1. High Stablecoin Borrowing Rates
Elevated Fed interest rates and soaring demand for on-chain debt in recent years have contributed to a spike in DeFi credit costs, especially during crypto market rallies. Stablecoins, predominantly USDC and USDT, now comprise over a third of DeFi’s total outstanding debt. This trend is a growing problem for stablecoin borrowers who must face rising interest expenses as the appetite for DeFi liquidity and leverage increases over time.
2. No Benefits from Major Stablecoin Reserves
The leading stablecoins, USDT and USDC, generate substantial interest earnings from their collateral reserves. However, these yields 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 Q1 2025, roughly 90% of the global stablecoin reserves are allocated to real-world assets (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 incentivize on-chain activities, stimulating growth. By externalizing reserve earnings, the stablecoin industry could evolve from a centralized profit center to a key driver of the decentralized economy, aligning more closely with DeFi's core tenets of financial inclusivity and user empowerment.
3. Structural Drawback for Yieldcoin Borrowers
Yield-bearing stablecoins, i.e., "yieldcoins," such as sUSDS, sfrxUSD, and sUSDe, do externalize interest earnings, but primarily to the token holders, including users who supply them to DeFi protocols. On the other hand, yieldcoin borrowers face a significant drawback: rapidly growing debt due to the token’s intrinsic yield—which compounds as new debt—on top of borrowing costs from the lending protocol.
Most yieldcoin projects have not addressed this structural issue of yield accrual as debt for borrowers, making them less attractive than vanilla stablecoin loans. While they remain popular among holders and suppliers (i.e., loopers, LPs), borrowers generally avoid them. As a result, yieldcoins tend to have very low utilization on lending protocols. This creates an imbalance in DeFi where yieldcoins disproportionately benefit the supply sides and buy sides, leaving sell-side demand at a disadvantage.
