What is the yield-generating stablecoin YLDS? Decoding the mechanism of earning money by holding it.

Yielding stablecoins automatically generate returns through built-in mechanisms, allowing users to earn passive income simply by holding, without the need for staking or mining. YLDS, launched by Figure Markets, is the first yielding stablecoin registered with the SEC in the United States, offering an annualized yield of over 3%.

Unlike the need for users to actively deposit stablecoins into DeFi platforms for farming, the yield-generating stablecoin YLDS constructs its yield system on the token itself, with the protocol handling all operations behind the scenes, achieving true passive income.

Core Operating Mechanism of Yield Stablecoin YLDS

Yield-bearing stablecoins are digital assets on the blockchain designed to maintain a stable value (typically pegged to fiat currencies like the US dollar) while generating returns for holders. Unlike traditional stablecoins like USDT or USDC that are purely pegged to fiat value and do not provide returns, yield-bearing stablecoins incorporate mechanisms for accumulating interest or rewards over time.

This innovative design addresses a fundamental problem of traditional stablecoins: holders earn zero returns. When you deposit $1,000 USDC in a wallet, you still have only $1,000 USDC after a year. While the value is stable, the time value of money is completely lost. In contrast, if you deposit the same $1,000 in a bank savings account, you can at least earn 1-2% interest. Yield-bearing stablecoin YLDS was created to fill this gap.

Five Major Yield Generation Mechanisms

Yield-generating stablecoins utilize various mechanisms to provide returns while maintaining a stable value:

DeFi lending protocols: Stablecoin issuers deposit user funds into decentralized lending platforms like Aave or Compound. These platforms pay interest on deposits, and issuers return the earnings directly to holders, usually in the form of interest-bearing tokens. For example, aUSDC is the interest-bearing certificate received by users after depositing USDC into Aave.

Staking and Rewards: Project representatives use users' staked collateral assets (usually other cryptocurrencies, such as ETH or DOT). They collect staking rewards and distribute them proportionally to stablecoin holders. This model allows users to share staking profits without directly exposing themselves to high-volatility assets.

Tokenization of Real World Assets (RWA): Issuers will invest user funds in income-generating financial instruments such as short-term U.S. Treasury bonds. They will tokenize the returns and distribute them to users as interest. This model is adopted by USDY and USDM, providing returns through the transmission of government bond yields, which is often more attractive to regulated investors or institutional investors.

Rebase: Some protocols use an algorithmic rebase to automatically increase users' token balances to reflect accumulated earnings without the need for manual claims or transfers. The number of tokens in users' wallets will automatically grow daily or monthly.

Delta Neutral Strategy: Taking Ethena's USDe as an example, the Delta Neutral Strategy provides algorithmic returns. This is a method of balancing long and short positions to reduce price volatility risk. Specifically, it earns returns by staking ETH while shorting in the derivatives market to offset price fluctuations, helping to stabilize the USDe price around 1 dollar while still generating high returns.

Yielding Stablecoin YLDS Key Project Analysis

In 2025, multiple stablecoin issuers are competing to combine yield with the stability of the US dollar. Here are the key projects to watch:

YLD: The first SEC registered yield stablecoin

YLD is launched by Figure Markets and operates on the Provenance blockchain. It is the first yield-bearing stablecoin registered with the U.S. Securities and Exchange Commission (SEC). It offers holders an annual yield of over 3%, calculated as the secured overnight financing rate (SOFR) minus 0.50%. Interest is accrued daily and distributed monthly.

YLD is supported by a portfolio of assets, primarily short-term U.S. Treasury bills and other low-risk instruments, similar to major money market funds. However, it may include some high-risk assets, such as asset-backed securities, and its assets are not isolated in a trust, meaning they are not fully separated from the issuer's assets in the event of bankruptcy. Nonetheless, its SEC registration provides a regulatory compliance aura that is highly attractive to institutional clients.

sDAI: The Savings Token of the Sky Ecosystem

sDAI (savings DAI) is the interest-bearing version of DAI, earning returns through the DAI Savings Rate (DSR) managed by Sky (formerly MakerDAO). Users lock DAI in the DSR contract to obtain sDAI, and its quantity (rather than value) increases with the growing returns. This design means the number of sDAI tokens in your wallet remains constant, but the redemption value of each sDAI gradually rises.

USDe: Ethena's algorithmic stablecoin

Ethena's USDe adopts the aforementioned Delta neutral strategy. This complex mechanism performs excellently in bull markets, providing double-digit annualized returns. However, there is a risk of decoupling under extreme market conditions, as evidenced by the recent event where USDe briefly fell to $0.65 on CEX platforms.

OUSD: Origin's yield-bearing coin without collateral

OUSD from Origin provides yield without the need for staking and integrates with multiple DeFi protocols. This design maximizes convenience—users simply need to hold OUSD, with no additional actions required, and the yield will automatically accumulate in their accounts.

USDY and USDM: Institutional-grade RWA stablecoins

Both of these projects pay returns through investments in short-term U.S. Treasury bonds, with annualized returns typically in the range of 4-5%. They are primarily aimed at institutional clients and regulated investors, requiring completion of KYC and accredited investor certification.

Yielding stablecoin YLDS and the key differences with traditional stablecoins

The fundamental differences between the two can be clearly seen through the comparison table:

Main goal: Yield stablecoins pursue stability and passive returns, while traditional stablecoins only pursue stability.

Source of income: Yield-generating stablecoins have built-in mechanisms such as DeFi, staking, and RWA, while traditional stablecoins rely on external platforms.

Profit methods: Yield stablecoins provide passive or protocol-based yields, while traditional stablecoins require external platforms (such as Aave).

