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Main Use Cases for Stablecoins
This article offers a practical overview of stablecoins, focusing on the main principles and a few examples. It does not attempt to cover every token, protocol, or strategy.
We will look at three common uses: moving capital, maintaining a financial reserve, and earning income. These uses can overlap, but each calls for a different balance between liquidity, accessibility, and risk.
Mobility and Access
You want to be able to access your money wherever you are. For freelancers, people working with international clients, and those who travel or live in different countries, this is often an everyday need.
Stablecoins can make that easier. You can keep funds in your own wallet and exchange what you need for local currency through services available at your destination. This lets you cover everyday expenses while keeping the rest of your balance in the same wallet as you move between countries.
Businesses can benefit too. Accepting stablecoin payments can make it easier to sell goods and services to customers abroad.
Security
Some people hold part of their savings in dollar-pegged stablecoins to avoid relying entirely on a bank. With a self-custodied wallet, you control the keys to your funds and keep this reserve outside your bank account.
This can matter when political instability, conflict, or a natural disaster disrupts banking services. You may still be able to access your savings from elsewhere, provided you have kept your wallet keys or recovery phrase safe and can get online.
Income
Stablecoins can also be used to earn income through DeFi. This is the main focus of the article: earning a return while keeping your capital accessible and easy to move.
The options range from simple deposits to complex strategies that require regular monitoring. Some strategies may tie up your capital, making it harder to access your funds at short notice.
Before choosing a strategy, understand where the income comes from, what risks you take, and how you can withdraw your funds. This matters even more if the same money also serves as your emergency reserve.
Stablecoin Types
Stablecoins differ in what backs them and how they maintain their target price. Understanding these differences helps explain where their value comes from and what could put it at risk.
This article focuses on three main models:
- Fiat-Backed
- Mixed-Collateral or Hybrid
- Crypto-Backed
We will also look at yield-bearing stablecoin tokens, such as sUSDS and sUSDe. These give holders access to income from an underlying protocol. Yield-bearing is an additional feature that can accompany different backing models, so we discuss it separately.
1. Fiat-Backed Stablecoins
Fiat-backed stablecoins are supported by reserves held by an issuer. For dollar stablecoins, these commonly include bank deposits, cash equivalents, and U.S. Treasury bills, or T-bills: short-term debt issued by the U.S. government.
Examples include USDT, USDC, RLUSD, PYUSD, and USDG. All aim to maintain a value close to one US dollar. They differ in the assets held in reserve, how those assets are held, and the conditions under which holders can redeem their tokens.
Tether’s June 2026 reserve report lists U.S. Treasury bills, overnight and term reverse repurchase agreements, and cash and bank deposits among the assets backing USDT. Its reserves also include gold, Bitcoin, secured loans, and other investments. Reserve reports are available in the Transparency section of Tether’s website.
The issuer earns income by investing its reserves. When Tether invests in Treasury bills, those securities remain part of USDT’s backing, while the investment income belongs to the company. Simply holding USDT does not entitle the holder to that income, as explained in Tether’s Relevant Information Document.
Liquid reserves help the issuer meet redemption requests. Tether can use available cash, money received when securities mature, or proceeds from selling assets to return dollars to eligible customers. Direct redemptions are subject to its terms, fees, and processing conditions.
Some stablecoins are also described as RWA-backed because their reserves include tokenized investment funds. According to Anchorage Digital’s August 2026 reserve report, USDtb is backed primarily by BlackRock’s BUIDL fund, with a smaller cash reserve. BUIDL invests in cash, U.S. Treasury bills, and repurchase agreements. We include USDtb in the fiat-backed category here: Treasury bills are themselves real-world assets, and holding them through a tokenized fund does not fundamentally change the nature of the backing.
2. Mixed-Collateral Stablecoins
Some stablecoins combine different assets and financial strategies to support their value. Ethena’s USDe, for example, is a synthetic dollar backed by liquid stablecoins, lending positions, tokenized real-world assets, and hedged trading positions. The allocation can change as market conditions evolve.
DeFi Lending
Ethena supplies part of its stablecoin reserves to lending markets such as Aave and Morpho, earning interest paid by borrowers. The return varies with borrowing demand and the amount of capital available in each market.
Institutional Lending
Ethena also lends stablecoins to institutional borrowers. These borrowers provide collateral, such as BTC, worth more than the amount borrowed and pay interest on their loans. The interest generates income for Ethena; the collateral helps protect it if a borrower fails to repay.
