From Human Decision-Making to Code Governance: How the Third Type of Stablecoin Can Enable Revenue to "Self-Generate"?

Original Title: "Type III Stablecoins"

Original Author: STANFORD BLOCKCHAIN CLUB

Compiled by｜Odaily Planet Daily Ethan（@ethanzhang_web3）

Stablecoins, as a key component of the cryptocurrency space, have seen their total market capitalization of liquid assets surpass $200 billion, firmly establishing their core position in today's crypto market. Some believe that the scale of stablecoins has decoupled from the highly volatile crypto market—despite a correction in the crypto market in 2025, stablecoins continue to demonstrate strong resilience, with an increasing number of traditional financial institutions integrating decentralized finance (DeFi) into their solutions.

Currently, stablecoins have served two main functions: fiat settlement and store of value (SoV). The daily trading volume of stablecoins has reached a record high of 81 billion dollars, with USDT and USDC accounting for over 95% of the market share in mature economies and emerging markets. They represent not only simple transactions but also financial inclusivity and the demand for low-volatility currencies.

However, compared to the value storage function, the acceptance of yield stablecoins is vastly different. Despite the continuous innovations in the DeFi space, yield stablecoins remain a niche application among stablecoins. The total market cap of yield stablecoins is about 10% of the market cap of USDT and USDC.

Why is there such a disparity? More importantly, how can we improve the current state of yield stablecoins?

This article will explore the evolution of yield-bearing stablecoins, analyze the execution mechanisms of yields, and ultimately discuss how Cap addresses scalability and security issues.

The "Coming of Age" of Yield Stablecoins: The Evolution from "Surviving" to "Making Money"

Earlier, the yield of stablecoins primarily came from endogenous mechanisms; the yield was entirely derived from DeFi platforms. Specifically, the yield was generated through liquidity provision and platform rewards, forming a closed loop of capital flow, where users continuously jumped from one protocol to another in order to speculate for higher annual interest rates. Therefore, the scale of yield could only increase with the expansion of the platforms.

The most representative example is the crypto collateralized stablecoin or Collateralized Debt Position (CDP). The most typical example of a CDP is the early MakerDAO, which mints DAI by using ETH as collateral. This model generates revenue by charging interest to borrowers who use their collateral to mint stablecoins. The interest is then redistributed to participants in the protocol, and the entire mechanism operates completely within the DeFi ecosystem. However, the scalability of this model can only expand with the growing demand for ETH.

Another popular model relies on voting escrow tokens (veTokens), locking these tokens allows the protocol to distribute rewards to specific liquidity pools. This has led to the so-called "token wars" (veToken wars), in which stablecoin protocols compete for the ability to control liquidity pools in order to obtain rewards from decentralized exchanges (DEX). These token wars, such as CRV and BAL, involve strategies to drive yields by purchasing DEX tokens.

Although the total locked value (TVL) of these two models has reached billions of dollars, their yields often fluctuate dramatically and are speculative in nature. Most importantly, the demand for these models is limited, especially compared to applications outside of DeFi mechanisms, where demand appears relatively small.

Therefore, the founders have been working within the industry to promote the expansion of stablecoins in order to break through the limitations of the endogenous yield model. With the rise of more and more synthetic dollar strategies backed by fiat currency or other assets, from T-Bill to experimental hedge fund strategies, stablecoins are beginning to attempt to address the scalability issues of yield stablecoins.

So, what perspective should we use to view these new types of stablecoins?

The "Power Games" of Stablecoins: Survival Rules for Three Types of Players

The core concept of a stable income currency, as the name suggests, is to issue new currency through reserves by lending out highly liquid assets to execute investment strategies.

In addition to choosing supported assets and lending parameters, the core difference of yield stablecoins lies in how they execute yields: who decides which strategies to implement? In the event of bankruptcy, how do users protect their rights?

In other words, the framework relied upon when assessing execution mechanisms is the capital allocation mechanism and security guarantees. Currently, there are mainly two execution methods in the DeFi field: dictatorial and committee-based. This article also introduces a third type—the self-reinforcing yield mechanism being pioneered by the Cap team.

The following section will delve into each type of stablecoin, particularly the capital allocation and security incentive mechanisms, as well as the corresponding trade-offs.

Category One: The Dictator's Dilemma - The Efficiency and Risks of "I Decide"

The first type of stablecoin is a unilateral market, where a single entity generates returns using depositor capital. Examples of this type of stablecoin include Ondo, Ethena, Usual, Agora, Resolv, and other synthetic assets supported by team-operated strategies. They are similar to hedge funds, with dApp teams selecting and executing a single (sometimes a few) strategy. As the name suggests, the first type of stablecoin is centralized, with the team having the final say on capital allocation and recourse. Depending on the team, they may offer security assurances including over-collateralization, decentralization, and transparency, but this is at the team's discretion, so risks are naturally concentrated.

The main motivation for adopting this model is to reduce the team's development costs and enhance users' agency. The development costs are low because the protocol focuses on a single strategy (such as basic trading). At the same time, users can switch between different stablecoins of this type and choose specific strategies.

