Authors | Turbo @IOSG & James @Surf
TL;DR
Stablecoin-based fixed-income products are more favored during bear markets.
During bull markets, the TVL (Total Value Limit) of all products increases, but performance diverges significantly during bear markets. In bear markets, investors favor more stable returns and lower underlying risk, which drives the growth of interest-bearing stablecoins.
Protocols are evolving towards front-end and back-end.
Major DeFi protocols are starting to build their own wallets and mobile apps to control traffic entry points. The crypto industry is entering an application era, where retail users can access financial services through mobile apps.
The demand for proprietary stablecoins from new L1/L2 and DeFi projects will drive interest-earning protocols toward a "backend" model, creating huge demand for such protocols.
Interest rate cuts, declining Treasury yields, and the rise of alternative RWA revenue sources
The anticipated interest rate cut will lead to a decline in Treasury yields. This will prompt stablecoins to incorporate a wider range of RWA assets into their underlying assets.
Real-world businesses and financial products can be a stable source of income, which can be a unique advantage of this interest-bearing agreement even in the case of a weak front end.
Current On-Chain Revenue Overview
We studied 18 on-chain yield products, covering a variety of yield sources. These include tokenized government bonds and their derivatives, native staking (ETH/SOL), liquidity staking tokens (LST) such as Lido and Jito, interest-bearing stablecoins (sUSDe, SyrupUSD), protocol revenue sharing models (JLP, SKY), DeFi strategies and ecosystem incentives (Lido GGV, SIUSD/LIUSD, asBNB), DEX LP (Uniswap), market making (HLP), and RWA products (PRIME, USDai, USP). For each product, this paper evaluates it from dimensions such as APY, liquidity, withdrawal time, and major risks.
▲ Source: IOSG; Data as of November 2025; USP, SIUSD, and LIUSD data as of January 2026.
▲ Source: Surf
Revenue Model
There are eight different on-chain reward mechanisms, each with different returns, risks, and sensitivity to market influences:
Consensus rewards (ETH/SOL staking, LST) provide stable, protocol-level guaranteed returns. Funding rate arbitrage and protocol revenue are affected by market cycles, strong in bull markets and compressed in bear markets. Lending and RWA revenue introduce counterparty risk but are relatively stable. LPs can capture transaction fees. DeFi strategies and ecosystem incentives aggregate revenue from multiple protocols, but also carry smart contract risks.
Risk stratification
The product mainly faces risks in the following four dimensions:
Protocol risks: Technical risks, including smart contract risks.
Participant risk: Market dependence on centralized entities or off-chain participants
Strategy risk: Exposure to asset price volatility or strategy issues
Liquidity Risk: TVL Depth and Withdrawal Mechanism
The very low-risk tier includes tokenized government bonds and mature lending. Low-risk products such as native staking and liquidity-staking derivatives introduce smart contract risks, but their code is already very mature, so this risk is low. Medium-risk products increase protocol complexity through DeFi strategy aggregation or protocol revenue sharing, while also facing risks of token price volatility and yield fluctuations. High-risk products present multiple overlapping risks: funding rate strategies face reduced returns in bear markets, market-making Vaults face market manipulation risks, and emerging RWA protocols introduce third-party participants, leading to issues of opacity and limited liquidity.
Key findings and the future of on-chain revenue
Stablecoin-based/relatively fixed-interest-rate products are the preferred choice during bear markets.
We conducted an in-depth analysis of the TVL and APY performance of different yield products during bull and bear markets. We selected stETH (staking), JitoSOL (staking), sUSDS (lending), WETH/USDT (Uniswap DEX LP), SyrupUSDC (Maple lending), and sUSDE (Ethena funding rate strategy) as representative products. The bull market lasted approximately from June to October, after which the market turned bearish.
▲ Source: DeFiLlama
Looking at TVL data, the TVL of all products increased during the bull market. However, during the bear market, the TVL of stETH, sUSDE, and JitoSOL decreased, while the TVL of sUSDS and SyrupUSDC increased.
