What Are Yield-Bearing Stablecoins? Earn Passive Income with sDAI, USDY & USDe

What Are Yield-Bearing Stablecoins?

Traditional stablecoins like USDT and USDC maintain a 1:1 peg with the US dollar, but they share one glaring flaw: holders earn nothing while issuers pocket billions in interest from the reserves backing those tokens. Tether earned over $6.2 billion in profit in 2023 alone, primarily from US Treasury yields on its reserves, while USDT holders received exactly zero of that income.

Yield-bearing stablecoins fix this by automatically generating yield and passing it back to token holders. Instead of letting reserves sit idle (or enriching only the issuer), these stablecoins deploy their backing into Treasury bonds, DeFi lending protocols, or structured financial strategies, and distribute the earnings to everyone who holds the token.

The growth has been explosive. The yield-bearing stablecoin market cap grew from approximately $1.5 billion in early 2023 to over $11 billion by the end of 2025. JPMorgan analysts predict that yield-bearing stablecoins will grow from roughly 6% of the total stablecoin market to as much as 50% in the coming years, a seismic shift in how stable digital dollars function.

This is not a minor improvement. It represents a fundamental rethinking of what a stablecoin should be. Rather than simply being a parking spot for value, yield-bearing stablecoins turn every idle dollar into a productive asset, effectively creating a savings account that lives on-chain and compounds automatically.

How Yield-Bearing Stablecoins Work

Not all yield-bearing stablecoins generate returns the same way. The source of yield matters enormously because it determines the risk profile, sustainability, and regulatory treatment of each token. There are three primary models in the market today.

Treasury-Backed Yield

The most conservative approach invests stablecoin reserves directly into US Treasury bills and other short-term government securities. Since Treasuries are considered the safest investment in traditional finance, this model offers reliable (though moderate) yields with minimal credit risk.

USDY by Ondo Finance is the leading example. Ondo takes dollars deposited by verified users, purchases short-term US Treasuries and bank deposits, and passes the yield back to USDY holders. The yield typically tracks the federal funds rate minus Ondo’s management fee, landing in the 4.5-5.5% APY range depending on interest rate conditions.

Mountain Protocol’s USDM follows a similar model. It invests reserves in short-duration Treasury instruments and distributes yield through a rebasing mechanism, meaning the number of USDM tokens in your wallet increases automatically each day to reflect earned interest.

Treasury-backed yield stablecoins are essentially tokenized money market funds. They carry minimal DeFi-specific risk but are subject to interest rate fluctuations. When the Federal Reserve cuts rates, yields on these tokens decrease proportionally.

DeFi-Strategy Yield

sDAI (Savings DAI) by MakerDAO is the flagship DeFi-strategy yield stablecoin. When you deposit DAI into Maker’s DSR (Dai Savings Rate) module, you receive sDAI in return. The yield comes from two sources: interest paid by borrowers who take out DAI loans on Maker, and returns from MakerDAO’s real-world asset (RWA) portfolio, which includes US Treasuries and other instruments.

The DSR rate is set by MakerDAO governance and has ranged from 5% to 8% APY depending on market conditions and Maker’s revenue. What makes sDAI particularly appealing is that it is fully permissionless. There is no KYC requirement, no minimum deposit, and no lock-up period. You deposit DAI, receive sDAI, and start earning immediately. When you want to exit, you redeem sDAI for DAI plus accumulated interest.

sDAI uses a reward-bearing model: the token price increases over time relative to DAI rather than rebasing your balance. One sDAI might be worth 1.00 DAI at launch but 1.07 DAI a year later, reflecting the accumulated yield.

Synthetic/Delta-Neutral Yield

USDe by Ethena Labs takes an entirely different approach. USDe is a synthetic dollar that maintains its peg through a delta-neutral strategy rather than holding traditional reserves. Here is how it works:

1. Users deposit staked ETH (stETH, cbETH, or similar) as collateral
2. Ethena opens an equivalent short perpetual futures position on centralized exchanges
3. The staked ETH earns staking yield (3-5% APY)
4. The short futures position earns funding rate payments when the market is bullish (historically positive most of the time)
5. Combined, these two yield sources produce returns that have ranged from 8% to over 25% APY

To earn yield, USDe holders must stake their tokens to receive sUSDe. The staking mechanism distributes protocol revenue to sUSDe holders. While the returns can be significantly higher than Treasury-backed alternatives, the strategy carries meaningful risks including negative funding rates, exchange counterparty risk, and potential liquidation in extreme market conditions.

