IOSG: From Interest-Bearing Stablecoins to Crypto Credit Products

Original Title: "IOSG Weekly Brief | On-chain Yield Landscape: From Interest-Bearing Stablecoins to the Evolution of Crypto Credit Products"

Original Source: IOSG Ventures

TL; DR

· Stablecoin-Based Fixed Income Products Will Be More Favorable in Bear Markets

- All products see TVL increase during bull markets, but performance diverges significantly in bear markets. Investors in bear markets tend to prefer more stable returns and lower underlying risks, driving the growth of interest-bearing stablecoins

· Protocols Moving Towards Frontend and Backend Development

- Leading DeFi protocols are starting to build their own wallets and mobile apps to control the traffic flow. The crypto industry is entering the application era, where retail users can access financial services through mobile apps

- The demand for native stablecoins in new L1/L2 and DeFi projects will drive interest protocols towards a "backend" model, bringing significant demand to interest protocols

· Interest Rate Cuts, Decline in Government Bond Yields, and the Rise of Alternative RWA Yield Sources

- Expected interest rate cuts will lead to a decrease in government bond yields. This will encourage stablecoins to include a wider range of real-world assets as underlying assets

- Real-world businesses and financial products can become stable sources of income, serving as a unique advantage for the interest protocol even in weaker frontend conditions.

Current On-chain Yield Landscape

We analyzed 18 on-chain yield products covering various sources of income. These include tokenized government bonds and their derivatives, native staking (ETH/SOL), liquidity staking tokens (LST) such as Lido and Jito, interest-bearing stablecoins (sUSDe, SyrupUSD), protocol revenue-sharing models (JLP, SKY), DeFi strategies and ecosystem incentives (Lido GGV, SIUSD/LIUSD, asBNB), DEX LP (Uniswap), market-making (HLP), and RWA products (PRIME, USDai, USP). For each product, this article evaluates from dimensions like APY, liquidity, withdrawal time, and key risks.

▲ Source: IOSG; Data as of November 2025, USP, SIUSD, LIUSD data as of January 2026

▲ Source: Surf

Earnings Model

On-chain revenue has eight different mechanisms, each with its own earnings, risks, and sensitivity to market impact:

Consensus rewards (ETH/SOL staking, LST) provide stable, protocol-level security revenue. Funding rate arbitrage and protocol revenue are influenced by market cycles, strong in a bull market and compressed in a bear market. Lending and RWA revenue introduce counterparty risk but are relatively stable. LPs can capture trading fees. DeFi strategies and ecosystem incentives aggregate multiple protocol revenues, also carrying smart contract risk.

Risk Stratification

Products are mainly at risk in the following four dimensions:

· Protocol Risk: Technical risk, including smart contract risk

· Counterparty Risk: Dependency on centralized entities or off-chain participants

· Strategy Risk: Exposure to asset price volatility or strategy issues

· Liquidity Risk: TVL depth and withdrawal mechanisms

The ultra-low risk layer includes tokenized national debt and matured lending. Low-risk products such as native staking and liquidity staking derivatives introduce smart contract risk, but their code is very mature, thus the risk is lower. Medium-risk products increase protocol complexity through DeFi strategy aggregation or protocol revenue sharing, facing token price volatility and revenue fluctuation risks. High-risk products present multiple layered risks, funding rate strategies experience reduced returns in a bear market, market manipulation risks for liquidity provider Vaults, and emerging RWA protocols involve third-party participants, leading to opacity and limited liquidity issues.

Key Findings and the Future of On-Chain Revenue

Stablecoin-Backed/Relatively Fixed Rate Products are the Go-To in a Bear Market

We have conducted an in-depth analysis of the TVL and APY performance of different yield products in bull and bear markets. We selected stETH (staking), JitoSOL (staking), sUSDS (lending), WETH/USDT (Uniswap DEX LP), SyrupUSDC (Maple lending), and sUSDE (Ethena funding rate strategy) as representatives of different yield products. The bull market lasted approximately from June to October, after which the market turned bearish.

▲ Source: DeFiLlama

Looking at the TVL data, during the bull market, the TVL of all products increased. However, in the bear market, the TVL of stETH, sUSDE, and JitoSOL decreased, while the TVL of sUSDS and SyrupUSDC increased.

