High Stablecoin Borrowing Rates
Elevated Fed interest rates and soaring stablecoin borrowing demand in recent years have contributed to a spike in DeFi credit costs, particularly during periods of high demand. Stablecoins, predominantly USDC and USDT, now comprise over a third of total DeFi outstanding debt. This trend poses a concern for stablecoin borrowers who must face rising interest expenses as the appetite for DeFi liquidity and leverage continues to grow.
No Benefits from Major Stablecoin Reserves
The leading stablecoins, USDT and USDC, generate substantial float interest from their collateral reserves, yet this yield doesn't benefit end users, including lenders and borrowers. Instead, issuers like Tether and Circle internalize this income, creating a disparity in value distribution.
As of Q3 2024, over 90% of global stablecoin reserves are allocated to real-world assets (RWA) such as bank deposits, money market instruments, and short-dated government bonds, yielding roughly 5% APY. In theory, these yields from traditional finance (TradFi) could be redirected to stablecoin users and dApps to stimulate on-chain activities. By externalizing this benefit, the stablecoin industry could evolve from a centralized profit center to a key driver of decentralized economic growth, aligning more closely with DeFi's core tenets of financial inclusivity and user empowerment.
Structural Drawback for Yieldcoin Borrowers
Yield-bearing stablecoins, or “yieldcoins,” such as sDAI from Sky (formerly MakerDAO) and sFRAX from Frax, do externalize float interest but only to the token holders, including suppliers/depositors of yieldcoins on DeFi platforms. On the other hand, yieldcoin borrowers face a significant drawback: rapidly increasing debt due to yield accrual on their loans, compounded by additional borrowing costs.
This structural issue of compounding debt has not been addressed by most yieldcoin projects, making them unattractive for borrowers compared to vanilla stablecoin loans. Furthermore, it creates an imbalance in the DeFi ecosystem, where yieldcoins primarily benefit buy-side demand (holders and suppliers), leaving sell-side demand (borrowers) at a disadvantage.