Seeking On-Chain Certainty: Analyzing Three Types of Encryption Income Assets

In today's world where macro uncertainty has become the norm, "certainty" has become a scarce asset. In an era where black swans and gray rhinos coexist, investors are not only pursuing returns but also those assets that can traverse volatility and have structural support. The "encryption interest-bearing assets" in the on-chain financial system may represent a new form of certainty.

These promised fixed or floating yield financial structures of encryption assets are re-entering the investors' view, becoming their anchor points in search of robust returns in turbulent market conditions. However, in the encryption world, "interest" is no longer just the time value of capital; it is often the product of protocol design and market expectations working together. High yields may stem from real asset income, or they may mask complex incentive mechanisms or subsidy behaviors. To find true "certainty" in the encryption market, investors need more than just interest rate tables; they need a deep dissection of the underlying mechanisms.

Since the Federal Reserve began its interest rate hike cycle in 2022, the concept of "on-chain interest rates" has gradually come into public view. Faced with a real-world risk-free interest rate that has long remained at 4-5%, crypto investors have started to re-evaluate the sources of returns and risk structures of on-chain assets. A new narrative is quietly taking shape—Yield-bearing Crypto Assets, which attempts to create financial products "that compete with the macro interest rate environment" on-chain.

However, the sources of returns on interest-bearing assets are vastly different. From the cash flow generated by the protocol itself to the illusory returns 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. We can roughly categorize the interest-bearing assets of current decentralized applications (DApps) into three types: exogenous returns, endogenous returns, and those linked to real-world assets (RWA).

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—without mature user demand and real cash flow, the market instead replaced it with "incentive illusion". Just like early ride-sharing platforms used subsidies to attract users, after a certain lending protocol initiated "liquidity mining", multiple ecosystems subsequently launched huge token incentives, attempting to buy user attention and locked assets through "return distribution".

However, these subsidies are essentially more like short-term operations where the capital market "pays" for growth indicators, rather than a sustainable revenue model. It once became a standard for the cold start of new protocols—whether it's 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 annual yields of hundreds or thousands are often just tokens "printed" out of thin air by the platform.

An ecological collapse in 2022 was just like this: the ecosystem offered up to 20% annual yield on stablecoin deposits through a protocol, attracting a large number of users. The yield was mainly reliant on external subsidies (foundation reserves and token rewards) rather than genuine income from within the ecosystem.

Historical experience shows that once external incentives weaken, a large amount of subsidized tokens will be sold off, damaging user confidence, which can lead to a death spiral decline in both TVL and token prices. According to data statistics, after the DeFi Summer craze in 2022 subsided, about 30% of DeFi projects saw a market value decline of over 90%, largely related to excessive subsidies.

Investors seeking to find "stable cash flow" need to be more vigilant about whether there is a real value creation mechanism behind the returns. Using future inflation to promise today's earnings is ultimately not a sustainable business model.

Endogenous Returns: Redistribution of Use Value

In simple terms, the protocol earns money by "getting things done" and then allocates it to users. It does not rely on issuing tokens to attract people, nor does it depend on subsidies or external funding, but rather generates income through real business activities, such as lending interest, transaction fees, and even penalties from default liquidation. This income is somewhat similar to "dividends" in traditional finance, and is therefore referred to as "dividend-like" encryption cash flow.

The biggest feature of this type of revenue is its closed-loop nature and sustainability: the logic of making money is clear, and the structure is healthier. As long as the protocol is operating and there are users using it, there will be income coming in, without relying on market hot money or inflation incentives to maintain operations.

Therefore, by clarifying what it relies on for "blood production", we can more accurately assess the certainty of its returns. We can classify this type of income into three prototypes:

The first category is "lending interest rate spread type". This is one of the most common and easiest to understand models in the early days of DeFi. Users deposit funds into lending protocols, where the protocol matches borrowers with lenders, and the protocol earns the interest rate spread. Its essence is similar to the traditional banking "deposit and loan" model – the interest in the fund pool is paid by borrowers, and lenders receive a portion as returns. This type of mechanism has a transparent structure and operates efficiently, but its yield levels are closely related to market sentiment. When overall risk appetite declines or market liquidity contracts, interest rates and yields will also fall accordingly.

The second type is "fee rebate type". This type of revenue mechanism is closer to the model of profit distribution for shareholders in traditional companies, or a profit-sharing structure where specific partners receive returns based on revenue proportions. Within this framework, the protocol returns a portion of its operating income (such as transaction fees) to participants who provide resource support, such as liquidity providers (LPs) or token stakers.

Taking a certain decentralized exchange as an example, the protocol will distribute a portion of the transaction fees generated by the exchange proportionally to users who provide liquidity for it. In 2024, a certain lending protocol provided an annualized return of 5%-8% for stablecoin liquidity pools on the Ethereum mainnet, while stakers of the protocol's tokens could earn over 10% annualized returns during certain periods. These earnings come entirely from the endogenous economic activities within the protocol, such as lending interest and transaction fees, and do not rely on external subsidies.

