Encryption Income-Generating Assets: Finding Certainty in Uncertainty

As the world becomes increasingly uncertain, "certainty" has become a scarce asset. Investors not only seek returns but also yearn for assets that can withstand volatility and possess structural support. In this context, "encryption interest-bearing assets" in on-chain financial systems represent a new form of certainty.

These promises of fixed or floating returns on encryption assets have re-entered the investor's view, becoming a anchor point for seeking stable returns in turbulent market conditions. However, in the encryption world, "interest" is not just the time value of capital, but rather a product of the interplay between protocol design and market expectations. High returns may stem from real asset income, or they may conceal complex incentive mechanisms or subsidy behaviors. To find true "certainty" in the encryption market, investors need to deeply understand the underlying mechanisms.

Since the Federal Reserve began its interest rate hike cycle in 2022, the concept of "on-chain rates" has gradually entered the public eye. In the face of a long-term risk-free rate of 4-5% in the real world, crypto investors have begun to reassess the sources of returns and risk structures of on-chain assets. A new narrative is quietly taking shape—yield-bearing crypto assets, which aim to build financial products on-chain that "compete with the macro interest rate environment."

However, the sources of income from interest-bearing assets vary significantly. From the cash flow "generated" by the protocol itself, to the illusion of income relying on external incentives, and then to the integration and transplantation of off-chain interest rate systems, the different structures reflect distinctly different sustainability and risk pricing mechanisms. Currently, interest-bearing assets in decentralized applications (DApp) can be roughly divided into three categories: exogenous income, endogenous income, and real-world asset (RWA) linkage.

Exogenous Returns: Subsidy-Driven Interest Illusion

The rise of exogenous returns is a reflection of the rapid growth logic in the early development of DeFi. In the absence of mature user demand and real cash flow, the market has replaced it with "incentive illusion." Just like early ride-sharing platforms used subsidies to attract users, after Compound launched "liquidity mining," several ecosystems followed suit by introducing massive token incentives, attempting to capture user attention and lockup assets through "disbursed returns."

These types of subsidies are essentially more like short-term operations where the capital market "pays for" growth indicators, rather than a sustainable revenue model. They were once standard for the cold start of new protocols, whether it is Layer2, modular public chains, or LSDfi and SocialFi, the incentive logic is the same: relying on new capital inflows or token inflation, with a structure resembling a "Ponzi" scheme. Platforms attract users to deposit money with high returns, and then delay redemption through complex "unlocking rules." Those annualized returns of hundreds or thousands are often just tokens "printed" out of thin air by the platform.

A typical case of ecological collapse in 2022: by providing up to 20% annualized returns on stablecoin deposits through protocols, it attracted a large number of users. The returns mainly relied on external subsidies (foundation reserves and token rewards) rather than real income from within the ecosystem.

Historical experience shows that once external incentives weaken, a large amount of subsidy tokens will be sold off, damaging user confidence and causing a death spiral decline in TVL and token prices. Data indicates that after the DeFi Summer craze faded in 2022, about 30% of DeFi projects saw their market cap drop by over 90%, often related to excessive subsidies.

If investors want to seek "stable cash flow" from it, they need to be more vigilant about whether there is a real value creation mechanism behind the returns. Using future inflation to promise today's returns is ultimately not a sustainable business model.

Endogenous Returns: Redistribution of Use Value

In short, endogenous revenue is the income earned by the protocol itself through "doing real business" that is redistributed to users. It does not rely on issuing tokens to attract people or external subsidies, but is generated naturally through real business activities, such as lending interest, transaction fees, and even penalties in default settlements. This income is similar to "dividends" in traditional finance, and is therefore also referred to as "quasi-dividends" in encryption cash flow.

The biggest characteristics of endogenous returns are closed-loop and sustainability: the logic of making money is clear, and the structure is healthier. As long as the protocol operates and users are using it, income can be generated without relying on market hot money or inflation incentives to maintain operations.

We can classify this type of income into three prototypes:

1. Lending Spread Type: This was the most common model in the early days of DeFi. Users deposit funds into lending protocols, which match borrowers and lenders and earn interest spreads. It is essentially similar to the traditional banking "deposit-loan" model. The structure is transparent and operates efficiently, but the level of returns is closely related to market sentiment.

2. Fee Rebate Model: Closer to the traditional corporate shareholder profit-sharing model. The protocol returns a portion of the operational revenue (such as trading fees) to participants who provide resource support. For example, a certain decentralized exchange distributes a portion of the fees generated by the exchange proportionally to liquidity providers. In 2024, a certain lending protocol provided an annualized return of 5%-8% for stablecoin liquidity pools on the Ethereum mainnet, while stakers could earn over 10% annualized returns during certain periods. These revenues are entirely derived from the endogenous economic activities of the protocol and do not rely on external subsidies.

