The Next Big Thing in Stablecoins

Why we’re so excited about the potential of yield-bearing stablecoins

November 7, 2023


I’ve always been fascinated by finance. In fact, that’s what I got into crypto to do: to help support builders who are building better financial products and infrastructure. What I’m most passionate about as an investor is really going deep on the core primitives of DeFi and finding new innovations in each of them. That’s things like decentralized exchanges, lending markets, and stablecoins.

There’s so much going on now in the stablecoin space. And when I say “now,” I mean literally over the last few weeks. We’ve been meeting with some really exciting projects, and the amount of activity there has driven us to accelerate our research and build out a framework.

So what I want to do is give you a glimpse, in real time, of how our thinking is evolving and try to bring you inside our process a little bit. To do that, I’m going to lay out our emerging framework for thinking about and identifying the most attractive projects in the stablecoin space.

You probably are familiar with stablecoins and know that they are one of the largest markets in crypto; they have signs of product-market fit. But it may not be obvious that right now there are some key building blocks falling into place that set up a next phase of growth for the market. There are lower transaction fees as a consequence of better scaling solutions, better key management and custody infrastructure, and we’re hopeful that there will be greater regulatory clarity thanks in part to the great work that Jake Chervinsky has been doing in Washington.

That all sets the stage. But what’s really going to unlock the next growth phase in stablecoins is an entirely new class of products: yield-bearing stablecoins. 

So, what’s a yield-bearing stablecoin?

It’s exactly what it sounds like: a stablecoin that pays yield to holders, and in some cases to intermediaries who hold the stablecoin as well. I’m going to focus on one specific type of yield-bearing stablecoin: a yield-bearing stablecoin that derives its yield from U.S. Treasuries. 

These stablecoins give onchain access to an enormous, important asset class: U.S. Treasuries. It’s a multi-trillion-dollar asset class, and it represents the risk-free rate. That’s important because as the risk-free rate, Treasury yield is a core component of compelling savings and investment products, and it’s a building block that developers can incorporate and use to build higher-yielding products as well. 

To cut to the chase, yield-bearing stablecoins are exciting because they give better product options to users and developers, and the intuition behind why yield-bearing stablecoins can be strictly better for many use cases is very simple: You’d rather get paid something than nothing. That’s exactly what yield-bearing stablecoins enable.


There are three things that we think will determine the winning projects in the stablecoin space.


The first is the ability to deliver exceptional user experience while maintaining sufficient compliance. User experience has a number of components. The most important is for the stablecoin to be permissionless and freely transferable. In short, to allow any type of user to use the product, send it where they want and to use it in DeFi, in CeFi, however they like.

The second element of a good user experience for a stablecoin is the ability for users to collect the yield without having to jump through a bunch of hoops. So: no staking mechanics, no dual-token mechanics, no gamified activity at all.

That’s what good user experience looks like in a nutshell, and it sounds simple enough to deliver. But the trick is you have to deliver that while maintaining sufficient compliance. This is important because we believe the largest prize is in addressing the market for compliant stablecoins globally with a single asset that can address both the U.S. market and international markets as well. That’s critical because having a single global stablecoin asset enables better building of liquidity, ubiquity, and utility.


That brings us to the second thing that we think will define the most compelling yield-bearing stablecoin products: the ability to build liquidity and secure integrations. Liquidity and integrations are core to what makes stablecoins useful and compelling as products. Liquidity enables users to get in and out without friction and at a low cost. And integrations enable users to use their assets across centralized and decentralized finance. The most compelling projects will have the ability to secure both. And that means having a compelling, strong go-to-market strategy as well as the required BD abilities. 

On the go-to-market front, it’s important that projects have a clearly defined sense of the most attractive early-user segments and a compelling value proposition. They also need the right set of skills to go out and sell—to get those users over the finish line to using their new stablecoin.

Importantly, projects need to be able to address institutions—cryptonative and non-cryptonative—as well as foundations and cryptonative end users. So you’re looking for a broad set of BD capabilities to address all of those different user segments.


The next thing that’s critical to the success of a stablecoin project is the ability to build a trusted brand. This comes down to the team, but it also relates to the structure of the project itself. We think teams that demonstrate maturity and have the ability to inspire confidence in a wide range of stakeholders will be the ones that do best in this area. In terms of the structure, what I mean is the legal entity structure for the stablecoin project and the product itself. What matters here is transparency, robustness, and the use of trusted third-party service providers to create a brand halo.

Over time, this ability to build trust through the characteristics of the team and the structure will be an important part of what enables certain projects to break away from the pack.


So that’s the framework, and we are incredibly excited to be putting it to work right now. This is a product category that can become one of the most widely used and largest in crypto. There’s a structural change in the competitive landscape happening right now, and it’s being led by a class of startups who are defining this new category of yield-bearing stablecoins.

We’re actively employing this framework, talking with new projects day to day, week to week, and really excited to report back on what we find.


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