Author: @TurboGuo | @IOSGVC , @DaiZeshi | @SurfAI
Thanks for the insights from Kevin, Selina, Momir
TL;DR
Stablecoin-backed, fixed-rate products are preferred in bear markets
During bull markets, TVL rises across all products. However, in bear markets, performance diverges significantly. In bear markets, investors gravitate toward more stable yields and lower underlying risk, driving growth in yield-bearing stablecoins.
2. The trend of protocols is developing towards frontend and backend
Large DeFi protocols are building their own wallets and mobile apps to control traffic entry points. Crypto is entering the era of apps, where retail users can access financial services through mobile applications.
Demand from new L1/L2s and DeFi projects for their own stablecoins will push yield protocols toward a "backend" model, creating large demand for yield protocols.
3. Fed rate cuts, declining T-Bill yields, and rise of alternative RWA yield sources
Interest rate cuts will lead to declining T-Bill yields. This will push stablecoins to incorporate a broader range of RWA assets as backing.
Real-world businesses and financial products can serve as solid yield sources, becoming a special edge for yield protocols even when they lack frontend strength.
Current On-chain Yielding Spectrum
Here we examined 18 on-chain yielding products across the various yield source spectrum. These include tokenized T-Bills and their derivatives, native staking (ETH/SOL), liquid staking tokens (Lido, Jito), yielding stablecoins (sUSDe, SyrupUSD), protocol revenue-sharing models (JLP, SKY), DeFi Strategies and ecosystem rewards (Lido GGV, SIUSD/LIUSD, asBNB), DEX LP, Market Making (HLP), and real-world asset products (PRIME, USDai, USP). Each product is evaluated on APY, liquidity, withdrawal timeframes, and key risks.
Yielding Pattern
On-chain yields derive from eight distinct mechanisms, each with unique risk-return profiles and market sensitivities. Native consensus rewards (ETH/SOL staking, LSTs) offer stable, protocol-secured returns. Funding arbitrage and protocol revenue are affected by the cycle, which are strong in bull markets, compressed in bears. Lending and RWA yields introduce counterparty risk but greater stability. Liquidity providers capture trading fees. DeFi strategies and ecosystem rewards aggregate multiple protocols, compounding both yields and smart contract exposure.
2. Risk Tier
Products are assigned to risk tiers mainly based on evaluation across three dimensions:
Protocol Risk: The ****Protocol’s technical risk, including smart contract risks
Participants Risk: Dependence on centralized entities or off-chain actors
Market/strategies Risk: Exposure to asset price volatility or strategies issues
Liquidity Risk: TVL depth and withdrawal mechanics
At the minimal-risk tier, tokenized treasuries and mature lending. Low-risk products like native staking and liquid staking derivatives introduce smart contract exposure but benefit from battle-tested code, the risk is low. Medium-risk products have additional complexity through DeFi strategy aggregation or protocol revenue sharing, they also face risks about token price volatility and yield variability.
High-risk products exhibit multiple compounding risks, funding rate strategies face yield compression during bear markets, market-making vaults carry manipulation exposure, and emerging RWA protocols introduce counterparty opacity with limited liquidity for exit.
Key Insights and The Future of On-chain Yielding
1. Stablecoin-backed / relatively fixed interest rates products are good choices in a bear market.
Here we have a deeper look at the TVL and APY of different kinds of yielding product over the bull market and bear market. We take stETH(Staking), JITOSOL(Staking), sUSDS(lending),WETH/USDT(Uniswap DEX LP), SyrupUSDC (Maple lending)and sUSDE (Ethena funding rate strategy) as representative of different yielding products. The bull market is around June to October and the market goes bear afterward.
From the TVL data, we can see that the TVL of all kinds of product goes up during bull markets. However, in the bear market, the TVL of stETH, sUSDE and JITOSOL goes down, but the TVL of sUSDS and SyrupUSDC goes up.
The APYs of WETH/USDT pool and stETH remain relatively the same during different market conditions. The APYs of JITOSOL, SyrupUSDC, sUSDE, and sUSDS experienced a decline, and the APYs of sUSDE and SyrupUSDC dropped significantly. The graph also shows that products with higher APYs experienced higher volatility. The APY of sUSDS is more governance-driven rather than market-driven, which is why it remains stable most of the time.
