The Benefits and Risks of Stablecoin Yield Farming
It’s impossible to talk about web3 in 2025 without talking about stablecoins. So let’s talk about stablecoins. Not the boring, centrally issued Tethers and USDCs of the world – they’ve had enough airtime thanks to catalysts such as the GENIUS Act and Circle IPO. Instead, let’s talk about a specific subset of the stablecoin market that’s enjoying a bumper year – and it hasn’t required Senate approval or Wall Street hype to get there.
Yield-generating stablecoins have taken DeFi by storm, exploding in every metric worth measuring, from market cap to multichain integrations. Now a $13B market and rising fast, yield-generating stablecoins have unlocked new possibilities when it comes to risk-reduction, composability, and, of course, sustainable yield. They – as well as standard stablecoins, which can also be locked into DeFi protocols to generate yield – have quietly become the earning agents at the heart of decentralized finance. This is the story of how this happened and what it means for the future of onchain yield.
The Birth of Stablecoin Farming
Yield farming is a term that entered common parlance five years ago, just as DeFi was getting started. By placing one token into a liquidity pool or staking protocol, users could earn a secondary – or more of the original – token in return. It was a simple concept but one that quickly gained traction, despite its inherent risks, not least in terms of impermanent loss caused by pooling volatile tokens whose value is prone to fluctuating wildly.
The first wave of yield farming, characterized by high APYs, came and went, but the concept didn’t go away. Instead, as DeFi consolidated, the industry entered a maturation phase in which yield was lower – often multiples lower – but eminently more sustainable. Now, users can stake low-volatility assets such as ETH as well as non-volatile assets like stablecoins and earn single-digit APYs. Ironically, the slogan that came to define the first wave of yield farming – “It ain’t much, but it’s honest work” – now applies to the second wave. The yield was low, but at least it was sustainable.
Despite this progress, yield farming was still the preserve of risk-on investors due to the prevalence of volatility and smart contract exploits, culminating in a record $3.1B in DeFi hacks occurring in 2022. Slowly but steadily, however, things began to change. DeFi protocols became safer, hacks diminished, and a new asset class emerged that has served to mainstream yield farming: stablecoin yield farming.
Dollar-Pegged Yield on Demand
Traditional stablecoins such as USDC and USDT serve as reliable units of account but they offer no inherent returns – at least not unless you lock them into yield-bearing DeFi protocols, which is fine for onchain natives but bewildering to less experienced users.
Yield-generating stablecoins, in comparison, enable holders to earn passive income simply by holding or staking their assets, without the volatility associated with other cryptocurrencies – not to mention the learning curve. Instead of having to study umpteen DeFi protocols, assess their yield and security score, and complete multiple hops to stake, unstake, and collect rewards, yield-generating stables automate everything.
Now, all you have to do is hold a non-volatile asset and stake it – at most – to earn up to double-digit APYs. It sounds too easy. And from a UX perspective, it is easy: rather than juggling multiple tokens, protocols, and networks, one asset can do it all. This ease-of-access and generous returns – particularly from a traditional finance perspective – has transformed yield-generating stablecoins into a highly lucrative onchain vertical that’s paid out more than $800M in yield to date.
Compelling as the concept of passive income from stablecoin farming sounds, there are of course trade-offs to factor in, just as there is with everything in life. We’ll examine these shortly, but first let’s take a closer look at two of the leading yield-generating stablecoin protocols in action.
Falcon and Ethena Fly the Flag for Stable Farming
Falcon Finance is a rising star in the stablecoin yield farming space, surpassing $1.4B in TVL in a matter of months and generating yield that’s the envy of other DeFi protocols. Its USDf stablecoin has become a versatile asset that’s deeply integrated into scores of centralized and decentralized platforms, while its staking counterpart, sUSDf, has been generating steady yield for holders that regularly run into double digits and currently stands at a respectable 7.7% APY.
Falcon utilizes sophisticated strategies such as basis trading and arbitrage ,leveraging market inefficiencies to generate consistent yields for stablecoin holders. The stablecoins themselves are over-collateralized using a basket of crypto assets – including conventional stablecoins – as well as a smaller amount of real-world assets such as T-bills. Falcon’s user-friendly interface, allowing investors to deposit stablecoins like USDC and earn passive income without complex DeFi expertise, has found product-market fit, and right now, it can do no wrong.
Ethena is the other star of the yield-generating landscape on account of USDe, whose parallel token – sUSDe – performs a similar role to Falcon’s sUSDf. By staking ETH and taking short positions in perpetual futures contracts, Ethena balances price risks to maintain USDe’s $1 peg while generating yield that currently stands around 10%. Users can mint USDe by depositing staked Ethereum (stETH) or can purchase the stablecoin on exchanges, then stake it to earn sUSDe, which accrues value over time.
Over 40% of the stablecoin yield paid out to date comes courtesy of Ethena, which attests to its dominance over the nascent but rapidly-expanding yield-bearing stablecoin market. Of course, the thing to know about Ethena – and Falcon for that matter – is that the yield isn’t just limited to the APY quoted for staking the stable in question. Because each asset has been broadly integrated into a slew of DeFi protocols, it’s possible to stack yield, such as by looping through lending protocols, maximizing the value of stable assets that can be deposited and then used to generate more yield-generating stablecoins. It’s a game, but it’s one worth playing.
Factoring in Underlying Risk
Needless to say, no investment opportunity is entirely devoid of risk, and stablecoin yield farming is no exception. One of the primary concerns that must be factored in pertains to custody, given the reliance on third-party platforms or protocols to manage user assets. An obvious example is a centralized exchange offering yield to stablecoin holders, since this requires custodying your assets and relying on the platform to manage them responsibly.
But the same holds true in many cases with DeFi platforms. For example, while a protocol may be decentralized in terms of its processes being controlled by smart contracts, there is still the need to custody assets in order to mint, say, a yield-generating stablecoin. Should the issuer suffer from a hack or exploit – as seen in past DeFi incidents – funds can be irretrievably lost.
Even with over-collateralization in protocols such as Ethena, the underlying assets (such as T-bills or staked ETH) may be held by centralized intermediaries, introducing points of failure. This risk is amplified in multichain environments, where bridging assets between networks can expose users to additional vulnerabilities from bridge exploits or chain-specific issues.
Another hazard that, while rare is not entirely out of the question, is capital stability risk: the potential for the stablecoin's peg to break or for yields to erode unexpectedly. While yield-generating stables aim for dollar parity through strategies like basis trading or delta-neutral hedging, market turbulence such as sharp interest rate shifts or liquidity crunches could destabilize these mechanisms. The onus is therefore on the user to conduct thorough due diligence and diversify across protocols to mitigate these risks.
Why Stable Farming Is All the Rage
Stablecoin farming is one of the fastest-growing onchain verticals for good reason. The yield is attractive and, while variable, it is at least sustainable. Complexity is minimal, making yield-bearing stables accessible to a vast swathe of onchain users, regardless of technical knowledge. And the risk, while not entirely eliminated, is low thanks to meticulous auditing, over-collateralization of stablecoins, and delta-neutral yield-generation strategies.
Moreover, the rewards on offer are generous enough to make yield-generating stables a compelling alternative to sources such as ETH staking – particularly given the absence of volatility when stacking stables. There are still sectors where yield-generating stablecoins are suboptimal, such as in payments, remittances, and B2B applications, where the added layer of complexity doesn’t justify their inclusion. But in DeFi, they’re a natural fit, bringing yield that’s deliverable through bull markets and bear while protecting holders from downside risk. 2025 will go down as the year that stablecoins became great and it’s thanks in no small part to yield-generating stables.
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