Rebasing vs. Reward-Bearing Models

Yield-bearing stablecoins distribute earnings through one of two mechanisms, and understanding the difference matters for taxes, DeFi composability, and portfolio tracking.

Most newer yield-bearing stablecoins are adopting the reward-bearing model because it is more composable with DeFi protocols and simpler from a tax reporting perspective.

Top Yield-Bearing Stablecoins Compared

The yield-bearing stablecoin landscape has matured significantly. Below is a comprehensive comparison of the major options available to investors.

sDAI (MakerDAO)

sDAI stands out as the most accessible and DeFi-native yield-bearing stablecoin. Created by MakerDAO (now rebranded to Sky Protocol), sDAI represents DAI deposited into the Dai Savings Rate contract.

How it works: You deposit DAI into the DSR smart contract at savings.makerdao.com and receive sDAI tokens. The exchange rate between sDAI and DAI increases continuously as yield accrues. When you redeem, you get back more DAI than you deposited.

Current yield: The DSR has been set between 5% and 8% APY, adjusted by MakerDAO governance based on protocol revenues and market conditions. As of early 2026, the rate has stabilized around 6% APY.

DeFi compatibility: sDAI is widely supported across DeFi. You can use it as collateral on Aave and Spark Protocol, provide liquidity on Curve Finance, and trade it on most major DEXs. This composability means your stablecoins earn the base DSR yield plus whatever additional yield you generate in DeFi.

Key advantage: No KYC, no minimum, fully permissionless, and backed by the longest-running decentralized stablecoin protocol in crypto.

USDY (Ondo Finance)

USDY is a tokenized note backed by short-term US Treasuries and bank demand deposits. Ondo Finance has positioned USDY as an institutional-grade yield-bearing stablecoin that bridges traditional finance with blockchain rails.

How it works: Ondo maintains a bankruptcy-remote SPV (Special Purpose Vehicle) that holds US Treasuries. USDY tokens represent a claim on these underlying assets. The yield, approximately 5% APY, reflects the return on short-term Treasuries minus Ondo’s management fee.

Institutional features: USDY has been adopted by multiple DeFi protocols and blockchain ecosystems. Ondo has secured partnerships with exchanges, lending platforms, and layer-2 networks. The token is available on Ethereum, Solana, Mantle, Sui, and several other chains.

KYC requirement: To mint USDY directly from Ondo, you must complete KYC/AML verification and not be a US person (due to securities regulations). However, USDY can be freely traded on secondary markets and DEXs once minted.

Key advantage: Full transparency into reserve holdings, institutional-grade custody, and the safety profile of US government-backed assets.

USDe (Ethena Labs)

USDe is the most innovative and controversial yield-bearing stablecoin. Ethena’s synthetic dollar uses a delta-neutral hedging strategy rather than traditional reserves, enabling significantly higher yields but with correspondingly higher risks.

How the delta-neutral strategy works:

1. Users deposit ETH or liquid staking tokens (stETH) to mint USDe
2. Ethena simultaneously opens short perpetual futures positions equal to the collateral value
3. The long spot position and short futures position cancel out price exposure (delta-neutral)
4. Yield comes from two sources: ETH staking rewards (~3-5%) and futures funding rate payments
5. In bullish markets, funding rates are typically positive, meaning shorts get paid. Combined yields have exceeded 20% APY during bull markets

Staking for sUSDe: Holding USDe alone does not earn yield. You must stake USDe to receive sUSDe, which accrues protocol revenue. The staking mechanism includes a 7-day cooldown period for unstaking.