Compared to the "interest rate spread" mechanism that is closer to the banking model, the "fee rebate" yield highly depends on the market activity of the protocol itself. In other words, its returns are directly linked to the protocol's transaction volume—more transactions mean higher dividends, while a decrease in transactions leads to fluctuating income. Therefore, its stability and ability to resist cyclical risks are often not as robust as that of the lending model.

The third type is "protocol service type" revenue. This is the most structurally innovative type of endogenous income in encryption finance, and its logic is similar to the model in traditional business where infrastructure service providers offer key services to customers and charge fees.

Taking a certain re-staking protocol as an example, this protocol provides security support for other systems through the "re-staking" mechanism, and thus earns returns. Such returns do not rely on lending interest or transaction fees, but come from the market pricing of the protocol's own service capabilities. It reflects the market value of on-chain infrastructure as a "public good." This form of returns is more diverse, potentially including token points, governance rights, and even future unfulfilled expected returns, demonstrating strong structural innovation and long-term nature.

In traditional industries, it can be compared to cloud service providers offering computing and security services to enterprises and charging fees, or financial infrastructure institutions (such as custodians, clearing houses, and rating companies) providing trust guarantees for systems and generating revenue. Although these services do not directly participate in terminal transactions, they are an indispensable underlying support for the entire system.

On-chain Real Interest Rates: The Rise of RWA and Interest-bearing Stablecoins

An increasing number of capital is pursuing a more stable and predictable return mechanism in the market: on-chain assets anchored to real-world interest rates. The core logic of this approach is to connect on-chain stablecoins or encryption assets to low-risk financial instruments off-chain, such as short-term government bonds, money market funds, or institutional credit, thereby obtaining "certain interest rates from the traditional financial world" while maintaining the flexibility of encryption assets. Representative projects include a DAO's allocation to T-Bills, a token launched by a protocol linked to ETFs, a project's government bond token, and Franklin Templeton's tokenized money market fund, among others. These protocols attempt to "import the Federal Reserve's benchmark interest rate onto the chain" as a foundational yield structure.

At the same time, interest-bearing stablecoins, as a derivative form of RWA, are also coming to the forefront. Unlike traditional stablecoins, these assets are not passively pegged to the US dollar, but actively integrate off-chain earnings into the tokens themselves. A typical example is USDM from one protocol and USDY from another, which accrue interest daily, with earnings sourced from short-term government bonds. By investing in US Treasury bonds, USDY provides users with stable returns, with a yield close to 4%, higher than the traditional savings account rate of 0.5%.

They are trying to reshape the usage logic of "digital dollars" to make it more like an on-chain "interest account".

Under the connectivity of RWA, RWA+PayFi is also a future scenario worth paying attention to: directly integrating stable yield assets into payment tools, thereby breaking the binary distinction between "assets" and "liquidity". On one hand, users can enjoy interest income while holding cryptocurrencies, and on the other hand, payment scenarios do not need to sacrifice capital efficiency. Products like the USDC automatic yield accounts on L2 launched by a certain exchange (similar to "USDC as a checking account") not only enhance the attractiveness of cryptocurrencies in actual transactions but also open up new use cases for stablecoins—transforming from "dollars in the account" to "capital in active water".

Three Indicators for Finding Sustainable Income-Generating Assets

The logical evolution of "encryption of interest-bearing assets" actually 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 by more and more protocols on their own self-sustaining capabilities and even interfacing with off-chain return curves, the structural design is moving out of the rough stage of "involution-style capital absorption" towards a more transparent and refined risk pricing. Especially in the current context of high macro interest rates, if encryption systems want to participate in global capital competition, they must establish a stronger "return rationality" and "liquidity matching logic". For investors seeking stable returns, the following three indicators can effectively assess the sustainability of interest-bearing assets:

1. Is the source of income "endogenous" and sustainable? Truly competitive income-generating assets should derive returns from the protocol's own business, such as lending interest, transaction fees, etc. If the returns primarily rely on short-term subsidies and incentives, it resembles a "game of hot potato": the subsidies are still there, and so are the returns; once the subsidies stop, the funds leave. This kind of short-term "subsidy" behavior, if it turns into a long-term incentive, will deplete project funds and easily lead to a death spiral of declining TVL and coin prices.

2. Is the structure transparent? The trust on-chain comes from being public and transparent. When investors leave the familiar investment environment of traditional finance, which has intermediaries such as banks as endorsements, how should they judge? Is the flow of funds on-chain clear? Is the interest distribution verifiable? Is there a risk of centralized custody? If these questions are not clarified, they will belong to black box operations, exposing the system's vulnerabilities. A clear financial product structure with on-chain public and traceable mechanisms is the real underlying guarantee.

3. Does the return justify the opportunity cost in reality?

At the Federal Reserve