▲ Source: DeFiLlama

The APY of WETH/USDT pool and stETH remained relatively stable in different market conditions. The APY of JitoSOL, SyrupUSDC, sUSDE, and sUSDS all decreased, with sUSDE and SyrupUSDC experiencing significant drops. The chart also shows that products with higher APY have greater volatility. The APY of sUSDS is mainly governance-driven rather than market-driven, thus remaining stable most of the time.

Overall, stablecoin-backed yield products shine in a bear market, attracting more attention and liquidity. Non-stablecoin-based yield products experience TVL decreases due to the underlying asset price drops in a bear market. Investors also prefer more stable yields and lower underlying risks, driving the growth of yield stablecoin TVL.

In a bear market, relatively fixed-rate products are a more sensible choice. Although sUSDS is not market-driven, its APY is stable and predictable in the medium term. The APY of sUSDE is highly influenced by market conditions, leading to significant fluctuations, making it less ideal during a bear market.

This also illustrates that when evaluating on-chain yield opportunities, looking only at the APY may not fully reflect the potential returns. The underlying asset plays a crucial role in determining actual performance, especially for products like JLP (an index fund consisting of SOL, BTC, ETH), asBNB, and SKY. In these cases, token price fluctuations often exceed the APY itself, making asset selection equally important as yield. However, some investors may mitigate this risk through hedging strategies, such as shorting equivalent underlying assets on CEX or DEX, thereby insulating themselves from underlying asset price volatility and only capturing interest income.

Protocol Development Toward Frontend and Backend

In the past, stablecoins were a great business due to the 4% yield on government bonds. However, yield-bearing stablecoins are products that share almost 100% of the government bond yield with users, posing some challenges to traditional stablecoins. Since 2024, the market share of interest-bearing stablecoins has been steadily increasing. If we look at the supply of the top three native yield-bearing stablecoins and the top three non-native yield-bearing stablecoins (USDT, USDC, PYUSD, USDe, USDS, USDY), the market share of native yield-bearing stablecoins has increased from 0.1% to 7.6%, peaking at 11.5%.

▲ Source: Artemis

This is why many DeFi protocols are starting to control the flow of traffic and trying to establish their own distribution channels. Many major DeFi protocols are building their wallets or mobile apps to control entry points.

This also indicates a trend: the crypto industry is entering the application era. Retail users can access financial services through mobile apps, which is a more convenient entry point into Web3 for Web2 users. These apps can also provide mnemonic-free services to lower the learning curve.

The demand from L1 and DeFi projects for proprietary stablecoins will be a key catalyst for the future growth of interest protocols. Interest protocols may also shift towards a "backend" model.

Given the current stablecoin supply situation, if all L1 blockchains deploy their stablecoins instead of relying on USDT or USDC, their revenue could double or triple. This presents a significant incentive for project teams. This trend is already clear, with MegaETH, Jupiter, Hyperliquid, BNB all launching their stablecoins, which will create significant demand for interest protocols.

Ethena has already seen this trend. They offer Stablecoin-as-a-Service, bringing sovereign yield to these projects. Protocols and chains can generate significant stable returns by deploying their own stablecoins.

▲ Source: DeFiLlama

Rate Cuts, Decline in Sovereign Yields, and the Rise of Alternative RWA Revenue

The landscape of on-chain yields will also shift due to the U.S. monetary policy.

▲ Source: FOMC

President Trump has nominated Kevin Warsh to succeed Powell as Fed Chair, with approval expected to be completed by May 2026.

The nomination of the new Fed Chair is expected to expedite the rate-cutting process, leading to a decrease in U.S. Treasury (T-Bill) yields.

▲ Source: FOMC participants' assessments of appropriate monetary policy: Midpoint of target range or target level for the federal funds rate; Dec 10th, 2025

This will prompt stablecoins to include a wider range of RWAs as underlying assets, thereby diversifying their underlying assets. Figure's PRIME is a typical example of bringing HELOC returns on-chain. HELOC (Home Equity Line of Credit) is a loan that allows homeowners to borrow against the equity in their home for spending and flexible repayment. PRIME token holders fund HELOC loans with a fixed yield of 8%.