Risks to understand: USDe carries unique risks. Prolonged negative funding rates could erode the peg. Centralized exchange counterparty risk exists since Ethena holds futures positions on platforms like Binance, OKX, and Bybit. Smart contract risk and potential regulatory action are additional considerations. During the 2022 bear market, funding rates were consistently negative, which would have made this strategy unprofitable.

Key advantage: Highest yields in the yield-bearing stablecoin category, permissionless access, and an innovative approach to maintaining dollar stability.

sFRAX (Frax Finance)

Frax Finance operates a dual stablecoin system. FRAX is the base stablecoin, while sFRAX is its yield-bearing counterpart. Frax has evolved from a partially algorithmic model to a fully collateralized system backed by a mix of real-world assets, DeFi positions, and protocol-owned liquidity.

How it works: When you stake FRAX in the sFRAX vault, your deposits are deployed into a combination of Treasury bill holdings (via Frax’s real-world asset strategy), protocol-owned AMO (Algorithmic Market Operations) strategies, and yield from the Frax lending market. The yield typically ranges from 4-6% APY.

Frax ecosystem: sFRAX integrates tightly with Frax’s broader ecosystem, including Fraxlend (lending), Fraxswap (DEX), and Fraxferry (bridging). The upcoming Fraxtal L2 chain is expected to use sFRAX as a core gas and yield asset.

Key advantage: Deep integration with one of DeFi’s most innovative protocols, no KYC requirements, and a diversified yield strategy.

USDM (Mountain Protocol)

Mountain Protocol’s USDM is a rebasing stablecoin backed entirely by short-term US Treasuries. Unlike reward-bearing tokens where the price increases, USDM maintains a $1.00 price while your token balance increases daily to reflect earned yield.

How it works: Mountain Protocol holds reserves in Treasury bills through regulated custodians. Each day, USDM balances automatically adjust upward to reflect the accrued yield. If you hold 1,000 USDM, you might see 1,000.014 USDM the next day (reflecting approximately 5% annualized yield distributed daily).

Multichain availability: USDM is available on Ethereum, Polygon, Base, Optimism, and Arbitrum, making it one of the most widely available Treasury-backed yield stablecoins.

Key advantage: Simple rebasing model that is intuitive for users, Treasury-grade backing, and broad multichain support.

Yield-Bearing vs. Traditional Stablecoins

To fully appreciate why yield-bearing stablecoins represent a paradigm shift, consider how they compare to the traditional stablecoins that dominate the market today.

The opportunity cost of holding non-yield-bearing stablecoins is substantial. If you hold $10,000 in USDC for a year, you earn nothing. That same $10,000 in sDAI at 6% APY would generate approximately $600 in passive income. At scale, this difference amounts to billions of dollars in value left on the table by stablecoin holders worldwide.

How to Earn Yield on Stablecoins (Step-by-Step)

Getting started with yield-bearing stablecoins is more straightforward than most DeFi activities. Here are the three most popular methods, each suited to different user profiles. You will need a DeFi wallet like MetaMask, Rabby, or Coinbase Wallet to follow any of these steps.

Method 1: Convert DAI to sDAI (Simplest)

This is the easiest entry point for anyone already familiar with DeFi. The entire process takes under five minutes.

1. Acquire DAI: Purchase DAI on any major exchange (Coinbase, Binance, Kraken) or swap for it on a DEX like Uniswap. If you hold USDC, you can swap 1:1 on Curve Finance with minimal slippage.
2. Visit the Spark Protocol app: Go to app.spark.fi (the official front-end for MakerDAO’s savings product, previously at savings.makerdao.com).
3. Connect your wallet: Click “Connect Wallet” and select your wallet provider.
4. Deposit DAI: Enter the amount of DAI you want to deposit. If this is your first time, you will need to approve the DAI token (one-time transaction).
5. Confirm the transaction: Sign the deposit transaction. You will receive sDAI tokens in your wallet.
6. Start earning: That is it. Your sDAI balance remains constant, but the value of each sDAI token increases continuously as yield accrues. When you want to withdraw, simply return to the app and redeem sDAI for DAI.

