SOTN 379 On Chain Yield

Coin Metrics State of the Network: Issue 379

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Stablecoins Capturing On-Chain Yield By: Cooper Duschang, Research Associate & Tanay Ved, Senior Research Associate

Key Takeaways ●​ The stablecoin market is over $290B. Across Aave v3 and Morpho, more than $8.6B is deposited in lending protocols earning interest from borrowers.

●​ The same stablecoin on different lending protocols can have different returns. The USDC lending rate on Aave and Morpho is on average 31 bps below and 65 bps above the 1-year treasury rate respectively. ●​ Stablecoin interest does not consistently outperform traditional fixed-income products. However, if invested since 2024 on Aave, USDC outperforms ETH lent on Aave by 50 bps, showing stablecoins are a productive source of steady yield.

Introduction The U.S. treasury market trades $1.2 trillion per day. Ranging from U.S. treasury bonds to junk bonds, fixed-income products are effective products to earn interest on idle assets. The stablecoin market has grown to over $290 billion. Holders can deposit stablecoins in different on-chain venues, popularly lending protocols including Aave and Morpho, to earn yield just like traditional financial instruments.

The introduction of tokenized treasuries, corporate bonds, and money market funds on-chain has expanded the number of opportunities to earn interest on assets, or borrow against them. These assets provide competitive rates to stablecoins in lending protocols. The expansion should lead investors to reevaluate the risks and rewards of owning different yield-bearing products.

In this State of the Network, we break down the additional risks earning on-chain yield, stablecoin and lending protocol differentiations leading to diverse returns, and stablecoin versus volatile asset lending.

Blurring the Line Between Traditional and On-Chain Yield Investors have historically invested in short-term treasuries and money market funds to earn yield with minimal risk exposure. The returns on these investments are relatively low but also considered safest because of the asset’s short duration and deep liquidity.

The emergence of on-chain yield includes yield-bearing stablecoins, interest on stablecoin deposits in DeFi protocols, and tokenized treasuries that possess similar properties to traditional fixed-income. They both are intended for low-risk, consistent returns, backed by credible institutions and reserves.