The First Principles of Stablecoin Yield: Behind the Clarity Act and Davos Debates, Revisiting the Nature of On-Chain Interest

Recently, discussions surrounding stablecoins have noticeably intensified within global policy and financial circles. On one hand, the Clarity Act, a crypto market structural bill currently being advanced in the United States, attempts to systematically define stablecoins, custody, yield attributes, and their regulatory boundaries. On the other hand, at the World Economic Forum in Davos, the CEO of Coinbase and the Governor of the Banque de France engaged in a direct debate over “whether stablecoins should bear interest.” Superficially, this is a debate about compliance and risk; in essence, however, it points to a more fundamental question: Where does the interest generated by stablecoins actually come from? Does it constitute a new form of “money printing mechanism”? If this point cannot be clearly understood, all discussions about stablecoins will inevitably remain mired in conceptual misunderstandings.

1. First Principles: What is the Essence of Stablecoin Yield?

From a financial principles perspective, the conclusion is actually not complicated. Stablecoin yield generation is not equivalent to printing money; its essence is highly consistent with the interest mechanism in the traditional financial system. Stablecoin holders do not receive returns out of thin air. Instead, they temporarily cede a “dollar-like asset” for use by the system or the market. The system participates in real financial activities using these funds and distributes the resulting returns to the fund providers according to predetermined rules. This logic is not fundamentally different from bank deposits, money market funds, or short-term financing markets. What is truly worth discussing has never been “whether stablecoins can generate yield,” but rather their methods of yield generation, risk-bearing structures, and the actual destination of the funds.

2. Deconstructing Four Models: Where Does the Yield Come From, and Where Does the Risk Go?

1. On-Chain Lending Model: Transparent Market Rates and Contract Risk

Looking at current market practices, stablecoin yield generation has roughly formed several different paths. The most representative is the on-chain lending model represented by Aave and Compound. In this mechanism, users deposit stablecoins into a decentralized protocol, which then lends the funds to market participants with actual demand, including leveraged traders, market makers, and arbitrageurs. These borrowers pay interest for using the funds, and this interest is proportionally distributed to depositors via smart contracts. Since the interest rate is entirely determined by the supply and demand of lending, this model is highly transparent. Its yield fluctuates with market conditions, and the risks are primarily concentrated in smart contract security and the liquidation mechanism itself.

2. RWA Model: “On-Chain Money Market Funds” and Custody Compliance Challenges

Another rapidly developing path in recent years is the stablecoin yield model backed by Real World Assets (RWA), particularly U.S. Treasury bonds. In this structure, the stablecoin issuer or custodian institution allocates the corresponding funds into short-term Treasury bonds or bills. The yield users receive essentially approximates the return from the Federal Reserve’s benchmark rate minus operational and compliance costs. From a financial attribute perspective, this type of stablecoin is closer to an “on-chain money market fund.” Its popularity is not accidental but the result of the combined effects of a high-interest-rate environment, institutional compliance needs, and on-chain settlement efficiency. This is precisely one of the key areas of focus for the Clarity Act. Its main risks do not stem from on-chain mechanisms but are more concentrated in custody structures, jurisdictions, and regulatory coordination.

3. Centralized Wealth Management Model: Credit-Based Yield and Shadow Banking Risk

In contrast, the stablecoin yield products offered by centralized platforms are closer to credit-based wealth management in traditional finance. Users deposit stablecoins into a platform, which then utilizes these funds through institutional lending, OTC trading, or quantitative strategies, promising users a relatively stable annualized yield. However, it must be clarified that in this model, what users receive is not a market-verifiable on-chain interest, but a credit-based interest paid by the platform based on its own balance sheet. Once a platform encounters liquidity or operational issues, users are, in a legal sense, merely ordinary creditors. This structure is not fundamentally different from the shadow banking system.

4. Algorithmic/Subsidy Model: Water Without a Source and Structural Fragility

The highest-risk model, which has been repeatedly proven unsustainable, is the so-called algorithmic or subsidy-based yield model. In this structure, the yield does not come from real financial activities but relies primarily on token subsidies, treasury discounts, or new funds covering old yields. The historical Terra / UST system has fully demonstrated the fragility of this model. A simple yet extremely effective criterion is: if a certain stablecoin’s yield is consistently and significantly higher than the risk-free rate and is almost unrelated to market conditions, then what users are likely receiving is not interest, but an early return of their principal.

3. Key Judgment Criteria: The Soul-Searching Questions for Sustainable Yield

Regardless of the form, any sustainable stablecoin yield mechanism must be able to clearly explain the actual flow of its funds. A reasonable structure should be one where funds first create value in the real market—for example, interest from leveraged trading, market making, and arbitrage activities, or returns from Treasury bonds and corporate short-term financing—and are then transmitted to stablecoin holders through protocols or platforms. If one cannot clearly answer “who is paying this yield,” “why are they willing to pay,” and “what happens if they don’t pay,” then the yield itself warrants high vigilance.

4. Macro Significance: Evolution from Medium of Exchange to Financial Infrastructure

From a broader perspective, the importance of stablecoin yield extends far beyond providing an income option for individual investors. It is gradually evolving into a crucial component of a new generation of financial infrastructure. For individuals, stablecoin yield offers a dollar-like cash flow tool that does not rely on directional price bets and has relatively controllable volatility. For institutions, it signifies on-chain cash management capabilities and a supplementary alternative to some traditional bank deposit functions. For the entire financial system, stablecoins are evolving from mere mediums of exchange into financial assets possessing time value.

5. Rational Framework: How to Find Value Amidst Risk?

At a practical operational level, understanding stablecoin yield does not mean ignoring risks. Any stablecoin yield mechanism should be examined within a clear risk assessment framework, including the true source of the yield, the ultimate bearer of the risk, the correlation between yield and market conditions, liquidity constraints, and the consequences in a worst-case scenario. Only when most of these questions have clear answers does the yield possess practical value for discussion.

6. Conclusion: The On-Chain Rebirth of an Ancient Concept

Ultimately, stablecoin yield is not a radical financial innovation. It is the first time the oldest financial concept—interest—has been systematically brought on-chain in a programmable, composable, and cross-border manner. The emergence of the Clarity Act, the cautious stance of central banks, and the public debates at Davos themselves illustrate that stablecoin yield is no longer a fringe experiment but a new form being seriously considered by the mainstream financial system.

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