The Onchain Credit Explosion: A Multi Billion Dollar Payday

Hi guys! Welcome back to The Crypto Fire…

Today we are going to slice open one of the next massive bets in the crypto universe. We are talking about the explosion of onchain credit, a place where your stablecoins stop gathering dust and actually start paying you rent.

If you recall our previous breakdowns, we have been loud and clear about our bullish stance on stablecoins. Today, we are doubling down on that take. If the stablecoin market is truly on track to hit 3 trillion USD by 2030, the opportunity ahead is absolutely colossal.

However, there is a specific niche shining brighter than the rest: Yield generating stablecoins.

Basically, these are tokens that do not just hold their peg to the dollar but also automatically accumulate value. This makes them infinitely more attractive than the plain vanilla stablecoins you use to buy groceries.

The big question is: where is the real alpha? For the first time, we believe the most exciting growth potential exists right here on the blockchain.

Why? Because crypto is unlocking yield strategies that were previously too complex or inaccessible, offering the best way to distribute these returns at scale.

This is the core of our big bet on the Onchain Credit Boom.

We are about to witness a tidal wave of new, creative yield strategies hitting the market. They are built to deliver strong returns that do not correlate with erratic crypto prices, which will drive demand through the roof.

This is not some distant sci fi future; it is happening right now. According to data at The Crypto Fire, the total supply of this niche is only about 19 billion USD today, but we expect that number to accelerate wildly, hitting 330 billion USD by 2030 with an annual growth rate of 80%.

Let us do some quick math. If stablecoin yield hit 330 billion USD by 2030 and protocols capture just 1.5% of that as Net Interest Margin (NIM), the net revenue would land around 5 billion USD. That is a massive pie, and plenty of protocols are going to fight tooth and nail for a slice.

Why are we so bullish on Yield Generating Stablecoins?

There are three blindingly obvious reasons we have high conviction in this space.

First is accelerating demand. Our long term view is simple: more people and more capital are shifting toward holding money that actually works for them.

Money must make money rather than sitting idle. Think about it: would you rather own a stock that stays flat or one that goes up and pays you dividends? The answer is obvious.

We are used to thinking in terms of checking accounts versus savings accounts, but that line is blurring. Even now, you can hold dollars that earn real yield while still being able to spend them instantly. All signs point to one thing: more people and capital will start using stablecoin yield by default.

Some of you might argue that the Clarity Act in the US, which bans interest on stablecoins, is a red flag. That is partially true, but the reality is that decentralized protocols do not fall under this regulation.

This law targets centralized companies. Decentralized protocols like Sky $SKY ( ▼ 0.71% ) , Aave $AAVE ( ▲ 0.06% ) , or Ethena $ENA ( ▲ 3.24% ) do not need to comply with these specific rules and are legal to use (at least for now).

This gives them a time advantage to build robust products without fierce competition from traditional finance.

The second reason is that yield is moving onchain. Blockchain technology is simply superior. No more waiting days for settlement, no more insane bank fees. Onchain is faster, cheaper, and more efficient.

Think about the scale of the 130 trillion USD bond market or 100 trillion USD in bank deposits. All of that is starting to migrate onchain. Accelerating demand meets accelerating supply. That is a powerful combo.

The final and most important reason for investors is stability. This market is less driven by price volatility. It does not chase the wild pumps and dumps like the rest of crypto.

Sky ($SKY) is the best proof; their stablecoin supply doubled to nearly 10 billion USD with revenue up 10% even during a year when the crypto market was gloomy.

In a bull market, demand for leverage pushes yields up. In a bear market, people flock to stablecoin yield to preserve capital, which also drives demand. Regardless of market conditions, the hunger is always there.

To truly understand how this machine works, we need to distinguish between two key groups: Operators and Allocators.

The Strategy Operators

We start here because they are the foundation of the ecosystem. Without scalable strategies built by these operators, the capital allocators would have nothing to do. We believe this group will capture the majority of the profits because they control the process from start to finish.

