What Are Yield-Bearing Stablecoins? How They Work & What To Watch in 2025

Key Takeaways

• Yield-bearing stablecoins offer passive income by generating returns through built-in mechanisms.
• They differ from stablecoin farming, which requires users to deposit funds actively into DeFi platforms.
• These assets carry risks, including smart contract flaws, liquidity gaps, and potential regulatory shifts.
• In 2025, stablecoins that combine transparency with sustainable strategies are gaining attention from retail and institutional users.

Stablecoins are no longer just digital assets used for making payments—they can earn yield if you hold them.

Stablecoin farming lets users earn by putting stablecoins like USDC, USDT, or DAI to work in decentralized finance (DeFi).

Instead of leaving funds idle, users deposit them into lending platforms, liquidity pools, or reward-based protocols. These platforms pay yield through interest or incentives. 

Users manage the process—choosing where to farm, tracking returns, and switching strategies. It is a hands-on way to earn passive income while holding dollar-pegged assets.

Yield-bearing stablecoins take a different approach. They build the earning system into the token itself. Users do not need to farm or deposit elsewhere (e.g., staking). Just holding the token triggers automatic returns. 

The protocol handles everything behind the scenes. Both methods aim to generate yield, but only one does it passively.

This article explains how yield-bearing stablecoins work, their differences with other options, and the risks. 

What Are Yield-Bearing Stablecoins and How Do They Work?

Yield-bearing stablecoins are digital assets on the blockchain designed to maintain a stable value. They are typically pegged to a fiat currency like the US dollar to create returns for investors. 

Unlike traditional stablecoins such as USDT or USDC, which are purely pegged to a fiat value and do not offer returns, yield-bearing stablecoins integrate mechanisms that accrue interest or rewards over time.

Some examples are:

• sDAI (Savings DAI): An interest-bearing version of DAI that earns from the DAI Savings Rate (DSR). Earns yield through the DAI Savings Rate (DSR), managed by Sky (previously MakerDAO). Users lock DAI into the DSR contract and receive sDAI, which grows in quantity (not value) as yield accrues.
• USDY and USDM: Tokenized stablecoins backed by short-term U.S. Treasury yields;  these stablecoins offer yield by passing on returns from government bonds, often appealing to more regulated or institutional investors.

Notably, tokens like aUSDC or aDAI are not stablecoins but interest-bearing tokens issued by Aave. Users deposit USDC or DAI into Aave’s lending protocol and receive aUSDC or aDAI, which accrue interest over time.

How Yield-Bearing Stablecoins Generate Yield

Yield-bearing stablecoins use several mechanisms to provide returns while maintaining a stable value:

• DeFi lending protocols: Stablecoin issuers deposit user funds into decentralized lending platforms such as Aave or Compound. These platforms pay interest on the deposits, and the issuer passes the yield directly to holders, often through interest-bearing tokens.
• Staking and rewards: Projects stake collateralized assets—typically other cryptocurrencies such as ETH or DOT—on behalf of users. They collect staking rewards and distribute them proportionally to stablecoin holders.
• Tokenized real-world assets (RWAs): Issuers invest user funds into yield-generating financial instruments like short-term U.S. Treasury bonds. They tokenize the returns and distribute them as yield to users.
• Rebasing mechanisms: Certain protocols use algorithmic rebasing automatically to increase users’ token balances over time, reflecting accrued yield without requiring manual claims or transfers.

What Is YLDS & How Does It Work

​YLDS, introduced by Figure Markets , is the first SEC-registered yield-bearing stablecoin in the U.S., operating on the Provenance blockchain.

It offers holders an annual yield of over 3%, calculated as the Secured Overnight Financing Rate (SOFR) minus 0.50%. Interest accrues daily and is distributed monthly. Unlike USDT or USDC, YLDS passes reserve-generated interest directly to verified holders.

YLDS is backed by a portfolio of assets, primarily short-term U.S. Treasuries and other low-risk instruments, resembling prime money market funds.

However, it may include some higher-risk assets like asset-backed securities, and its assets are not held in a ring-fenced trust, meaning they are not fully segregated from the issuer’s assets in bankruptcy scenarios.

