Stop mixing up stablecoins! Understanding the core differences between "payment-type" and "yield-type".

Written by: @Jacek_Czarnecki, former legal director of Sky

Compiled by: J1N, Techub News

The two core uses of stablecoins

Payment-type stablecoin: provides funds transfer functionality

Yield-bearing stablecoins: provide currency appreciation features

This distinction is concise and clear, which is very helpful for users to understand the classification of stablecoins and can inspire many people. It guides us on how to design stablecoins to fit applications, user experience, regulation, and use cases. Other more refined classifications of stablecoins, such as over-collateralization, peg mechanisms, decentralization, or regulation, are still important.

Stablecoins are widely seen as a breakthrough use case for cryptocurrencies. However, to scale, we need a more user-centric framework. You shouldn't use yield-generating stablecoins to buy your daily coffee. Merging two types of stablecoins into one category is like depositing your salary into a hedge fund; technically feasible, but not very meaningful.

Of course, the boundaries of classification are somewhat blurred. Stablecoins can actually play any role, and each design carries its own risks. Here, I focus on their primary user purposes. We can refine this distinction to make it less straightforward:

Stablecoins with payment priority: aim to maintain a 1:1 peg with fiat currency as much as possible; designed for instant spending and low-cost settlement; typically, the issuer captures the profits; however, stablecoins can also be lent out in the lending market to generate returns.

Yield-focused stablecoins: still aiming for peg, but typically pass through the yields of specific yield strategies to holders; usually held rather than used, while also offering many unique yield strategies to choose from.

As mentioned above, stablecoins can undergo a role transformation, switching from payment type to yield type, and vice versa. However, the conversion between payment type and yield type helps provide a smarter user experience, clearer regulation, and more convenient adoption. Both are anchored to fiat currency, but their purposes of use differ.

This simple framework takes a market-driven perspective. It is based on how people actually use stablecoins, rather than regulations or rules. Regulators have responded to this divergence: think of the "payment stablecoin" in the U.S. GENIUS Act. Like my favorite @SkyEcosystem, I have been working for years to separate the payment stablecoin USDS from the yield-bearing stablecoin sUSDS.

Why should stablecoins be divided into payment-type and yield-type?

Different risk frameworks

The criteria for measuring income-generating tokens should include: sources of income and their health status, strategy concentration, redemption/exit risks, anchoring stability, leverage usage, protocol risk exposure, and more. Payment tokens, on the other hand, need to pay more attention to anchoring stability, market depth and liquidity, redemption mechanisms, reserve quality and transparency, as well as issuer risk. A one-size-fits-all metric is not applicable.

Retail Adoption

This distinction aligns with the thinking patterns of TradFi and reduces user confusion and errors. New users should not hold complex yield tokens without being informed.

Better user experience

Providers like wallets should avoid confusing payment and yield stablecoins to prevent user confusion. This will lead to a more streamlined and intelligent wallet user experience. Experienced users fully understand the differences, but appropriate labels should be provided in the user experience so that even newcomers can clearly understand. This will also make it easier for new banks and other fintech companies to integrate. Of course, the real barrier to user experience is not just labels, but the education on tail risks.

Institution adoption

The distinction between revenue/payment is consistent with existing financial categories, improves the separation of accounting and risk, and supports regulatory clarity.

Better regulation

The regulation of payment stablecoins and yield stablecoins will differ. These products have different risk profiles, and regulators will naturally distinguish between them. It is not accidental that payment and investment (which usually refers to securities) are subject to almost completely different regulatory regimes around the world. Lawmakers have been working in this direction: the U.S. "GENIUS Act" and the EU "MiCAR Act" both acknowledge this. This does not mean that certain payment stablecoins can never provide yields (as discussed in the "GENIUS Act"), but it is like a savings account among many investment products.

Although this is not a perfect classification model, it is the simplest way to guide products, users, and policies. There are some drawbacks to this classification:

Yield is a complex category that encompasses various subtypes. They differ in structure, risk, and use cases. Some are lent to DeFi, some stake Ethereum, and others purchase US Treasury bonds. Undoubtedly, this is a macro term, and as the market matures, especially with the involvement of regulators, it is foreseeable that yield stablecoins will change over time. Over time, the concept of "yield stablecoins" may gradually break down into more specific and clearer categories.

Who benefits from the profits? If the profits are not passed on to users, then other participants (usually the issuer) will benefit. As mentioned above, stablecoins can shift from "issuer profits" to "holder profits." Additionally, stablecoin users can earn profits in the lending market, but from the user's perspective, it is still uncertain whether yield-generating stablecoins have a sufficient distinction from secondary sources of yield.

Some believe that we should refer to this broader category as "yield tokens" rather than "yield stablecoins." This makes sense. However, in practice, yield stablecoins have become a unique subcategory with stable anchoring mechanisms and specific user roles. They are often viewed as a different category compared to risk assets (RWA) tokenized with non-stablecoin, liquidity staking tokens (LST), or different DeFi structured yield products. We will observe how this trend develops over time, as these boundaries are often quite blurred, such as the re-adjustment of yield stablecoin benchmarks.

Paying with stablecoins may one day provide returns. Regulations will define these boundaries. MiCAR prohibits such stablecoins. The "GENIUS Act" debated this issue. The market will adjust accordingly.

These concerns do exist. However, it is meaningless to discuss "stablecoins" in isolation. The distinction between payments and yields is fundamental and should have been made long ago. We should clearly define it and build around it. If your stablecoin cannot easily be classified into any category, please clarify that. Moreover, we need to conduct more research, especially regarding assets with ambiguous boundaries (such as pegged tokens) or assets that exist outside of those boundaries (such as non-stable yield tokens and tokenized RWAs).