Crypto Basis
Ethena holds cryptoassets such as BTC or ETH and opens matching short positions in perpetual futures. For example, it can hold 1 BTC and short 1 BTC. If BTC falls in price, the short gains value. If BTC rises, the BTC gains value while the short loses value. The aim is to keep their combined value relatively stable in dollars. This is called a delta-neutral strategy.
Income can come from funding payments. When funding rates are positive, traders holding longs pay those holding shorts, including Ethena. When funding rates turn negative, Ethena pays instead.
The short trade must actually be executed and remain matched to the crypto holdings. Ethena’s trading system monitors orders and open positions, selects trading venues based on liquidity and costs, and checks that the portfolio stays within its risk limits.
Ethena’s documentation also describes using futures with an expiry date. These contracts have no periodic funding payments. A return can instead come from buying a cryptoasset and selling a matching futures contract at a higher price, then holding the paired trade to expiry. Trading and other costs reduce the return.
When part of the backing is held in staked ETH, Ethena can also earn rewards for helping secure the Ethereum network.
Real-World Assets (RWA)
Ethena uses some of the reserve assets received when eligible participants mint USDe to buy tokenized shares in investment funds. Those fund shares then become part of USDe’s backing.
Consider a simplified example, ignoring fees. A participant transfers 100,000 USDC to Ethena and receives 100,000 USDe. Ethena then uses 20,000 USDC to buy fund shares. The backing now consists of 80,000 USDC and fund shares initially worth $20,000. The participant still holds the same 100,000 USDe.
The allocation shown includes two tokenized funds: JAAA, the Janus Henderson Anemoy AAA CLO Fund, and STAC, the Securitize Tokenized AAA CLO Fund. Both invest in securities backed by pools of corporate loans, known as collateralized loan obligations, or CLOs.
Companies pay interest on these loans, providing income for the funds through their CLO investments. By holding the funds’ tokens, Ethena receives a share of that income after fees and expenses. For JAAA, accumulated income is reflected in the value of its fund shares.
Liquid Stablecoins
Ethena keeps part of USDe’s backing in readily available stablecoins, including USDT, USDC, USDtb, and PYUSD. These provide funds for redemptions and portfolio adjustments without first having to sell fund holdings or close hedged trading positions.
For example, USDC held in an available reserve can be used directly to meet a redemption request. Funds invested in JAAA must first be recovered by selling or redeeming fund shares. USDC supplied to Aave must first be withdrawn from the lending market. “Liquid” therefore describes how readily the funds can be used: the same stablecoin can fall into different categories depending on how Ethena holds it.
3. Crypto-Backed Stablecoins
Crypto-backed stablecoins are issued against cryptocurrency collateral. In an overcollateralized model, borrowers deposit assets worth more than the stablecoins they borrow. The difference provides a buffer against a fall in the collateral’s value.
One example is BOLD, issued through Liquity. Its collateral consists of ETH, held in wrapped form, and the liquid staking tokens wstETH and rETH.
Positions can be liquidated if their collateral value falls below the required level. Liquidations help cover outstanding debt, while redemption mechanisms help support the dollar peg.
Before borrowing, users should understand when their position could be liquidated and how to manage that risk. Managing a borrowing position is beyond the scope of this article.
4. Yield-Bearing Stablecoin Tokens
Yield-bearing tokens give holders access to income generated by a stablecoin protocol. Users deposit USDS into Sky’s savings contract to receive sUSDS, or stake USDe with Ethena to receive sUSDe. These tokens represent a position in a contract holding the underlying stablecoin.
The source of income depends on the protocol:
- sUSDe: Ethena distributes part of its revenue to users who stake USDe. Sources can include lending interest, returns on tokenized funds, rewards on eligible stablecoin holdings, Ethereum staking rewards, and positive funding payments. These are the income sources discussed in the USDe section above.
- sUSDS: Holders earn the Sky Savings Rate, set by Sky Governance. Sky generates revenue through activities including collateralized lending, U.S. Treasury investments, and lending markets. Savings payments are funded from the protocol’s overall surplus, so the rate does not directly track the return of any single investment.
