USDC’s Max Borrow APY on Aave—the world’s largest DeFi lending protocol—has been rising since 2023 due to growing credit demand and utilization on-chain (source: Dune).
USDC’s Max Borrow APY on Aavethe world’s largest DeFi lending protocolhas been rising since 2023 due to growing credit demand and utilization on-chain (source: Dune).

1. High Stablecoin Borrowing Rates

Elevated Fed interest rates and growing demand for on-chain credit have driven up borrowing costs for digital assets in recent years, particularly for stablecoins—which now comprise nearly half of DeFi's total outstanding debt. This creates an ongoing challenge for stablecoin borrowers who face rising interest expenses as the demand for on-chain credit continues to grow.

2. No Benefits from Major Stablecoin Reserves

The leading stablecoins, USDT and USDC, generate substantial interest earnings from their collateral reserves. However, these profits don't benefit end users directly. Instead, issuers like Tether and Circle internalize most of these earnings, creating a disparity in value distribution.
As of Q2 ‘25, over 95% of stablecoin reserves globally are allocated in RWA, such as bank deposits, money market instruments, and short-dated government bonds—yielding above 4% APY. In theory, these yield streams from TradFi could be redirected to stablecoin users and dApps to stimulate on-chain economic activities. By externalizing reserve earnings, the stablecoin industry could evolve from a centralized profit center to a key driver of growth in decentralized economies, aligning more closely with DeFi's core tenets of financial inclusivity and user empowerment.

3. Structural Drawback for Yieldcoin Borrowers

Liquid staked stablecoins (yieldcoins) such as sUSDS, sfrxUSD, and sUSDe, are supply-side assets designed to externalize yields primarily to their token holders, including users who supply them to DeFi protocols. On the other hand, users who borrow yieldcoins on the demand side face a significant drawback: rapidly growing debt due to the yieldcoin’s intrinsic APY, which compounds as additional debt on top of borrowing costs.
To date, no yieldcoin project has addressed the structural issue of yield-to-debt accrual for borrowers, making them less attractive than vanilla stablecoin loans. While they remain popular among holders and suppliers, borrowers generally avoid them. As a result, yieldcoins typically have very low utilization rates on lending protocols (i.e., high capital inefficiency). This creates a structural imbalance in DeFi where yieldcoins disproportionately benefit the supply side, leaving the demand side at a disadvantage.
A supply and demand matrix for USDC during DeFi contraction and expansion cycles, where USDC demand is driven by sUSDe loopers.
A supply and demand matrix for USDC during DeFi contraction and expansion cycles, where USDC demand is driven by sUSDe loopers.