Cost: You will pay gas fees for the approval and deposit transactions, typically $2-10 on Ethereum mainnet. There are no protocol fees for depositing or withdrawing.

Method 2: Mint USDe and Stake for sUSDe (Higher Yield)

For users willing to accept more risk in exchange for higher returns, Ethena’s USDe/sUSDe offers a compelling option.

1. Visit app.ethena.fi: Go to Ethena’s official application.
2. Connect your wallet: Link your Ethereum wallet.
3. Mint USDe: You can mint USDe using USDT, USDC, DAI, or ETH. Select your input asset and the amount you want to convert.
4. Stake USDe for sUSDe: Navigate to the “Stake” section and deposit your USDe. You will receive sUSDe tokens that accrue yield.
5. Monitor your position: Ethena’s dashboard shows your current yield, which fluctuates based on funding rates and staking rewards.
6. Unstaking: When you want to exit, initiate an unstake request. There is a 7-day cooldown period before you can withdraw your USDe.

Important note: Simply holding USDe does not earn yield. You must stake it for sUSDe to receive protocol revenue.

Method 3: Purchase USDY (Institutional Grade)

For users who prefer the security of Treasury-backed assets and do not mind completing identity verification:

1. Visit ondo.finance: Navigate to the official Ondo Finance website.
2. Create an account and complete KYC: Provide identification documents and proof of address. This process typically takes 1-3 business days. Note that US persons are generally not eligible.
3. Fund your account: Transfer USDC or wire USD to Ondo. The minimum investment is $500.
4. Receive USDY: Once verified and funded, USDY tokens are minted to your wallet.
5. Earn automatically: USDY is a reward-bearing token. Its price increases daily to reflect the yield from underlying Treasury holdings.

Alternative: You can also purchase USDY on secondary markets through DEXs on Ethereum, Solana, and other supported chains without KYC, though liquidity may be limited.

DeFi Strategies with Yield-Bearing Stablecoins

Yield-bearing stablecoins become even more powerful when combined with DeFi yield farming strategies. Because these tokens already generate a base yield, any additional DeFi yield stacks on top, creating compounding returns.

Use as collateral on Aave or Spark: Deposit sDAI as collateral on lending platforms like Aave V3 or Spark Protocol. You continue earning the DSR yield on your sDAI while simultaneously borrowing against it. For example, deposit $10,000 in sDAI (earning 6%), borrow $7,000 in USDC, and deploy that USDC elsewhere. Your effective cost of borrowing is reduced by the sDAI yield.

Provide liquidity in Curve pools: Curve Finance hosts liquidity pools for yield-bearing stablecoins. The sDAI/DAI pool, for instance, lets you earn trading fees and CRV token rewards on top of the base sDAI yield. Be aware of impermanent loss risks, though they are minimal for same-peg pairs.

Leverage looping: Advanced users can create leverage loops: deposit sDAI on Aave, borrow DAI, convert to sDAI, deposit again, and repeat. Each loop increases your effective yield but also increases smart contract risk and liquidation exposure. A typical 3x loop on sDAI might yield 12-15% APY (3x the base rate minus borrowing costs) but carries significant risk.

Pendle Finance yield trading: Pendle allows you to split yield-bearing tokens into principal and yield components. You can sell your future sDAI yield upfront for a fixed return, or speculate on yield increases by purchasing yield tokens. This creates opportunities for fixed-rate income or leveraged yield exposure.

Risks of Yield-Bearing Stablecoins

While yield-bearing stablecoins offer compelling advantages, they introduce risk layers that traditional stablecoins do not carry. Understanding these risks is essential before allocating significant capital.

Smart Contract Risk

Every yield-bearing stablecoin relies on smart contracts to manage deposits, generate yield, and handle redemptions. A bug, exploit, or vulnerability in these contracts could result in partial or total loss of funds. While established protocols like MakerDAO have undergone extensive audits and have operated for years without major incidents, newer protocols like Ethena have shorter track records.

Mitigation: Stick to protocols with multiple audits, bug bounty programs, substantial TVL (Total Value Locked), and proven track records. Diversify across multiple yield-bearing stablecoins rather than concentrating in one.

