Elevated Fed rates and growing demand for on-chain credit are driving borrowing costs higher across DeFi. Stablecoins now account for nearly half of all outstanding DeFi debt, cementing their role as the backbone of the on-chain credit system. Yet, this dominance comes with strain: stablecoin borrowers face rising interest expenses, especially during crypto bull markets when leverage demand surges.
Outstanding debt composition of Aave on Ethereum, the world’s largest lending protocol.
The top two stablecoins, USDT and USDC, control more than 95% of the market and earn billions in interest from their collateral reserves. Yet, most of these profits flow to their centralized issuers, Tether and Circle, not to end users.
Currently, over 95% of global stablecoin reserves are parked in bank deposits, money markets, and US T-Bills, earning risk-free yields. These TradFi yields, in theory, could be shared with stablecoin users and dApps as rewards or rebates to stimulate on-chain economic growth.
By externalizing reserve earnings, the stablecoin industry could evolve from a centralized profit center to a key driver of growth in decentralized economies, aligning more closely with DeFi's core tenets of financial inclusivity and user empowerment.
Liquid-staked tokens (LSTs) and yield-bearing stablecoins (YBS), such as sfrxETH, stETH, sUSDS, sUSDe, sfrxUSD, etc., are supply-centric assets designed to externalize their underlying yields to token holders or stakers. On the demand side, borrowing LST/YBS carries a major drawback: rapidly compounding debt due to the underlying yield, which accrues as new debt in addition to borrowing costs—making yield-bearing tokens more expensive to borrow.
As a result, these assets typically have very low utilization rates on lending protocols. This creates a structural imbalance in DeFi where LST/YBS yield distributions disproportionately benefit the supply side, leaving borrowers on the demand side at a disadvantage.
A novel solution recently pioneered by dTRINITY to address the above challenges is redirecting reserve earnings to LST and stablecoin borrowers as interest rebates, rather than distributing them as yield to token holders or stakers.
By subsidizing borrowing costs, rebates can actually stimulate credit demand and increase utilization to generate more yield for lenders. This is possible because borrower subsidies shift the demand curve upward, creating a new supply-demand equilibrium with higher utilization and raw lending rates that attract more liquidity—creating a win-win dynamic for both sides of the market.
A theoretical supply-demand chart for lending and borrowing, with the effect of borrower subsidies illustrated.