3. Protocol Service Type Income: The most structurally innovative endogenous income in encryption finance. The logic is similar to the model in traditional business where infrastructure service providers offer key services to clients and charge fees. For example, a certain protocol provides security support to other systems through a "re-staking" mechanism and receives rewards. This type of income comes from the market pricing of the protocol's service capabilities, reflecting the market value of on-chain infrastructure as a "public good."

The Real Interest Rate on the Chain: The Rise of RWA and Interest-Bearing Stablecoins

More and more capital in the current market is beginning to pursue more stable and predictable return mechanisms: on-chain assets are anchored to real-world interest rates. The core logic is to connect on-chain stablecoins or encryption assets to off-chain low-risk financial instruments, such as short-term government bonds, money market funds, or institutional credit, while maintaining the flexibility of encryption assets and obtaining "the certainty of interest rates in the traditional financial world."

Representative projects include a certain DAO's allocation of T-Bills, a certain Finance's product linked to BlackRock ETFs, a certain dock's government bond tokens, and a certain Templeton's tokenized money market fund, among others. These protocols attempt to "bring the Federal Reserve's benchmark interest rate on-chain" as a foundational yield structure.

At the same time, interest-bearing stablecoins as a derivative form of RWA are also beginning to come to the forefront. Unlike traditional stablecoins, these assets are not passively pegged to the US dollar but actively embed off-chain returns into the tokens themselves. For example, the stablecoin from a certain Protocol and the stablecoin from a certain Finance generate daily interest, with the source of returns being short-term government bonds. By investing in US government bonds, they provide users with stable returns, with yields close to 4%, which is higher than the 0.5% of traditional savings accounts.

These new stablecoins aim to reshape the usage logic of the "digital dollar", making it more like an on-chain "interest account".

Under the connectivity effect of RWA, RWA+PayFi is also a future scenario worth paying attention to: directly embedding stable yield assets into payment tools, breaking the binary division between "assets" and "liquidity." Users can enjoy interest-bearing income while holding cryptocurrencies, and payment scenarios do not have to sacrifice capital efficiency. A large exchange's USDC automatic yield account on the L2 chain (similar to "USDC as a checking account") not only enhances the attractiveness of cryptocurrencies in actual transactions but also opens up new use cases for stablecoins – transforming from "dollars in the account" to "capital in active circulation."

Three Indicators for Finding Sustainable Income-Generating Assets

The logical evolution of "encryption of income-generating assets" reflects the market's gradual return to rationality and the redefinition of "sustainable returns". From the initial high inflation incentives and governance token subsidies to the increasing emphasis on self-sustaining capabilities and connecting off-chain yield curves, structural design is moving out of the rough phase of "involution-style fundraising" toward more transparent and refined risk pricing. In the current environment of high macro interest rates, if encryption systems want to participate in global capital competition, they must build stronger "return rationality" and "liquidity matching logic". For investors seeking stable returns, the following three indicators can effectively assess the sustainability of income-generating assets:

1. Is the source of income "endogenous" and sustainable? Truly competitive income-generating assets should derive their earnings from the protocol's own business activities, such as lending interest, trading fees, etc. If the returns primarily rely on short-term subsidies and incentives, it resembles "passing the buck": as long as the subsidies are in place, the returns remain; once the subsidies stop, the funds leave. This short-term "subsidy" behavior, if it turns into a long-term incentive, will deplete the project's funds and is likely to enter a death spiral of declining TVL and token prices.

2. Is the structure transparent? Trust on the chain comes from openness and transparency. When investors leave a familiar investment environment, how should they discern? Is the flow of funds on the chain clear? Is the interest distribution verifiable? Is there a risk of centralized custody? If these questions are not clarified, they will fall into black box operations, exposing the system's vulnerabilities. A financial product with a clear structure and a publicly accessible, traceable mechanism on the chain is the true underlying guarantee.

3. Do the returns justify the opportunity cost in reality? In the context of the Federal Reserve maintaining high interest rates, if the returns of on-chain products are lower than the yields of government bonds, it will undoubtedly be difficult to attract rational funds. If on-chain returns can be anchored to a real benchmark like T-Bill, it would not only be more stable but could also become a "rate reference" on-chain.

However, even "yield-bearing assets" are never truly risk-free assets. No matter how robust their yield structure is, one must remain vigilant about the technical, compliance, and liquidity risks within the on-chain structure. From whether the clearing logic is sufficient, to whether the protocol governance is centralized, to whether the asset custody arrangements behind the RWA are transparent and traceable, all of these determine whether the so-called "certain yield" truly has the ability to be realized.

The future market for interest-bearing assets may represent a reconstruction of the "currency market structure" on-chain. In traditional finance, the money market plays a core role in funding pricing through its interest rate anchoring mechanism. Now, the on-chain world is gradually establishing its own concepts of "interest rate benchmarks" and "risk-free returns", creating a more robust financial order.