Understanding Stablecoin Yield: A Framework for Risk-Based Allocation

Stablecoins like USDT are often perceived as safe-haven assets with steady prices. However, the yield side of stablecoins can be more complex and nuanced.

The return on investment in stablecoin yield comes from various sources, including borrowers, trading fees, or real-world assets such as short-term US Treasuries. To earn interest, one must place their USDT into a yield product, which can take the form of CeFi savings accounts, DeFi lending pools, or tokenized Treasury products.

CeFi products, like Nexo's Earn page, offer fixed-term yields and are often easy to use but come with counterparty risk. DeFi lending protocols, such as Aave, pay users through market demand, which can change rapidly.

Four notable examples of stablecoin yield products include USDY, OUSD, Curve, and Pendle, each with distinct characteristics and risks. USDY ties its yield to short-term Treasuries, while OUSD routes yield through DeFi strategies. Curve pays liquidity providers from trading fees, and Pendle can turn floating yield into fixed yield.

When considering stablecoin yield allocation, users should prioritize risk assessment over chasing high yields. A balanced approach involves allocating funds according to one's comfort level, with options ranging from low-risk Treasury-backed products to higher-risk DeFi pools.