The recent move by MakerDAO’s Spark Protocol to adjust the DAI Savings Rate (DSR) to 8% has sparked significant discussion. This decision is widely seen as a strategic effort to compensate users for the opportunity cost of holding traditional assets like ETH, USDT, or USDC. More importantly, it highlights a broader trend: the emergence of yield-bearing stablecoins like eUSD and DAI, which offer higher returns and are increasingly competing with established stablecoins such as USDT and USDC.
A key innovation in this space is the separation of yield-generation and circulation functions within stablecoin systems. This approach can significantly enhance capital efficiency for protocols like MakerDAO.
Understanding DAI’s Recent Growth
A critical question arises: why would MakerDAO offer such a high yield on DAI? The answer is clear: MakerDAO aims to incentivize growth by sharing its revenue, effectively creating arbitrage opportunities for users through subsidized rates.
Data from MakerBurn shows that DAI's supply grew from 4.4 billion to 5.2 billion in just four days following the announcement of the 8% DSR. This growth was driven by two primary user actions:
1. Leveraging LSD Restaking
The substantial gap between the 8% DSR and the ~3.19% cost to mint DAI using wstETH as collateral creates a clear arbitrage opportunity. For example, a user staking $200 worth of ETH to mint $100 worth of DAI and then depositing that DAI into the DSR could achieve an estimated yield of:
3.7% + (8% - 3.19%) / 200% ≈ 6.18%
This yield is highly competitive compared to simple staking or other low-risk, single-asset strategies available on the market, attracting more users to mint DAI.
2. Swapping Other Stablecoins for DAI
For users holding assets like USDT or USDC, swapping them for DAI to access the 8% DSR is an obvious choice. This yield is attractive both on and off-chain, driving demand for DAI and further increasing its circulating supply.
This growth creates a flywheel effect. As the supply of DAI increases, the protocol accumulates more assets like USDC. These can be deployed into Real-World Asset (RWA) investments, generating more real yield for the protocol, which can then be used to sustain or even enhance the DSR.
The Limits of Arbitrage and Sustained Growth
A natural follow-up question is: how long can this growth continue? The growth will likely persist until the arbitrage opportunity becomes negligible.
For users minting DAI with staked assets like stETH or rETH, the incentive remains as long as the DSR rate is higher than the minting cost. These assets often have limited alternative uses beyond being used as collateral, making this a straightforward strategy.
The dynamic is more complex for users swapping USDT/USDC for DAI. While USDC might offer around 2% on lending platforms like Aave, the 8% DSR is a powerful incentive to switch. As long as MakerDAO can redeploy the incoming USDC/USDT into RWA investments that generate a yield higher than the DSR payout, this arbitrage can be sustained. This implies that DAI could continuously absorb market share from traditional stablecoins over a prolonged period.
The Common Goal: Competing for Market Share
DAI's path to challenging Tether and Circle is not without obstacles, including concerns about RWA collateralization and its current smaller scale. However, DAI is not alone. A new generation of stablecoins—including crvUSD, GHO, eUSD, and Frax—along with offerings from exchanges like Huobi and Bybit, are all entering the fray with a similar value proposition: returning yield to the holder.
These projects differ primarily in their source of yield:
- RWA-Backed Yield: Models like those from Huobi or Bybit generate yield primarily from traditional off-chain assets like U.S. Treasuries, aiming to return the profits that would otherwise go to Tether or Circle.
- On-Chain Staking Yield: Stablecoins like crvUSD and eUSD are backed by on-chain collateral (e.g., stETH). Their yield is derived from the staking rewards of the underlying assets, with the protocol taking a small fee.
- Hybrid Models: DAI utilizes a combination of both RWA and on-chain collateral.
Despite different approaches, they all share the same goal: to reduce the user's opportunity cost. When you hold USDT or USDC, you forgo the 4-5% yield that the issuing companies earn on their reserves. Newer stablecoins seek to return this yield to the user.
Tether reported a staggering $1.48 billion profit in just Q1 2023. Capturing even a fraction of this market could inject tens of billions in annual real yield back into the crypto ecosystem. The largest real-yield opportunity in crypto might be the simplest: giving stablecoin holders the yield they deserve.