Ethena’s reserve fund provides an example of how revenue allocation can change. In its Reserve Fund: March 2026 Update, published on April 8, 2026, the risk committee assessed the fund as more than sufficient for the risks covered. It recommended redirecting interest earned on the fund’s USDtb holdings to sUSDe holders.
Tether’s Revenue Model and USDT’s Dollar Peg
Revenue Model
Tether’s reserves back USDT and generate income for the company.
When USDT is issued, an eligible customer transfers US dollars to Tether and receives the corresponding amount of USDT. The tokens can then be held in a wallet, transferred, or used for payments.
The dollars received become part of Tether’s reserves. The company invests a substantial portion in income-generating assets, particularly short-term U.S. Treasury bills.
Consider a simplified example, ignoring fees. A customer exchanges $100,000 for 100,000 USDT. If the corresponding reserve assets earn a hypothetical annual return of 4%, they generate approximately $4,000 in gross annual income for Tether. The customer still holds 100,000 USDT. The investment income belongs to Tether and is not added to the customer’s balance.
To put this business model into perspective, Tether reported more than $10 billion in net profit for 2025, according to its year-end results published on January 30, 2026.
USDT’s Dollar Peg via Arbitrage
USDT aims to trade close to $1, but its market price can temporarily fall below that level. This can create an opportunity for traders to earn the difference through arbitrage.
Suppose USDT trades at $0.99. An eligible trader buys 1,000,000 USDT for $990,000 and redeems it with Tether for $1,000,000. The difference is $10,000 before trading fees, redemption fees, and other costs.
These purchases increase demand for USDT and help push its price back toward $1. As the price gap narrows, the potential profit shrinks.
This mechanism depends on confidence in Tether’s reserves and on eligible traders being able to redeem their tokens. It helps support the dollar peg, but does not guarantee that USDT will always trade at exactly $1.
A similar arbitrage principle helps support the dollar pegs of BOLD and USDe, although the assets received on redemption and the conditions for accessing it differ.
Earning on Stablecoins: Strategies, Networks, and Liquidity
Choosing a Network
Reliability and Liquidity
Stablecoin markets operate across both EVM-compatible and non-EVM networks. Ethereum, Base, Arbitrum, Plasma, and Monad belong to the first group; Solana, Sui, Aptos, NEAR, and Stellar belong to the second. The available protocols and earning opportunities vary between networks. When choosing a network, I focus on two main factors: reliability and liquidity.
Ethereum mainnet has a long operating history, making it a conservative starting point for holding stablecoins and using DeFi. However, transaction fees can make smaller deposits or frequent transactions less economical, especially during periods of high network activity.
Ethereum also leads EVM networks in both the amount of capital held in DeFi protocols and stablecoin supply. Deep liquidity can help limit a large trade’s impact on the price. Still, the liquidity available for your particular token pair matters more than the network’s overall size.
Solana is an established non-EVM network with an active stablecoin market and a range of lending and other DeFi protocols. Its low transaction fees can make it practical for smaller balances and frequent transactions. As on Ethereum, liquidity depends on the tokens and protocols you use.
Responding to Incidents
A large, established ecosystem brings together experienced developers and security specialists. On Ethereum, these teams and their tools have helped investigate attacks and resolve technical problems. The following examples show why that experience matters:
- Euler, March 2023: An investigation and negotiations helped recover funds stolen from the lending protocol. The case shows the value of coordinated incident response, although recovery is never guaranteed. See CertiK’s review.
- Ethereum, May 2023: Software problems temporarily delayed the final confirmation of blocks. Other independently developed clients continued working, helping the network recover without a manual restart. See the developers’ incident report.
Practical Approaches
1. Lending Markets
Lending markets such as Aave and Morpho allow you to supply stablecoins and earn interest paid by borrowers. Some positions also receive additional rewards from protocols, token issuers, or vault curators seeking to attract deposits.
Before depositing, check the following:
- Where the yield comes from. Separate borrower interest from additional rewards. In variable-rate markets, the base return changes with borrowing demand. Incentives can end, and rewards paid in another token can lose value. Look at the rate history and reward terms before relying on the advertised percentage.
- Which market or vault you are entering. Supplying USDC does not mean the loans are backed by USDC. Check what borrowers provide as collateral and how the market handles a fall in its value. If liquidations fail to recover enough to cover the debt, depositors can face losses. For a Morpho vault, also check who sets its risk limits and where it allocates deposits. Two vaults accepting the same stablecoin can have very different exposures.
