This essay is for information and discussion. It’s not investment, legal, or tax advice. Crypto is volatile and risky; never rely on a single source (including me) to make decisions.
Traditional Banking
Modern money still starts with a simple picture: you “deposit dollars” at a bank, the bank lends them out, earns interest, pays you a slice, and keeps the spread. Cash in your wallet does nothing; hand it to a bank and it starts working, and in 2025 a decent high-yield account lands around 4.35%.
Stablecoins were born by porting that mental model onto public blockchains. Historically you sent dollars to a stablecoin issuer, the issuer invested those dollars (in T-bills), kept the interest, and gave you a token that behaved like a digital dollar. Similarly, you can also deposit at a crypto exchange, the exchange works with a compliant issuer, the issuer holds Treasuries and earns interest, shares some economics with the exchange, and the exchange may share some with you.
Think of Coinbase’s USDC Rewards, framed as a loyalty program around ~4.1% for many users, not as “lending your assets to the US Government,” but as a distribution of base-layer economics that originate from the issuer’s reserve portfolio. So far, so familiar: it rhymes with banking, just with different wrappers.
Stablecoin Banking
Where crypto diverges, and why low-risk yields can look “too good,” is due to the creative financial engineering that you can do with stablecoins. On-chain, USDC or similar behaves like electronic cash: you hold it directly, transfer it peer-to-peer, or plug it into smart contracts without asking a bank to rewrite its ledgers. And once you hold it, you can lend it again, this time in crypto’s credit markets.
The first leg of “lending” happens off-chain at the issuer level (your dollars ultimately fund T-bills); the second happens on-chain when you supply those stablecoins to money markets, credit vaults, or curated allocators that route into multiple pools.
This is the double-lending stack: dollars get lent into the real world via reserves, and the corresponding tokens get lent into the crypto world via DeFi. That’s why in DeFi, your stablecoins should roughly yield twice what you would otherwise get in a high-yield savings account, precisely because of this regulatory mechanism that allows you to engage in fractional reserve banking (you are lending out your money twice).
Now, reality is messier because spreads compress, platforms take a cut, and risks stack; but directionally you’ve layered two return sources: base carry from T-bills / reserves and market carry from borrower demand. Coinbase’s recent on-chain lending feature is a tidy productized example: they spin up a smart-contract wallet, route USDC across Morpho vaults curated by Steakhouse Financial on Base, and surface headline yields that have printed in the ~10% neighborhood.
Crypto is Regulatory Technology
The core policy move of the current administration regarding crypto was to legitimize payment stablecoins with clear reserve rules, issuer licensing paths, and consumer-protection guardrails, while drawing a deliberate line between the issuer (which holds safe assets and generally cannot pay “interest” to you) and the distribution or market layer (exchanges, wallets, and protocols that can offer rewards).
However, there is nothing prevent issuers from offering incentives to distribution layers; in other words, while regulation prevents stablecoins issuers from paying interest to consumers directly, it does not prevent from from offering incentives to lending protocols or exchanges in return for being the default currency (or any other advantage). The natural effect of competition is that these incentives accrue to the end user, and so distribution platforms end up paying the consumer anyways.
Crypto Cost of Capital
The effect is profound for cost of capital. Crypto historically carried a steep premium thanks to custody frictions, smart-contract risk, fragmentation, and regulatory overhang; lenders demanded double-digit compensation because risk and hassle were real. But once stablecoin issuance is standardized and anyone can route dollars-on-chain into lending with one tap, the supply of lendable cash mushrooms.
When the set of capital providers expands from “specialists who understand DeFi” to “literally anyone,” borrowers compete for a larger pool of dollars, and equilibrium borrowing costs drift down, even as lenders may still realize attractive top-line yields because they’re stacking base carry with market risk premia.
Before the largest balance sheets (think banks) completely arbitrage this away, the industry is living through what feels like a systematic mispricing, a regulatory arbitrage where everyone is effectively allowed a modest, universal form of fractional-reserve behavior. You’re not levering to infinity, but you can participate in two tiers of lending without a banking charter: issuers earn T-bill carry; you, via an exchange or protocol, can lend the tokenized dollars again.
