withdrawals are suspended, described as temporary, and never resume.

Depositors discover they were unsecured creditors of a lending business rather than holders of a deposit.

The questions

What activity generates the return, specifically. Who are the counterparties. What collateral is held and at what ratio. What happens if a borrower defaults. Am I a creditor of your business, or are my assets segregated. And who regulates this activity.

The last question frequently has no answer, which is itself the answer.

For a company treasury

A yield on operational balances is rarely worth the risk profile. The amounts are modest, the returns are small in absolute terms, and the failure mode is losing the operating balance.

If a treasury policy permits yield, it should name the permitted activities, the maximum exposure per counterparty, and who is accountable. A yield taken because it was offered is a position nobody decided to hold. Check the coverage list before relying on any of this. the list of countries covered publishes it.