Depeg Risk

Yield-bearing stablecoins, particularly synthetic ones like USDe, face depeg risk under extreme market conditions. If Ethena’s delta-neutral strategy fails during a prolonged period of negative funding rates, or if a large number of holders try to redeem simultaneously, USDe could temporarily trade below $1.00.

Treasury-backed stablecoins like USDY carry less depeg risk because their reserves are held in highly liquid government securities, but even they can face temporary dislocations during market panics.

Yield Sustainability

High yields are not permanent. USDe’s 15-25% APY periods occur during bull markets when funding rates are elevated. During bear markets or neutral conditions, yields can compress to low single digits or even become negative. sDAI yields depend on MakerDAO’s revenue, which fluctuates with borrowing demand. Treasury-backed yields move with federal interest rate policy.

Do not make financial decisions based on current yields remaining constant. Model your returns using conservative yield assumptions, not peak returns.

Regulatory Risk

Yield-bearing stablecoins occupy a regulatory gray area. Products like USDY may be classified as securities in certain jurisdictions, which is why Ondo restricts access to non-US persons. DeFi-native products like sDAI and sUSDe exist in a permissionless environment but could face regulatory action as governments develop stablecoin frameworks.

The EU’s MiCA regulation and proposed US stablecoin legislation could both impact how yield-bearing stablecoins operate and who can access them.

Counterparty Risk

Ethena’s USDe relies on centralized exchanges to maintain its short futures positions. If a major exchange like Binance or OKX were to become insolvent or restrict access, it could compromise USDe’s hedging strategy. Ethena uses off-exchange settlement providers like Copper ClearLoop and Ceffu to reduce this risk, but it cannot be eliminated entirely.

Treasury-backed stablecoins carry custodial counterparty risk, where the entity holding the Treasuries could face insolvency, mismanagement, or legal issues. Always verify the custody and audit arrangements for any yield-bearing stablecoin you hold.

Tax Implications

Yield-bearing stablecoins create tax obligations that differ meaningfully from traditional stablecoins. Understanding these implications is crucial to avoid unexpected tax bills. For a comprehensive overview, see our crypto taxes guide.

Yield is taxable income: In most jurisdictions, the yield earned from stablecoins is treated as ordinary income, taxable at your marginal rate in the tax period it is received or accrued.

Rebasing creates complexity: Rebasing stablecoins like USDM automatically increase your token balance daily. Each rebase could be considered a taxable event, meaning you may have hundreds of small income events to report each year. This makes rebasing tokens significantly more complex for tax reporting.

Reward-bearing tokens (sDAI, sUSDe, USDY): These may be simpler to account for because the income is realized when you redeem or sell the tokens, not continuously. However, tax treatment varies by jurisdiction, and some authorities may argue that value accrual constitutes ongoing income regardless of when you sell.

Record keeping: Use crypto tax software like Koinly, CoinTracker, or TokenTax to automate tracking of yield-bearing stablecoin transactions. Manual tracking of daily rebases or exchange rate changes is impractical for most users.

Frequently Asked Questions

Conclusion

Yield-bearing stablecoins represent one of the most important developments in cryptocurrency since the invention of stablecoins themselves. The idea that your stable dollars should sit idle while issuers profit from your deposits is rapidly becoming outdated. Whether through Treasury-backed models like USDY and USDM, DeFi-native approaches like sDAI, or innovative synthetic strategies like Ethena’s USDe, there are now multiple ways to put your stablecoins to work.

For most users, sDAI offers the best balance of yield, accessibility, and risk. It requires no KYC, has no minimum deposit, is backed by one of DeFi’s most battle-tested protocols, and is widely accepted across the DeFi ecosystem. Users seeking higher yields can explore sUSDe, while those preferring the safety of government securities may find USDY more suitable.

Regardless of which option you choose, the key principle is the same: in an era of on-chain yield, holding non-productive stablecoins means leaving money on the table every single day. Start with a small allocation, understand the risks of your chosen protocol, and let your stablecoins earn the yield they should have been generating all along.