Why Interest-Bearing Stablecoins Are Inherently Unstable

Interest-bearing stablecoins are inherently unstable because they embed a variable yield into a unit of account. This creates a price discovery problem where the stablecoin's value is no longer pegged to $1, but to its fluctuating future yield, violating the core function of a stable medium of exchange.

Yield is a liability, not a feature, for a stablecoin. Protocols like MakerDAO's sDAI and Ethena's USDe must manage this liability by generating yield from volatile sources like staking rewards or perpetual futures funding rates, introducing systemic risk that a simple collateral-backed stablecoin like USDC does not carry.

The peg becomes a moving target. Unlike a static $1 peg, the value of an interest-bearing stablecoin is the net present value of its future yield stream. This creates arbitrage complexity that on-chain oracles like Chainlink cannot trivially solve, leading to persistent de-pegs during market stress, as seen with Terra's UST.

Evidence: During the May 2022 depeg, UST's death spiral was accelerated by its Anchor Protocol yield collapsing from 20% to near zero, instantly destroying the token's perceived fundamental value and triggering a reflexive sell-off.

Instant Redemption vs. Locked Yield: Protocols like Ethena's USDe or Mountain Protocol's USDM promise on-demand dollar redemption. Their underlying yield-generating assets—staking derivatives or T-Bills—have maturity or unbonding periods. This creates a structural liquidity mismatch.

The DeFi Liquidity Crunch: During market stress, redemptions spike. The protocol must sell its yield-bearing assets at a discount to meet demand, triggering a death spiral. This is the same flaw that broke Terra's UST, just with 'real yield' assets.

Yield is Not Liquidity: Aave's GHO or Maker's upcoming Spark Protocol sidestep this by using overcollateralized debt positions as the primary backing. Their stability comes from collateral liquidation, not asset maturity transformation.

Evidence: The 2022 Lido stETH depeg demonstrated this. stETH, a yield-bearing derivative, traded at a 7% discount when redemptions were gated by Ethereum's withdrawal queue, proving secondary market liquidity fails under stress.

Yield is a subsidy that masks the underlying cost of capital. Protocols like Ethena and Mountain Protocol pay yield to bootstrap demand, but this creates a price-insensitive user base that chases yield, not utility.

This misalignment breaks during stress. When underlying yields drop or volatility spikes, the sudden capital flight from these 'stable' assets is more violent than from non-yielding ones like USDC, as seen in the UST depeg cascade.

The yield is a liability, not a feature. It transforms a stablecoin from a neutral settlement layer into a competitive yield product, forcing it into unsustainable battles with T-Bills or DeFi pools for capital.

Evidence: The total collapse of UST's $18B market cap in days proved that algorithmic yield, even when 'real', cannot defend a peg against reflexive selling pressure and liquidity evaporation.

Interest-bearing stablecoins are monetary hybrids that attempt to be both a stable medium-of-exchange and a yield-bearing store-of-value. This creates a fundamental conflict where the token's utility for payments is undermined by the incentive to hold it for yield, reducing its velocity and liquidity precisely when needed.

Yield is a liability, not a feature. Protocols like MakerDAO's sDAI and Ethena's USDe must generate returns to pay holders, embedding an unavoidable risk vector. This yield is sourced from volatile on-chain lending (Aave, Compound) or complex delta-neutral derivatives, introducing points of failure absent in simple, asset-backed stablecoins.

The peg breaks during stress. In a market downturn, the scramble to exit the yield-bearing asset and the potential collapse of its underlying yield strategy creates a reflexive death spiral. This is distinct from the run-on-collateral model that felled Terra's UST, but the instability is inherent to the design.

Evidence: The DeFi composability trap. The 2022 liquidity crisis demonstrated that yield sources like stETH de-pegging can cascade. A yield-bearing stablecoin integrated across Aave, Curve, and Uniswap amplifies this contagion risk, turning a single point of failure into a systemic event.