▲ Source: Kamino

Another category is to put real-world business on-chain as a revenue source. USDai is a way of financing GPUs on-chain. USDai's revenue comes from the borrower's loan repayment, specifically the monthly repayment from GPU infrastructure operators who received financing by pledging GPU hardware.

Private lending is also gaining attention as an APY attractive steady income source. Projects like Craftt and Pareto allow on-chain users to earn income by lending assets to institutions and businesses. This type of income also has solid real-world business support.

These examples show that real-world business and financial products can be a steady source of income. Even in cases of a weaker frontend, this can be a unique advantage of a lending protocol.

Crypto-native revenue sources are also becoming increasingly important in a competitive market. Products offering exclusive revenue streams have a special value. For example, asBNB offers Binance Launchpad revenue exposure, which is a revenue source only available within the BSC ecosystem.

Similarly, when revenue-sharing models have transparent revenue fundamentals, such models are also very attractive. The success of JLP and HLP demonstrates that users are willing to invest in products that directly share real protocol revenue.

Institutional Adoption of On-Chain Revenue: End-to-End Services and Crypto Credit Products (Preferred Stock)

With the wave of institutional adoption, many institutions may seek to capture on-chain revenue or crypto income. The key is to provide end-to-end services.

End-to-End Services of DeFi Protocols

For example, Ether.fi offers institutional staking services, with a focus on end-to-end asset management. They provide both custody and non-custody staking options, as well as a service called "white-glove," which is an end-to-end staking service offering a controlled environment, including annual audits, KYC compliance, and monthly reports. This ETH fund is also a CIMA registered fund. Beyond staking, institutions can also engage in DeFi lending and other fixed-income protocols.

Preferred stock is a Crypto-based form of "national debt" and is a key way to allocate crypto income to institutions.

The underestimation of DAT's preferred stock as a means for institutions to earn on-chain rewards is actually quite substantial. Essentially, this is a form of credit debt asset based on Crypto, similar to a government bond. A government bond is a debt based on national credit and capability, while a DAT company creates a credit market based on Crypto assets, and preferred stock is a credit debt product created based on this credit market. Preferred stock provides encrypted returns to traditional institutions through dividends. There are mainly two types of returns: long-term CAGR and DeFi returns, including staking.

Strategy's STRC offers an annualized dividend of 11.5%, payable monthly in cash, and tradable on most mainstream brokerage platforms. The basis of Strategy is Bitcoin's CAGR. It assumes that BTC is an inflation-resistant asset and considers the actual inflation rate to be about 8%. STRF and other similar preferred stock products such as STRD and STRK bring the inflation-resistant portion of returns to investors. Investors can also choose STRK with an 8% return, with the opportunity to convert to MSTR to capture more upside potential of Bitcoin.

▲ Base information about STRC; Source: Strategy

Similar inflation-resistant products exist in traditional finance, such as TIPS (Treasury Inflation-Protected Securities issued by the government). TIPS rise with inflation and fall with deflation. They adjust based on the CPI (Consumer Price Index) calculated by the US Bureau of Labor Statistics. Although TIPS rates are lower than the inflation rate (2.7%), this is a real return after inflation adjustment, as the principal is adjusted based on the inflation rate, resulting in a real yield of about 4%.

▲ Interest rate of TIPS; Source: Treasurydirect.gov

Interestingly, stablecoin projects like Saturn Labs are bringing DAT's stable returns on-chain as a source of stablecoin returns. In the era of digital assets and Fed rate cuts, this could be an on-chain government bond alternative.

Preferred stock dividends can also be a way to distribute aggregated on-chain returns to stock investors. Solana DAT Forward Industries stakes nearly all their SOL holdings (over 6.87 million SOL) to receive about 7% staking rewards. They also convert about 25% of SOL to fwdSOL (LST) for greater DeFi liquidity and earning opportunities. While they have not yet announced that these returns will be distributed to investors through preferred stock, they have the ability to provide about a 7% return and leverage on-chain protocols for higher earnings. The DeFi Development Company offers Series C Perpetual Preferred Stock with an annualized dividend rate of 10%. Based on the current on-chain yield and SOL staking rate, they can afford these dividends.

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