Overall, in bear markets, stablecoin-backed yielding products will attract more attention with higher liquidity. Non-stablecoin-based yielding products will experience TVL drops in bear markets because of the price drops of backed assets. People also want more stable yields with less underlying risk, which also boosts the TVL of stablecoin-backed yielding products.
In bear markets, relatively fixed-rate products are a more reasonable choice. Even though sUSDS is not market-driven, its APY is stable and predictable in the mid-term. The APY of sUSDE is too unstable due to market conditions, and it is not a good choice in bear markets since it may drop significantly.
This also shows that, when evaluating on-chain yielding opportunities, APY alone does not provide the complete picture of potential returns. The underlying assets play a crucial role in determining actual performance, particularly for products like JLP (an index fund comprising SOL, BTC, and ETH), asBNB, and SKY. In these cases, token price fluctuations often exceed the APY itself, making asset selection as important as yield rates. However, some investors can mitigate this risk through hedging strategies, such as shorting equivalent values of the underlying assets on centralized or decentralized exchanges to isolate and capture only the yield component.
2. The trend of protocols is developing towards frontend and backend.
Before, stablecoin was a good business with great cash flow through the 4% yield on T-Bills. However, yielding stablecoins are the kind of product that shares almost 100% of T-Bill yields with users, which brings challenges to traditional stablecoins. The market share of yielding stablecoins has steadily increased since 2024. If we look at the supply of the top 3 stablecoins with native yield and the top 3 stablecoins without native yield (which are USDT, USDC, PYUSD, USDe, USDS, and USDY), the market share of stablecoins with native yield increased from 0.1% to 7.6%, peaking at 11.5%.
This is why many DeFi protocols are starting to control their entry points and trying to build their own distribution channels. Many large DeFi protocols are building their own wallets or mobile apps, and this way, they can control the retail entry point.
This also shows a trend that crypto is entering the era of apps. Retail users can access financial services through mobile apps, which is a much more convenient way for web2 users to onboard to web3. These apps can also provide seed phrase-free services to lower the learning curve.
Demand from L1s and DeFi projects for their own stablecoins will be an important catalyst for the growth of yielding protocols in the future. Yielding protocols could also be pushed toward a 'backend' model.
Given the current stable supply landscape, if Layer 1 deployed their own stablecoins instead of relying on USDT or USDC, their revenues could potentially be 2X or even 3X. This represents a significant incentive for adoption for new L1/L2s and DeFi projects. The trend is clear, MegaETH, Jupiter, Hyperliquid, BNB are all doing their own stablecoins and this would be a huge demand for yielding protocols. Ethena has seen this trend. They provide stablecoin-as-a-service that brings T-Bill yields to these projects. By deploying their own stablecoin, protocols and chains can generate substantial, stable revenue flows.
3. Fed Cut, the decline of T-Bill yield and the rise of additional yield source
A significant shift is underway in yielding landscape, driven by a chain of macroeconomic events originating from the U.S. monetary policy.
President Donald Trump nominated Kevin Warsh to succeed Jerome Powell as the Chairman of the Federal Reserve, with the transition expected in May 2026, if this is approved.
The recent nomination of a new Federal Reserve Chairman is poised to accelerate interest rate cuts, leading to a decline in U.S. Treasury Bill (T-Bill) yields.
This, in turn, is creating a compelling reason for stablecoins diversify their backing assets into a broader range of RWAs. Figure’s PRIME is a good example of bringing HELOC yield on-chain. A home equity line of credit (HELOC) is a loan that allows homeowners to borrow against, spend, and repay as needed, using their home as collateral. Holders of PRIME tokens are providing capital to HELOC loans. The yield is fixed at 8%.
Another kind is to bring real world business on-chain as a yielding source. USDai is a way to bring GPU financing on-chain. The source of USDai's yield is borrower loan payments, specifically, GPU infrastructure operators who obtain financing by posting their GPU hardware as collateral make monthly loan payments.