Whether through RWA or pure on-chain collateral, the trend of eroding the market share of centralized stablecoins appears strong. As long as the APY advantage of protocols like Spark or Lybra exists, USDT and USDC will face continuous pressure.
A More Efficient Future: Separating Yield from Circulation
A significant inefficiency in the current Spark DSR model is that DAI deposited into the DSR is taken out of circulation. This means the growth in supply doesn't directly benefit ecosystem activity; it can become a game of capital cycling within the protocol itself. A more efficient solution is to separate the yield-bearing and medium-of-exchange functions of a stablecoin.
1. Separating DAI’s Yield Attribute
Currently, depositing DAI into Spark converts it to sDAI, which accrues yield but is illiquid. A more efficient model would involve a new protocol (let's call it Xpark). Users deposit DAI into Xpark, which pools all funds into the Spark DSR to earn yield. In return, users receive a liquid token, xDAI, which is always redeemable 1:1 for DAI.
xDAI could then be used freely throughout the ecosystem—for trading, as margin, for payments, or providing liquidity on DEXs—while the underlying DAI continues to generate yield in the DSR. This solves the capital efficiency problem.
A potential challenge is ensuring liquidity and trust for xDAI. This can be addressed through innovative mechanisms like virtual liquidity pools:
- A protocol could deposit $1m in ETH and $1m in DAI to create a pool.
- 80% of the DAI is placed in the DSR to earn yield, while 20% is used with the ETH to provide actual liquidity for swaps.
- If the DAI ratio in the pool drifts beyond a set threshold, funds are automatically rebalanced between the DSR and the liquidity pool.
- This allows LPs to earn both trading fees and a share of the DSR yield, significantly boosting their capital efficiency.
2. A More Fundamental Separation
Imagine a stablecoin (XUSD) backed by a diversified basket of yield-generating assets: RWA (U.S. Treasuries), staked ETH, WBTC, and LP positions. The protocol would maximize yield by ensuring every asset in the basket is productively deployed.
XUSD itself would be a non-yielding, highly liquid stablecoin used for transactions. All yield generated by the collateral basket would be distributed directly to the minters of XUSD based on their collateral type and amount. This model achieves a pure separation of function from inception.
While a vision like XUSD may be some way off, the concept of liquid yield-bearing tokens is already gaining traction. 👉 Explore more strategies for maximizing capital efficiency. Notably, Lybra Finance’s v2 plans to implement a similar separation with its peUSD (for circulation) and eUSD (for yield) tokens.
The path forward for on-chain stablecoins is clear: integrate more real-yield assets, maximize capital efficiency, and separate monetary functions. On this path, the twilight for traditional stablecoins like USDC and USDT is becoming increasingly visible.
Frequently Asked Questions
What is a yield-bearing stablecoin?
A yield-bearing stablecoin is a digital currency pegged to a stable asset like the US dollar that also generates a passive yield for its holder. This is different from traditional stablecoins (USDT, USDC) where the issuing company profits from the underlying reserves instead of the user.
How does the DAI Savings Rate (DSR) work?
The DSR is a feature offered by MakerDAO that allows users to lock their DAI tokens in a dedicated contract and earn interest. The current rate is set by the protocol and is designed to incentivize holding and using DAI.
What is the opportunity cost of holding USDT or USDC?
The opportunity cost is the potential yield you miss out on. Companies like Tether and Circle earn interest on the traditional assets (e.g., U.S. Treasuries) that back their stablecoins. By holding USDT or USDC, you are forgoing that income, which is instead captured by the issuing company.
What are the risks of RWA-backed stablecoins?
The primary risks are tied to the real-world assets themselves, including counterparty risk (the entity holding the assets defaults), regulatory risk (government action against the assets or the issuer), and the lack of transparency compared to on-chain, cryptographically verifiable collateral.
What does "separating yield from circulation" mean?
It refers to creating a system where one token (e.g., xDAI) is used for everyday transactions and maintains liquidity, while the underlying asset (e.g., DAI) is deployed to generate yield. This solves the problem of having capital sit idle when it could be both earning yield and supporting economic activity.
Will stablecoins like USDT and USDC disappear?
It is unlikely they will disappear entirely in the near future due to their massive liquidity, entrenched positions, and regulatory compliance efforts. However, they are likely to face increasing competition and may see their market share decline as users migrate to stablecoins that offer better yields and more innovative features.