Let us look at a few names representing different strategies.

Ethena ($ENA): They hold assets like $ETH ( ▼ 0.83% ) and open a corresponding short position. This keeps the overall dollar value stable regardless of market moves. Their profit comes from the funding rate (fees the Longs pay the Shorts).

Over the last 365 days, funding rates were positive 87% of the time. It is smart and effective. Even when the market crashed on October 10th, Ethena remained safe thanks to solid risk management and special agreements with exchanges to avoid auto liquidation.

Syrup: Their core game is lending to institutions. Big financial firms cannot just ape into random DeFi protocols; they need compliance.

Syrup provides that solution, and in return, institutions are willing to pay above average rates. Data from Dune Analytics shows Syrup’s token, syUSDC, frequently outperforms the lending rates of Aave.

Aave ($AAVE): The number one DeFi app for lending and borrowing. Their strategy is decentralized, overcollateralized lending markets. If you want safe exposure to DeFi yields, aUSDC is likely one of the best bets today.

We are also seeing novel strategies emerge. Daylight tackles energy bottlenecks using blockchain. Their sGRID stablecoin is backed by actual solar panels and batteries in households.

Or Neutrl with OTC trading strategies, hedging locked token positions to deliver impressive double digit yields despite its small size. There is even Permian Labs with sUSDai, backed by hardware loans, effectively lending to companies buying high end NVIDIA GPUs.

The Strategy Allocators

If evaluating the risks of every single strategy feels overwhelming, that is where the Allocators step in. Their job is to assess risk, filter out weak strategies, and move your capital to where the risk adjusted returns are best. Think of them as an index fund for yield strategies.

Steakhouse is a prime example. They use Morpho vaults as infrastructure to manage about 1.8 billion USD in user deposits. However, most of these asset managers do not have their own token yet.

But you do not have to pick a single manager. Imagine a "Meta aggregator" model that allows your capital to be distributed across multiple strategy managers. That is exactly what Sky ($SKY) is building.

Sky currently manages around 10 billion USD in deposits. They act as a yield engine. Strategy managers (like Spark, Grove, Obex) can borrow capital from Sky at a fixed rate (say 4%) and deploy it to earn 5%, pocketing the 1% difference.

Sky filters out risky players and only funds the strongest managers. We are incredibly bullish on this model because Sky possesses a massive balance sheet and deep liquidity, creating an economic moat that is very hard to bridge.

Also, do not ignore second order effects like the yield trading market dominated by Pendle $PENDLE ( ▲ 1.31% ) . Pendle lets you split yield tokens into principal and yield to speculate or hedge. With a TVL around 4 billion USD, Pendle is basically running this race alone.

The Massive Potential: Why Money Cannot Resist Onchain

We talk about potential, but what specifically makes giants like BlackRock or Franklin Templeton start moving? The answer is two words: Efficiency.

Imagine a bank that works 24/7, has no holidays, no grumpy tellers, and most importantly, near zero operating costs compared to Wall Street’s bloated infrastructure. Onchain credit is that bank.

Removing middlemen not only makes transactions instant but also returns most of the profit to the end user, which is you.

Instead of the bank eating the massive spread, smart contracts redistribute that chunk to liquidity providers. That is why rates on Aave or Sky are always juicier than your savings account.

Furthermore, onchain credit democratizes finance. previously, to access US Treasury bonds or premium corporate credit, you needed to be an accredited investor with massive capital.

With onchain tech, a farmer in Vietnam or a student in Argentina can access the same investment opportunities as a millionaire in New York, with just a few clicks and an internet connection.

This is an unprecedented market expansion, connecting global excess capital with real borrowing needs without borders.

Finally, do not forget absolute transparency. In the 2008 financial crisis, nobody knew what bad debts banks were holding until everything collapsed. With onchain credit, every loan and every collateral asset is visible on the blockchain in real time.