- How much liquidity is available for withdrawals. Total deposits are not the same as funds available to withdraw. If a market has 10 million USDC in deposits and 9.5 million is already lent out, only 500,000 USDC remains available at that moment. Further withdrawals depend on repayments or new deposits. Compare your position size with available liquidity. For a vault, also check its withdrawal conditions and access to funds in the underlying markets.
- What remains after costs. Check whether the displayed return already accounts for vault fees. Network fees and the cost of claiming or exchanging rewards can further reduce earnings, particularly on smaller deposits.
These checks remain relevant after depositing. Monitor the base rate, reward programmes, available liquidity, and changes to the vault’s allocations. A rising interest rate can mean that more of the supplied funds have been borrowed, leaving less available for withdrawals. A higher return can therefore come with less flexibility over when you can access your money.
Lending markets can be a practical way to earn a moderate return while keeping funds accessible, provided enough liquidity remains available for withdrawals.
2. Stability Pools
Liquity’s Stability Pools allow BOLD holders to earn income by providing funds for liquidations. When a borrower’s collateral value falls below the required level, the position can be liquidated. The protocol burns BOLD from the corresponding Stability Pool to cancel the debt and distributes collateral from the liquidated position to depositors. Each depositor’s share of the debt cancellation and collateral received is proportional to their deposit.
Income comes from two sources:
- Borrower interest. Each borrowing market directs 75% of its interest revenue to its Stability Pool, paid in BOLD. Depositors can therefore earn income even when no liquidations occur. The return varies with borrowers’ interest rates, outstanding debt, and the amount deposited in the pool.
- Liquidation gains. Depositors effectively acquire collateral at a discount. The gain is the difference between the value of the collateral received and the BOLD used to cancel the debt.
For a simplified example, suppose you deposit 10,000 BOLD. A liquidation uses 1,000 BOLD from your share and gives you ETH worth $1,050 at that moment. You now have 9,000 BOLD plus $1,050 in ETH: a combined value of $10,050, assuming BOLD trades at $1 and ignoring interest and costs.
The ETH can fall in value before you sell it, reducing or erasing the gain. Rapid price declines or delayed price updates can also make a liquidation unprofitable.
Before depositing, decide which collateral you are willing to receive and whether you intend to hold it or exchange it back into stablecoins. Monitor your remaining BOLD balance and accumulated collateral, as repeated liquidations can gradually change the composition of your position.
Direct Stability Pool deposits have no fixed lock-up period. However, withdrawing your remaining BOLD does not convert the collateral you have received back into stablecoins. That requires a separate sale, where trading fees and available liquidity matter.
3. Yield-Bearing Stablecoin Tokens
As discussed earlier, you can earn income by holding sUSDe. When you need the funds, you can convert your position back into USDe, subject to the protocol’s withdrawal conditions.
4. Stablecoin Liquidity Pools
Pools containing two or more stablecoins allow direct on-chain swaps, for example between USDC and PYUSD. Liquidity providers supply the assets needed for these swaps and receive a share of trading fees. They may also receive additional rewards funded by stablecoin issuers, their partners, DeFi protocols, or network ecosystem programmes.
These incentives help attract liquidity and make stablecoins easier to trade and use. PayPal, for example, has supported PYUSD incentive programmes in DeFi, including an initiative covering PYUSD deposits on Aave and PYUSD/GHO liquidity on Balancer.
Returns depend on trading activity, your share of active liquidity, and any additional rewards. Check how much of the advertised yield comes from trading fees and how much depends on temporary incentives.
5. Looping Strategies
Looping uses borrowing to increase the size of a yield-generating position. The borrowed funds are reinvested into the strategy, with the aim of earning more on them than it costs to borrow.
Returns depend on the difference between the yield earned and the borrowing rate, after fees. A change in either rate can reduce or reverse that difference. Looping also increases exposure to depegs and liquidation risk, so it requires active monitoring.
Do not use looping until you understand how the strategy works and what can trigger liquidation. Under favourable market conditions, some looping strategies can offer double-digit APYs, but those rates may not last.
Conclusion
Stablecoins can offer a way to hold capital, earn income, and keep funds accessible. Combining these benefits depends on the tokens and strategies you choose, the available liquidity, and the withdrawal conditions.
Look beyond the advertised yield. Understand where the income comes from, what risks you take, and how readily you can access your money when you need it.