Incentive Mechanism Adjustment

In this model, the decision-makers are the dApp teams. Generally, the teams will optimize yield and security to attract more users. If the returns are not competitive, or if users' funds suffer losses, as more and more projects are launched, the project may quickly become outdated. Therefore, the team's focus is often on sustaining the growth of TVL and maintaining competitive yields.

In theory, the team should minimize the risks associated with the strategy. However, most of these stablecoins exist in the form of bankruptcy-remote entities, and users are unable to protect their rights through regulatory or legal means. Therefore, the team does not have to prioritize user protection and transparency as strictly regulated financial institutions do.

Weighing the pros and cons

The main reason for choosing the first type of stablecoin design is simplicity. This model can concentrate resources to implement a single strategy, resulting in lower startup costs and reducing concerns about potential vulnerabilities. Another advantage is the choice for users. By focusing on one or two strategies, the team returns decision-making power to the users, allowing them to move funds between different applications based on market changes.

However, as mentioned earlier, the first type of stablecoin typically lacks an effective recourse mechanism. Their operation is akin to an unsecured loan to the application team. If the strategy results in losses, the custodian goes bankrupt, or the team runs off with user deposits, users have little to no way to recover their losses. Moreover, due to the lack of regulation, the team may protect themselves through legal structures, thereby evading responsibility.

Another key issue is the obsolescence of strategies—no strategy can indefinitely generate returns that exceed the market efficiently. When a team chooses a strategy that aligns with market conditions, it may achieve extraordinary returns of over 30%. However, as market conditions change, the team's returns gradually diminish or get diluted as scale increases. At this point, the team has to continually seek new strategies to adapt to the changes in the market.

Category 2: The Committee's Game - Can "Collective Decision-Making" Cure All Ills?

To address the issue of outdated strategies, the second type of stablecoins has introduced a mechanism for the parallel operation of multiple strategies. Examples of the second type of stablecoins include Maple and Sky (formerly known as MakerDAO). They delegate user deposits to various yield strategies by establishing committees or decentralized autonomous organizations (DAOs), which include strategies from first-type stablecoin teams as well as banks and market makers from outside the crypto space. Therefore, this model shifts the execution responsibility from a single team to a collectively decision-making organization.

The main motivation for adopting the second type of stablecoin is scalability. If the current strategy does not yield substantial returns or poses excessive risks, the DAO can decide to switch to a better strategy, thereby allowing the second type of stablecoin to provide users with stronger guarantees of robustness.

Incentive Mechanism Adjustment

Overall, the allocation decision of capital is made by the three parties: governance token holders, representatives, and committees.

The goal of governance token holders is to vote for the third-party strategies that are the most expressive and scalable. Unlike governance tokens in the first category of stablecoins, holders of governance tokens in the second category of stablecoins have greater decision-making power and can exert a greater influence on the decisions of the DAO in open forums. However, it should also be noted that governance token holders are not necessarily the participants who understand risk management the best.

Representatives are those actors who do not hold governance tokens but exercise voting rights through the authorization of governance token holders. Typically, investors and founders delegate their voting rights to professional representatives, DAO service providers, or university blockchain clubs. It is worth noting that representatives are not necessarily bound by the interests of depositors, as their primary source of income comes from fees earned through their proxy services, rather than the interests of the users.

The committee is the decision-making body within the project, responsible for making a series of specific decisions, including the introduction of new collateral, the formulation of marketing strategies, and the management of other core functions. In the process of allocating capital to generate returns, the committee is the direct decision-maker. Similar to the delegators, the committee aligns its interests with depositors through monetary rewards obtained from the project. Compared to representatives, the entry requirements for the committee are stricter. Members of these committees are often "dxxed"—this adds an extra layer of protection for members who value their public brand.

Weighing the pros and cons

The notable feature of the second type of stablecoin is the scalability achieved through outsourcing. They act as a layer above yield stablecoins (including the first type of stablecoins) and can leverage market forces to achieve large-scale yields. In this model, the allocation of capital changes with the market environment, and the governance structure reallocates capital based on yield and safety performance. Therefore, the second type of stablecoin offers stronger robustness guarantees compared to the first type of stablecoin.

However, like the first type of stablecoin, the second type of stablecoin also faces the issue of recourse not being guaranteed. If a third-party team experiences a financial loss, the end users will be unable to recover the losses. Since these organizations are decentralized, legal recourse is also not feasible.

Another important factor to consider is the issue of corruption. As past DAO experiments have shown, the security of capital allocation can be directly influenced by bribing and corrupting DAO representatives, voters, and committee members. Special advisor positions, regular payments, and token distributions are common ways to corrupt decision-makers. This directly affects the security of the second type of stablecoins, as corrupt decision-makers may allocate capital to unsafe or malicious actors.