▲ Source: DeFiLlama
The APY of the WETH/USDT pool and stETH remained relatively stable under different market conditions. The APYs of JitoSOL, SyrupUSDC, sUSDE, and sUSDS all declined, with sUSDE and SyrupUSDC showing significant drops. The chart also shows that products with higher APYs tend to have greater volatility. The APY of sUSDS is more governance-driven than market-driven, thus remaining stable for most of the time.
Overall, stablecoin-backed yield products will attract more attention and have higher liquidity during a bear market. Non-stablecoin-backed yield products will experience a decline in TVL (Total Value Limit) due to falling underlying asset prices. Investors also tend to favor more stable returns and lower underlying risk, which in turn drives the growth of TVL for interest-bearing stablecoins.
In a bear market, products with relatively fixed interest rates are a more sensible choice. Although sUSDS is not market-driven, its APY is stable and predictable in the medium term. sUSDE's APY is too volatile due to market conditions and may drop sharply in a bear market, making it less ideal.
This also illustrates that when assessing on-chain yield opportunities, simply looking at the APY (Average Return) does not fully reflect the potential returns. The underlying asset plays a crucial role in determining actual performance, especially for products like JLP (an index fund composed of SOL, BTC, and ETH), asBNB, and SKY. In these cases, token price volatility often exceeds the APY itself, making asset selection as important as yield. However, some investors can mitigate this risk through hedging strategies, such as shorting an equivalent amount of the underlying asset on a CEX or DEX, thereby isolating themselves from the price volatility of the underlying asset and capturing only the yield.
Protocols are evolving towards front-end and back-end.
In the past, stablecoins, with their 4% yield on government bonds, were a business with excellent cash flow. However, yield-generating stablecoins share almost 100% of the government bond yield with users, posing a challenge to traditional stablecoins. Since 2024, the market share of interest-bearing stablecoins has steadily increased. If we look at the supply of the top three native yield stablecoins and the top three non-native yield stablecoins (USDT, USDC, PYUSD, USDe, USDS, USDY), the market share of native yield stablecoins rose from 0.1% to 7.6%, peaking at 11.5%.
▲ Source: Artemis
This is why many DeFi protocols are starting to control traffic entry points and are trying to build their own distribution channels. Many large DeFi protocols are building their own wallets or mobile applications to control these entry points.
This also reveals a trend: the crypto industry is entering an application era . Retail users can access financial services through mobile apps, which is a more convenient way for Web2 users to get started with Web3. These apps can also offer mnemonic services to lower the learning curve.
The demand for proprietary stablecoins from L1 and DeFi projects will be a significant catalyst for the future growth of yield-generating protocols. Yield-generating protocols may also be pushed towards a "back-end" model.
Given the current stablecoin supply, if all L1 blockchains deployed their own stablecoins instead of relying on USDT or USDC, their revenue could potentially increase two to three times. This would be a significant incentive for project teams. This trend is already clear; MegaETH, Jupiter, Hyperliquid, and BNB are all developing their own stablecoins, which will create huge demand for interest-bearing protocols.
Ethena has already recognized this trend. They offer stablecoin-as-a-Service, generating government bond yields for these projects. Protocols and chains can generate substantial, stable revenue streams by deploying their own stablecoins.
▲ Source: DeFiLlama
Interest rate cuts, declining Treasury yields, and the rise of alternative RWA yield sources
The on-chain revenue structure will also change due to the influence of US monetary policy.
▲ Source: FOMC
President Trump has nominated Kevin Warsh to succeed Jerome Powell as Federal Reserve Chairman. If approved, the transition is expected to take place in May 2026.
The nomination of a new Federal Reserve chairman is expected to accelerate the process of interest rate cuts, leading to a decline in U.S. Treasury (T-Bill) yields.
▲ Source: FOMC participants' assessments of appropriate monetary policy: Midpoint of target rangeor target level for the federal funds rate; Dec 10th 2025
This will encourage stablecoins to incorporate a wider range of RWAs assets into their underlying assets, thereby diversifying their underlying assets. Figure's PRIME is a prime example of putting HELOC yields on-chain. HELOC (Home Equity Line of Credit) is a loan that allows homeowners to borrow, consume, and repay on demand using their homes as collateral. PRIME token holders fund HELOC loans with a fixed yield of 8%.
