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Stablecoins exhibit variations in their asset backing, collateral ratios, issuance mechanisms, and price maintenance approaches. While different stablecoins may find relevance in specific use cases, they all share a common limitation: The absence of interest income.
It is important to acknowledge that stablecoin holders do indeed desire interest income. This arises from the fact that stablecoins, lacking interest generation capabilities, leave their holders exposed to the continual devaluation of the USD caused by inflation and the high interest rates set by the Federal Reserve.
Considering the apparent demand for interest income among stablecoin holders, it is reasonable to question why it is not readily provided. The answer lies in the current issuance mechanisms and underlying assets of existing stablecoins. Fiat-collateralized stablecoins, whether issued by centralized or decentralized entities, tend to maintain stable values and high collateral ratios. However, their overall issuance volume remains relatively small, resulting in lower yields and an inability to offer returns comparable to traditional bank deposits.
Cryptocurrency-collateralized stablecoins, on the other hand, rely on holders pledging a specific amount of cryptocurrency as collateral. Since the collateralized cryptocurrencies themselves do not generate interest income, stablecoin issuers face challenges in providing a secure and stable income stream to their holders.
In conclusion, the absence of interest income in current stablecoins stems primarily from the limitations imposed by their issuance mechanisms and underlying assets. This whitepaper aims to delve into the concept of an interest-bearing stablecoin collateralized by ETH and stETH, which addresses the imperative for stablecoin holders to generate interest income while preserving the essential characteristics of stablecoins.