That’s why 10%+ returns with negligible volatility aren’t a paradox in this regime, they’re the natural byproduct of base-layer returns flowing through distribution plus healthy demand for leverage on the other side.
For example, in 2024 Ethena sUSDe program, which harvested perpetual funding to support a synthetic dollar and averaged around the 19% returns that year before normalizing into the low-double-digits (8%-12%) more recently, is the poster child for how “cash-like” constructs can earn decidedly non-cash-like yields. When the default earnings is at roughly 10% for lending to the US government stacked with lending to extremely safe overcollateralized vaults, there is little to no incentive for DeFi participants to closer low-risk basis gaps below 10% to 12%.
Implications for Industry
Fundamentally, crypto’s rebuilt a broad, retail-scale version of fractional reserve economics. The implication is that the industry’s true cost of capital is structurally falling even as headline APYs still look elevated to traditional eyes. The base-layer yield now percolates through rewards, fee-shares, or tighter issuer spreads; while the market-layer has access to far more lender.
That’s bullish for real onchain businesses that borrow stablecoins: more supply, better routing, and institutional-grade wrappers mean you can finance inventory, market-making, or working capital at rates that would have been impossible when only a handful of crypto-native lenders showed up to the auction.
For savers and investors, the short-to-medium-term opportunity is straightforward: move dollars into regulated stablecoin rails, then selectively engage the second layer of lending that matches your risk tolerance. Until banks and asset-managers fully crowd this trade and until policymakers further narrow affiliate “interest-like” behaviors, this remains a generational dislocation, a sanctioned hack where you get to act a little like a bank without being regulated like one.
Risks & Disclaimers
Of course, none of this is magic or perpetual motion. Two layers of return mean two layers of risk and two layers of liquidity gates: issuer-level redemption dynamics when markets stress, and protocol-level exit risk if borrow demand vanishes or collateral wobbles. Smart-contract and oracle risk never go to zero; funding-rate strategies can retrace; regulatory drift can reprice economics overnight.
The “infinite money glitch” narrative dies the moment spreads compress under inbound capital or a rule tweak pushes more economics back inside the perimeter. But right now, before full equilibrium, the combination of clear rules for issuers and open competition at the market edge is producing exactly what you’d expect from fresh financial plumbing: base carry that leaks into the user experience and composability that turns idle dollars into working capital, twice.
The result is a credible path where the default return on on-chain dollars screens as 10%-ish in healthy regimes, and the industry’s borrowers finance real activity at steadily lower costs. That is unambiguously bullish for crypto and for real tokens tied to real cash flows. Stablecoin legitimization didn’t just make digital dollars safe; it made the entire system more bank-like for everyone, and for a while, that means savers can earn like banks while builders borrow like blue-chips.
What We Are Building
On Freeport, you can already buy or hold yield-accruing stablecoins like sUSDe, sDAI, and other tax-efficient cash tokens that automatically compound without manual reinvestment. These let you earn above T-bill yields directly on-chain while staying in stable, dollar-denominated assets. Over the weekend, we are also rolling out on-platform lending, letting users re-lend their stablecoins into curated, risk-scoped pools for additional yield, effectively stacking the “base carry” from the stablecoin itself with a second layer of on-chain lending carry.
The aim is to deliver institutional-grade returns (often 8–12% APY) with negligible risk and instant liquidity. In other words, you’ll soon be able to park cash in dollars like USDe, toggle lending on within Freeport, and earn 2x bank-like returns on crypto dollars automatically and without leaving the platform.
Disclaimer
The information provided on TheLogbook (the “Substack”) is strictly for informational and educational purposes only and should not be considered as investment or financial advice. The author is not a licensed financial advisor or tax professional and is not offering any professional services through this Substack. Investing in financial markets involves substantial risk, including possible loss of principal. Past performance is not indicative of future results. The author makes no representations or warranties about the completeness, accuracy, reliability, suitability, or availability of the information provided.
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