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 tenets of user empowerment and democratized finance.
Yieldcoins, such as liquid-staked tokens (LST) and staked stablecoins like sfrxETH, stETH, sUSDS, sUSDe, sfrxUSD, etc., are supply-centric assets designed to externalize their underlying yields to the token holder or staker. On the demand side, yieldcoin borrowers face a major structural drawback: rapidly compounding loans due to the underlying yield which accrues as new debt on top of borrowing costs. This drawback makes yieldcoins more expensive to borrow vs. non-yielding assets.
As a result, yieldcoins typically have near-zero utilization rates in lending protocols. This leads to capital inefficiency and structural imbalances in DeFi that only encourage holding yieldcoins passively or using them as collateral for leverage, not lending them, prohibiting further credit expansion and economic activity to emerge onchain.
A novel solution recently pioneered by dTRINITY to address the above challenges is redirecting yield from a stablecoin’s underlying yieldcoin reserve to its borrowers as interest rebates, rather than to token holders or stakers. This makes it cheaper for users to borrow stablecoins. Borrower rebates also stimulate credit demand and utilization, which increases lending yield for the stablecoin. This is possible because borrower rebates (subsidies) shift the demand curve upward, leading to a new supply-demand equilibrium with higher utilization, rates, and 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.
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