Key Differences Between Yield Stablecoins and Traditional Stablecoins

Yield-bearing stablecoins aim to combine price stability with passive income. Built-in systems like DeFi lending, staking, RWAs, or rebasing generate yield directly within the protocol. 

Users earn simply by holding them, without needing to stake or lend elsewhere. 

While these stablecoins carry higher risks due to smart contract flaws and regulatory uncertainty, they support broader use cases like savings, income, and active participation in DeFi ecosystems.

Top Yield-Bearing Stablecoins To Watch in 2025 

Several stablecoin issuers are heading the race to combine returns with dollar stability. 

• USDe by Ethena: USDe offers algorithmic yield by using delta-neutral strategies—a method that balances long and short positions to reduce exposure to price swings. Simply put, it earns yield from staked ETH while taking short positions in derivatives to cancel out price volatility. This helps keep USDe stable around $1 while still generating high returns.
• sDAI and aDAI: Built on Sky and Aave, these stablecoins let users earn while staying in DAI.
• USDY: Pays through exposure to short-term U.S. Treasuries.
• OUSD by Origin: Delivers yield without staking and integrates with DeFi protocols.
• YLDS: The first Securities and Exchange Commission (SEC)-registered yield-bearing stablecoin, linked to traditional financial instruments under full compliance.

These coins blend DeFi and traditional finance to serve crypto native users and institutional buyers.

Risks of Investing in Interest-Earning Stablecoins

Stablecoins that pay yield may seem like passive income, but users must weigh the risks hidden beneath the returns. These are the most important ones to know:

• Smart contract flaws: Bugs or exploits in yield protocols can freeze or drain funds. Many losses start with one line of broken code.
• Liquidity crunches: If the assets backing the yield cannot be sold quickly—especially in stress events—users may face withdrawal delays or depeg events.
• Losing the peg: Yield-bearing stablecoins can fall below $1 if their mechanisms break, users panic, or returns cannot be sustained.
• Regulatory shifts: Pending U.S. legislation, such as the STABLE Act (focused on issuer oversight) or GENIUS Act (supporting blockchain innovation), could reclassify these assets as securities, impacting operations.
• Protocol defaults: If yield comes from lending, borrowers or partner platforms can default or get hacked, exposing users.
• Too complex to trust: Some yield strategies are hard to understand. If users cannot track how the return is made, they cannot judge the risk.
• Market downturn risk: Even stablecoins can suffer in a crash, mainly if returns depend on risky crypto assets.
• Off-chain dependencies: Stablecoins backed by RWAs must trust banks, custodians, and brokers, adding risk beyond the blockchain.

Regulatory Risks Facing Yield-Bearing Stablecoins

Yield-bearing stablecoins are drawing attention well beyond crypto natives. In 2025, traditional finance (TradFi), regulators, and the general market will reshape their work. The result is rising demand, stricter scrutiny, and a new push for transparency.

Institutional Momentum

Big banks and asset managers now offer tokenized treasuries and launch yield-bearing stablecoins, betting on strong demand for on-chain instruments. These digital versions of traditional assets like U.S. Treasuries are designed to earn yield while staying easily tradable on blockchain networks.

Upcoming Regulation

U.S. will finalize rules on stablecoin audits, asset backing, and disclosures. The STABLE Act emphasizes strict issuer compliance, while the GENIUS Act promotes innovation with lighter oversight, both shaping stablecoin operations.

Risk and Transparency Focus

Users and regulators are now watching how issuers manage risk and report their holdings. This means they want to see exactly what assets back the stablecoin and how the issuer protects against losses, like through hedging strategies such as shorting ETH, using derivatives, or diversifying across stable and low-risk assets. Full visibility into the backing assets and risk controls is becoming a core expectation.

Conclusion

Yield-bearing stablecoins are redefining passive income in crypto by blending price stability with real returns. Projects like USDe, sDAI, and USDY show how stablecoins can now generate yield by tapping into DeFi, real-world assets, or algorithmic strategies. 

But higher returns come with risks—from smart contract flaws and liquidity gaps to regulatory changes and off-chain dependencies. 

As 2025 shapes the future of this space, users must weigh the rewards against the risks and choose stablecoins with transparent strategies and proven pegging models.

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