Fixed income is no longer exclusive to traditional finance (TradFi). On-chain yield has become a core pillar of cryptocurrency, with Ethereum, as the largest proof-of-stake (PoS) blockchain, positioned at the center. Its economy relies on users locking their ETH (ETH) to help secure the network and earning yield in return.

However, Ethereum is not the only player. Today, cryptocurrency users have access to an increasing number of yield-bearing products, some of which directly compete with Ethereum's staking rewards, potentially undermining the blockchain. Yield-bearing stablecoins offer greater flexibility and exposure to traditional finance, with returns linked to U.S. Treasury bonds and synthetic strategies.

Meanwhile, DeFi lending protocols have expanded the range of assets and risk characteristics available to depositors. Both often provide higher yields than Ethereum staking, raising a key question: Is Ethereum quietly losing the yield battle?

Ethereum staking rewards are the returns earned by validators for securing the network. They come from two sources: consensus rewards and execution layer rewards.

Consensus rewards are issued by the protocol and depend on the total amount of staked ETH. The more ETH staked on the network, the lower the rewards for each validator, which is by design. Its formula follows an inverse square root curve, ensuring that as more capital enters the system, returns gradually decrease. Execution layer rewards include priority fees (paid by users to ensure their transactions are included in blocks) and maximum extractable value (MEV), which is additional profit gained by optimizing transaction ordering. These extra rewards fluctuate based on network usage and validator strategies.

Since the Merge in September 2022, Ethereum's staking rewards have gradually declined. From a peak of about 5.3%, total returns (including consensus rewards and tips) are now below 3%, reflecting the increase in total staked ETH and the maturity of the network. In fact, over 35 million ETH, or 28% of its total supply, is currently staked.

However, full staking rewards are only available to independent validators—those who run their own nodes and lock 32 ETH. While they can retain 100% of the rewards, they also bear the responsibility of staying online, maintaining hardware, and avoiding penalties. Most users opt for more convenient options, such as liquid staking protocols like Lido or custodial services offered by exchanges. These platforms simplify access but charge fees—typically between 10% and 25%—further reducing the yield users ultimately receive.

While Ethereum's annual staking yield of less than 3% may seem average, it still holds an advantage over its closest competitor, Solana, which currently has an average network annual yield of about 2.5% (with a maximum network annual yield of 7%). From a practical perspective, Ethereum's yield performance is better: its net inflation rate is only 0.7%, while Solana's is 4.5%, meaning Ethereum stakers face less dilution over time. But Ethereum's main challenge is not other blockchains, but the rise of alternative yield-bearing protocols.

Yield-bearing stablecoins allow users to hold assets pegged to the U.S. dollar while earning passive income, typically sourced from U.S. Treasury bonds or synthetic strategies. Unlike traditional stablecoins like USDC or USDT, which do not pay users yield, these new tools distribute a portion of the underlying returns to users.

The five major yield-bearing stablecoins—sUSDe, sUSDS, SyrupUSDC, USDY, and OUSG—account for over 70% of the $11.4 billion market and use different methods to generate yield.

sUSDe, issued by Ethena, a company backed by BlackRock, relies on synthetic neutral strategies involving ETH derivatives and staking rewards. It offers some of the highest yields in cryptocurrency, with historical annual yields fluctuating between 10% and 25%. Although current yields have dropped to about 6%, sUSDe still surpasses most competitors, despite its complex, market-dependent strategies being riskier.

sUSDS, developed by Reflexer and Sky (formerly MakerDAO), is backed by sDAI and real-world assets (RWA). Its yield is more conservative—currently at 4.5%—focusing on decentralization and risk mitigation.

SyrupUSDC, issued by Maple Finance, generates yield through tokenized Treasury bonds and MEV strategies. It offered double-digit returns at launch, but now yields 6.5%, still higher than most centralized alternatives.

USDY, issued by Ondo Finance, tokenizes short-term Treasury bonds, yielding 4.3%, targeting institutional users with regulated, low-risk characteristics. OUSG, also from Ondo, is backed by BlackRock's short-term Treasury bond ETF, yielding about 4%, requiring full KYC and focusing on compliance.

The key differences among these products lie in their collateral (synthetic vs. real-world), risk characteristics, and accessibility. sUSDe, SyrupUSDC, and sUSDS are entirely DeFi-native and permissionless, while USDY and OUSG require KYC and target institutional users.

Yield-bearing stablecoins are rapidly gaining traction, combining the stability of the dollar with yield opportunities once limited to institutions. This sector has grown 235% over the past year, showing no signs of slowing down as demand for on-chain fixed income increases.

Decentralized lending platforms like Aave, Compound, and Morpho allow users to earn yield by providing crypto assets to lending pools. These protocols set interest rates based on supply and demand algorithms. When borrowing demand rises, interest rates also increase, making DeFi lending yields more dynamic—and often uncorrelated with traditional markets.

The Chainlink DeFi yield index tracks average lending returns across major platforms, showing stablecoin lending rates typically around 5% for USDC and 3.8% for USDT. During bull markets or speculative frenzies—such as from February to March and November to December 2024—borrowing demand surges, and yields often skyrocket.

In contrast to banks that adjust rates based on central bank policies and credit risk, DeFi lending is market-driven. This creates opportunities for higher returns but also exposes borrowers to unique risks, such as smart contract vulnerabilities, oracle failures, price manipulation, and liquidity crises.

However, paradoxically, many of these products are built on Ethereum itself. Yield-bearing stablecoins, tokenized Treasury bonds, and DeFi lending protocols largely rely on Ethereum's infrastructure, and in some cases, even directly incorporate ETH into their yield strategies.

Ethereum remains the most trusted blockchain among traditional finance and crypto-native finance participants, and it continues to lead in custodial DeFi and RWA. As these areas gain more adoption, they drive increased network usage, enhance transaction fees, and indirectly bolster the long-term value of ETH. In this sense, Ethereum may not be losing the yield battle—it may simply be winning in a different way.

This article does not contain investment advice or recommendations. Any investment and trading activities involve risks, and readers should conduct their own research before making decisions.

Related: Staked Ethereum (ETH) reaches a new high of 35 million, liquid supply declines

Original: “Ethereum and the Battle for Yield: Will ETH Win?”

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