▲ Source: Kamino
Another type involves using real-world business transactions on the blockchain as a source of revenue. USDai is a way to finance GPUs on the blockchain. USDai's revenue comes from loan repayments by borrowers; specifically, it's the monthly repayments made by GPU infrastructure operators after they obtain financing by pledging GPU hardware.
Private lending is also gaining increasing attention, representing an attractive and stable source of APY returns. Projects like Craftt and Pareto allow on-chain users to earn yields by lending assets to institutions and businesses. These yields are also backed by solid real-world business practices.
These examples demonstrate that real-world businesses and financial products can be robust sources of income. This can be a unique advantage of interest-bearing agreements, even when the front end is weak.
Crypto-native revenue streams are becoming increasingly important in a highly competitive market. Products offering exclusive revenue streams have unique value. For example, asBNB offers Binance Launchpad revenue exposure, a revenue stream available only within the BSC ecosystem.
Similarly, revenue-sharing models are attractive when they are backed by transparent revenue fundamentals. The success of JLP and HLP demonstrates that users are willing to invest in products that directly share in real protocol revenue.
Institutions utilize on-chain revenue: end-to-end services and Crypto credit products (preferred stock).
With the wave of institutional adoption, many institutions are likely to try to capture on-chain yields or crypto revenue. The key is to provide end-to-end services.
End-to-end services of DeFi protocols
For example, Ether.fi offers institutional staking services, with end-to-end asset management at its core. They provide both non-custodial and custodial staking options, as well as a service called "white-glove," an end-to-end staking service that provides a controlled environment including annual audits, KYC compliance, and monthly reports. The ETH fund is also a CIMA-registered fund. Beyond staking, institutions can also participate in DeFi lending and other protocols' fixed-income offerings.
Preferred stock is a type of "government bond" based on Crypto, and is an important way to distribute crypto yields to institutions.
DAT's preferred stock, as a way for institutions to obtain on-chain returns, is actually underestimated. Essentially, it's a credit debt asset based on cryptocurrencies, similar to government bonds. Government bonds are debt created based on a nation's credit and capacity, while DAT has created a credit market based on crypto assets, and preferred stock is a credit debt product created based on that credit market. Preferred stock provides crypto returns to traditional institutions through dividends. There are two main types of returns: long-term CAGR and DeFi returns, including staking.
Strategy's STRC offers an 11.5% annualized dividend, payable monthly in cash, and is tradable on most major brokerage platforms. Strategy is based on Bitcoin's CAGR (Cost Per Growth Rate). It assumes BTC is an inflation hedge and estimates the actual inflation rate to be around 8%. STRF and other similar preferred stock products such as STRD and STRK deliver the inflation-hedging portion of the returns to investors. Investors can also opt for the 8% return STRK, which has the potential to convert into MSTR to capture further Bitcoin price appreciation.
▲ Base information about STRC; Source: Strategy
Traditional finance offers similar inflation-hedging products, such as TIPS (Treasury Inflation-Protected Securities). TIPS rise with inflation and fall with deflation. They adjust TIPS using the CPI (Consumer Price Index) compiled by the U.S. Bureau of Labor Statistics. Although the TIPS interest rate is lower than the inflation rate (2.7%), this is the real return after adjusting for inflation, as the principal is adjusted according to the inflation rate; the real return is approximately 4%.
▲ Interest rate of TIPS; Source: Treasurydirect.gov
Interestingly, stablecoin projects like Saturn Labs are using on-chain DAT yields as a source of stablecoin returns. In the era of digital assets and during a Fed rate-cutting cycle, this could be a viable alternative to on-chain government bonds.
Preferred stock dividends can also be a way to distribute aggregated on-chain yields to equity investors. Solana DAT Forward Industries staked almost all of its SOL holdings (over 6.87 million SOL) for approximately 7% staking yield. They also converted about 25% of their SOL into fwdSOL (LST) to gain greater DeFi liquidity and yield opportunities. While they haven't announced that these yields will be distributed to investors through preferred stock, they have the capacity to provide approximately 7% yield and generate even higher yields using on-chain protocols. DeFi Development Company offers Series C perpetual preferred stock with an annualized dividend yield of 10%. Based on current on-chain yields and SOL staking rates, they are able to afford these dividends.