Category Three: Mechanisms and Rules - When Stablecoins Learn to "Self-Sustain"

The third type of stablecoin represents a shift away from human subjective decision-making towards an automatically executed system of collective rewards and penalties. In a sense, they are more like a protocol rather than a traditional hedge fund. Immutable rules set by smart contracts replace the process of capital allocation and recourse handling performed by human decision-makers.

The core motivation for adopting the third type of stablecoin is to enhance security and reduce latency. Users are protected at the smart contract level, allowing them to check the code to verify the recourse mechanism when a strategy fails. Furthermore, the response speed to strategy switches in the open market is significantly accelerated, enabling quick adjustments to respond to changes in market dynamics. This allows the third type of stablecoin to fully leverage the power of the market and rapidly deploy multiple parallel yield strategies.

Cap's Ambition: Creating a "Yielding Perpetual Motion Machine" for Stablecoins

Currently, there is no third type of stablecoin on the market, and Cap is the first stablecoin to create this category.

Cap utilizes the lending market and the Shared Security Model (SSM) to provide efficient capital allocation and reliable financial guarantees, thereby innovating the first type of third-class stablecoin. The protocol supervises the ability of third-party operators to generate profits by publishing participation rules at the smart contract level. Interested readers are encouraged to read the introductory article to understand its mechanism overview.

Cap is a tripartite market that integrates operators, stakers, and end-users.

Operators are financial institutions responsible for generating revenue. Their participation is regulated by smart contracts and market dynamics. Before operators borrow any assets, the protocol first checks for common over-collateralization or excessive guarantees in the crypto lending market. The difference here is that operators do not invest capital themselves, as doing so would reduce capital efficiency; instead, they accept the entrustment of re-stakers, using locked-up crypto assets as collateral. Previously idle re-staked assets begin to earn returns through this new use. What operators need to do is persuade re-stakers to delegate their stakes to them.

The capital allocation for operators is economically adjusted through the interest rates set by the lending market mechanism. It is not determined by the team how much funding each operator should receive, but rather the operators themselves choose whether to join the agreement based on whether they can provide returns at the current benchmark interest rate. The benchmark interest rate is also determined procedurally—it is the deposit rate of the main lending market plus the usage premium of the Cap. This usage premium is calculated as a percentage of the lending capital, indicating the competitiveness of capital supply under specific market conditions.

Stakers receive rewards by delegating to operators. The interest rate is determined by the stakers and operators through an agreement. Similarly, end users also receive rewards for providing funds, with the interest rate determined by the benchmark yield. The amounts they receive are recorded and distributed on-chain, ensuring the transparency of the agreement.

If the operator engages in malicious behavior or a black swan event occurs, resulting in losses of the loan amount, then the re-staker will face penalties. The penalties will involve removing the re-staker's held cryptocurrencies to compensate the end users. The forfeited funds will be redistributed to the end users, ensuring that the right of recourse is always available and can be verified through code.

Incentive Mechanism Adjustment

Since third-party operators must obtain the authorization of the staker to lend, the decision-makers of Cap are essentially the stakers. The stakers have the final say on which third parties can enter the protocol and generate profits.

Re-stakers are incentivized through the delegated premium provided by operators. The re-staked assets, being locked-up crypto assets, have a low opportunity cost and low capital premium. In other words, these assets cannot be used to generate significant returns. Therefore, re-stakers are motivated to delegate this idle value to operators for use. While having the power to make decisions, re-stakers are also directly exposed to the outcomes of those decisions, so they are encouraged to prioritize safety.

It can be noted that Cap's ultimate goal is to become a completely permissionless and minimally governed protocol, in which operators and restakers can participate freely. However, considering the novelty of the design, in the early stages of the protocol, restakers and operators will be certified entities and whitelisted. This provides a security mechanism for restakers, as they have a way to reach agreements with each other and enforce legal recourse.

Weighing the pros and cons

The key advantage of this model lies in its security. Since decision-makers bear the full risk of their decisions, retail holders do not need to worry about the process of generating returns. All rules are executed by smart contracts, eliminating the need for human arbitration. This provides retail investors with stronger regulatory protection than traditional finance.

Similar to the second type of stablecoin, the delay decreases when identifying and adopting new strategies. There are no conversion costs when the system reallocates capital. Unlike the second type of stablecoin, the allocation of capital does not require long deliberations from the DAO and committees. Each staker has the right to allocate capital to the operator individually at the same time.

However, compared to the second type of stablecoin, the complexity of the third type of stablecoin is higher. This complexity may introduce risks in smart contracts, as the entire system relies on code to regulate the execution process.

Conclusion: Paradigm Shift is Inevitable

Currently, interest yields are still far from reaching the level needed to unleash the potential of DeFi. With the continuous growth of the stablecoin market, there will be more and more strategies supporting interest-yielding stablecoins. However, unless there is a paradigm shift in the fundamental design of these stablecoins, they will once again face the same risks and fatigue, making scalability unattainable. Therefore, there is an urgent need to develop a more efficient, scalable, and secure system that transcends the limitations of traditional human decision-making and promotes the widespread adoption of stablecoins.