You can check for yourself if Ethena actually holds enough ETH to back USDe, rather than trusting the word of some CEO.

Fatal Risks: The Death Pits to Avoid

It sounds amazing, but let me splash some cold water on your face. Onchain credit is not for the ignorant. The biggest and scariest threat is Smart Contract Risk.

Remember, "Code is Law," but code is written by humans, and humans make mistakes. A misplaced semicolon or a tiny logic flaw can vaporize billions of dollars in seconds. We have seen historic hacks like Euler Finance $EUL ( ▼ 15.98% ) or the Curve $CRV ( ▼ 0.46% ) exploit.

When you deposit money into a credit protocol, you are trusting those lines of code. If it gets hacked, there is no deposit insurance or government bailout. Your money is gone forever.

Next is Liquidity Risk and Depeg events. In normal markets, everything runs like a well oiled machine. But when panic hits and everyone wants to withdraw at once, a "bank run" can occur.

If a protocol’s liquidity is not deep enough or collateral cannot be liquidated fast enough, the yield stablecoin you hold could lose its 1 dollar peg. Remember the lesson of UST (Terra), an algorithmic stablecoin that completely collapsed due to a flawed design when facing sell pressure.

While current models like Sky or Ethena are much more robust, in finance, nothing is "too big to fail."

Finally, Regulatory Risk. Governments and agencies like the SEC are watching this market like hawks. A ban or a new adverse rule could force a thriving protocol to shut down or restrict access in certain countries.

While DeFi is decentralized, the on and off ramps and centralized stablecoin issuers (like Circle, Tether) are still subject to the law. If they get squeezed, the entire onchain credit ecosystem will shake.

Advice for the Insiders

So what do we do? Quit the game or dive in blind? Neither. We participate, but with a cool head and strict risk management.

Never put all your eggs in one basket. Diversify your capital across different protocols (Strategy Diversification) and prioritize platforms with a long history (Lindy Effect) like Aave or MakerDAO (now Sky).

Watch the protocol health metrics (TVL, collateral ratio, revenue) closely rather than just staring at the sexy APY number.

Onchain credit is the future, I am sure of it. But the road to that future will be paved with both roses and thorns. Your job is to equip yourself with the best shoes, which is knowledge, to walk steadily on this path.

Conclusion and Investment View

Back to the NIM (Net Interest Margin) concept we mentioned earlier. This measures a protocol's efficiency in turning deposits into revenue.

According to financial analysis from The Crypto Fire, Sky currently boasts the highest NIM at 2.3%, while others lag behind, usually hovering around 1% to 1.5%.

Therefore, to front run this trend, your portfolio should focus on the strongest players. Sky ($SKY) is our top pick because it acts as a super aggregator for all onchain yield strategies with excellent risk management.

Through Sky, we also get indirect exposure to quality projects like Spark or Grove. Additionally, Aave ($AAVE) remains an indispensable pillar in the lending space.

The list of opportunities in this market will only get longer. The key is to understand the context, the risks, and the growth drivers to spot the gems before the crowd does.

Key Takeaways

• Yield generating Stablecoins are an inevitable trend as users demand their money works for them instead of sitting still.

• Operating Model: The market splits into two main groups: Operators (creators of strategies like Ethena, Syrup) and Allocators (risk managers like Sky, Steakhouse).

• Investment Opportunity: Sky ($SKY) is highly rated for its "Meta aggregator" role with superior Net Interest Margin. Aave ($AAVE) and Pendle ($PENDLE) are crucial infrastructure pieces you cannot ignore.

• 2030 Vision: With a forecasted 330 billion USD scale, this is the golden time to start learning and allocating capital to the protocols leading this onchain credit trend.

⚠️ Disclaimer: This newsletter is for informational purposes only, just for fun and knowledge. This is not investment advice. Your money, your responsibility!