Private credit is also getting more attention since this is a solid yield source with appealing APY. Projects like Craftt and Pareto allow on-chain users to earn yield through lending assets to institutions and business. This kind of yield also has solid real-world business to support it.
These examples show that real-world business and financial products can be a solid yield source. This can also be a special edge for yielding protocols, even if they are weak at the front end. It is also a solid alternative for T-Bill yields for stablecoins.
Crypto native unique yield sources will become increasingly important in the competitive landscape. Products that offer exclusive access to revenue streams hold particular value. For instance, asBNB provides exposure to Binance Launchpad revenues, a yield source exclusively available within the BSC ecosystem. Similarly, revenue-sharing models have proven highly appealing when backed by protocols with strong and transparent revenue fundamentals. The continued success of JLP and HLP demonstrates that users are willing to commit capital to products that directly share in genuine protocol revenues.
4. Institution Adoption for On-chain Yielding: End-to-end services and Crypto credit product (preferred stock)
With the wave of institution adoption, many institutions may try to capture on-chain yielding or revenue from crypto. The key here is to provide end-to-end services
End-to-end services from DeFi protocols
For example, Ether.fi provides institution staking service and the key here is end-to-end asset management. They provide both non-custodial and custodial options for staking. They also provide a service called white-glove, which is an end-to-end staking service that offers a controlled environment with annual audits, KYC compliance and monthly statements. The ETH fund also is a CIMA-registered fund. On top of the staking, institutions can also participate in DeFi lending and fixed rewards from other protocols.
Preferred stock is a form of "treasury bond" built on crypto, and serves as an important approach for distributing crypto yield to institutions
The preferred stock issued by DATs is actually a way for institutions to access onchain yield. In essence, this is a credit product built on crypto, similar to government bonds. Government bonds are debt instruments created on the basis of national credit and capacity; DAT companies have created a credit market built on crypto, and preferred stock is a credit product created on top of that credit market. Preferred stock delivers crypto yield to traditional institutions through dividends. There are two main yield types: long term CAGR and DeFi yields including staking.
STRC from Strategy provides a 11.5% dividend annually and is payable monthly in cash. It is available on most major brokerage platforms. The thesis of Strategy is based on the CAGR of Bitcoin. The assumption is that BTC is an anti-inflation asset, and they believe the real inflation rate would be around 8%. STRF and some other preferred stock products like STRD and STRK bring the anti-inflation part of revenue to investors. Investors can also choose STRK with an 8% yield but have the chance to convert into MSTR to capture more upside from Bitcoin.
There are similar products in TradFi for anti-inflation like TIPS (government-issued bonds, Treasury Inflation-Protected Securities). The principal (called par value or face value) of a TIPS goes up with inflation and down with deflation. They will adjust the principal of TIPS using CPI(Consumer Price Index) from the Bureau of Labor Statistics. Even though the interest rate of TIPS is lower than the inflation rate (2.7%), this is the real yield that represents a return after inflation since they will adjust the principal according to the inflation rate and the real yield is around 4%.
It is also interesting to see stablecoin projects like Saturn @saturn_credit bring the stable yield of DATs on-chain as the yield source of stablecoins. This could be an on-chain alternative to T-Bills in the age of digital assets and Fed rate cuts.
Preferred stock's dividend could also be a way to distribute aggregated on-chain yields to stock investors.
The Solana DAT, Forward Industries, staked nearly all of their SOL holdings (more than 6.87 million SOL) and earned around 7% staking yield. They also converted around 25% of the SOL into fwdSOL, the liquid staking token (LST), to gain greater DeFi liquidity and yield opportunities. Although they have not yet announced that these yields will be distributed to investors through preferred stock, they have the ability to provide around 7% yields and leverage all on-chain protocols to generate better yields. DeFi Development Company provides Series C Perpetual Preferred Stock that provides dividends at the annual rate of 10%. According to current on-chain yield rates and SOL staking rates, they can likely afford the dividends.
Reference:
https://research.artemisanalytics.com/p/understanding-strategy-from-the-ground
https://aptuscapitaladvisors.com/tips-vs-treasuries-real-yield-is-back/