Complexity: Yield-based stablecoins have a higher complexity due to their income mechanism, while traditional stablecoins are simpler and do not have built-in yields.

Risk Level: Yield-type stablecoins have higher risks (contract risks, RWA risks, regulatory risks), while traditional stablecoins have lower risks (mainly pegging and issuer risks).

Main use cases: Yield stablecoins are used for income, savings, and DeFi integration, while traditional stablecoins are used for payments, trading, and collateral.

Although yield-bearing stablecoins carry higher risks due to smart contract flaws and regulatory uncertainty, they support a wider range of use cases, making them particularly suitable for investors looking to maximize capital efficiency.

The Eight Major Risks of Investment Yield Stablecoin YLDS

Stablecoins that pay yield may seem like the perfect passive income tool, but users must weigh the hidden risks behind the returns. Here are the most important risks to understand:

Smart contract flaws: vulnerabilities in yield agreements can freeze or deplete funds. Many DeFi losses stem from a flaw in a single line of code. Even audited contracts may contain undiscovered vulnerabilities.

Liquidity tightening: If the yield-supporting assets cannot be quickly sold (especially during stress events), users may face withdrawal delays or decoupling events. The decoupling of USDe on CEX in October 2025 is a typical case.

Loss of Peg: If the mechanism collapses, users panic, or returns cannot be maintained, the price of yield-generating stablecoins may fall below $1. Once the peg is lost, even temporarily, it can severely damage trust.

Regulatory changes: Upcoming legislation in the United States, such as the STABLE Act (focusing on issuer regulation) or the GENIUS Act (supporting blockchain innovation), may reclassify these assets as securities, thereby affecting operations.

Breach of Agreement: If the earnings come from lending, the borrower or the partnering platform may default or be attacked by hackers, thereby exposing users to the risk of losing funds.

Too complex and hard to trust: Some yield strategies are difficult to understand. If users cannot track how the yields are generated, they cannot assess the level of risk. Projects with insufficient transparency should raise red flags.

Market downturn risk: Even stablecoins may be affected during a crash, primarily if returns depend on high-risk crypto assets. When DeFi protocols collectively face a liquidity crisis, interest-bearing stablecoins may fail to deliver the promised yields.

Off-chain reliance: Stablecoins backed by RWA must trust banks, custodians, and brokers, which increases risks outside of the blockchain. If the custodian goes bankrupt or assets are frozen, the value of the stablecoin may be compromised.

Regulatory Landscape and Institutional Dynamics in 2025

The focus of yield-bearing stablecoin YLDS extends far beyond the native realm of cryptocurrencies. In 2025, traditional finance (TradFi), regulatory bodies, and the entire market are reshaping the way they operate. The result is growing demand, stricter scrutiny, and a new push for transparency.

Institutional Momentum Acceleration Adoption

Large banks and asset management companies are now launching tokenized government bonds and issuing yield-generating stablecoins, betting on strong demand for on-chain tools. These digital versions of traditional assets such as U.S. government bonds are designed to earn yields while maintaining their ease of trading on blockchain networks.

Companies utilize yield-bearing stablecoins for efficient capital management, allowing idle funds to earn passive income while maintaining liquidity to meet operational needs. For companies holding large amounts of cash, allocating some funds to yield-bearing stablecoins may be more attractive than keeping them in traditional stablecoins with zero interest rates.

Upcoming Regulatory Framework

The United States will eventually finalize the rules for stablecoin audits, asset backing, and information disclosure. The STABLE Act emphasizes strict compliance for issuers, requiring regular audits, sufficient asset reserves, and transparent information disclosure. In contrast, the GENIUS Act encourages innovation and reduces regulatory burdens, attempting to strike a balance between protecting investors and promoting innovation.

The final form of these two bills will profoundly affect the operation of yield-generating stablecoin YLDS. If regulation is too strict, it may stifle innovation and increase compliance costs; if it is too lenient, it may provide opportunities for bad issuers, damaging the reputation of the entire industry.

Transparency Becomes a Core Competitiveness

Users and regulators are now focusing on how issuers manage risks and report their holdings. This means they want to know exactly what assets back the stablecoin and how issuers mitigate losses. Transparency requirements include:

Detailed composition of reserve assets (proportion of government bonds, proportion of cash, other assets)

Risk control strategies (hedging strategies, use of derivatives, asset diversification)

Regular Audit Report (Third-Party Verification of Reserve Adequacy)

Method of calculating returns (clearly explain how annualized returns are derived)

A comprehensive understanding of supporting assets and risk control is becoming a core expectation. Projects that can provide high transparency in yield-generating stablecoin YLDS will have a competitive advantage in 2025.

Investor Strategies and Selection Criteria

Faced with a plethora of yield-generating stablecoin options, how should investors make decisions?

First, assess the sustainability of the source of returns. If a stablecoin promises a 20% annual yield while the yield on government bonds in the market is only 4-5%, where does the extra return come from? Does it rely on high-risk DeFi lending or leverage strategies? A sustainable return model should align with the actual returns of the underlying assets.

Secondly, check the transparency and audit situation. Quality projects regularly publish Proof of Reserves and invite third-party auditing agencies for verification. Projects that refuse to disclose transparently should raise alarms.

Third, consider the regulatory compliance status. Products like YLDS that are registered with the SEC may have slightly lower yields, but regulatory endorsement provides an extra margin of safety. For investors with lower risk tolerance, compliant products are a safer choice.

Fourth, diversified allocation reduces risk. Do not invest all funds into a single yield-generating stablecoin. You can diversify your allocation among different mechanism products such as YLDS, sDAI, and USDY to lessen the impact of a single protocol failure.