Stablecoins have evolved from simple fiat-backed digital assets into a core pillar of the crypto economy, providing crucial liquidity for trading, payments, and decentralized finance (DeFi). Over the years, their role has shifted in response to macroeconomic changes—most notably rising U.S. interest rates—and to the emergence of tokenized money market fund (MMF) products, which offer stable value alongside yield.
Some argue that holding stablecoins now makes little sense, given that MMF tokens provide comparable liquidity while granting holders direct yield exposure. Yet, each MMF product carries unique considerations—as noted in research by Collin Erickson at RWA.xyz—and large DeFi players are already diversifying into these new instruments. Meanwhile, bundling multiple MMFs into a single product is increasingly common, ostensibly to spread out operational and regulatory risks. But once you begin adding different exposure types for more yield, the product’s underlying risks become less transparent.
It is challenging to find a perfect analogue in traditional finance for these emergent instruments. Are they akin to mutual funds, robo-advisors, or entirely new vehicles for private wealth management? Many newly launched or soon-to-launch products blend MMF returns with other, riskier exposures. This can blur the lines of what was once universally understood as a “stable” coin.
This piece explores the historical development of stablecoins, the competitive tension introduced by MMF tokens, and the risks associated with stablecoin-MMF hybrids that embed speculative assets into their structures.
The Historical Evolution of Stablecoins
Stablecoins arose as a response to the extreme volatility of cryptocurrencies like Bitcoin and Ethereum. Early pioneers, such as Tether (USDT) and USD Coin (USDC), used fiat reserves to maintain a 1:1 peg with the U.S. dollar, allowing traders to hedge against price swings while remaining in the crypto ecosystem.
Over time, several new models emerged:
Crypto-collateralized stablecoins (e.g., DAI, crvUSD) maintain pegs via overcollateralization with assets like Ethereum.
Algorithmic stablecoins (e.g., UST) rely on algorithmic mechanisms and minimal direct collateral to sustain their pegs. Many, such as TerraUSD (UST) in 2022, collapsed when market conditions undermined their peg-stabilizing logic.
As stablecoins became central to crypto-based liquidity, they also generated significant earnings for issuers. Notably, companies like Tether and Circle earn interest on the short-term U.S. Treasurys backing their tokens. With the Federal Reserve hiking rates above 5%, the yield on these reserves can be substantial—and so far, largely retained by the issuers. This dynamic leads to a simple question: Why hold a zero-yield stablecoin when tokenized MMF products can deliver risk-free returns for holders?
The Competitive Tension Between Stablecoins and MMF Tokens
Tokenized MMFs—like BlackRock’s BUIDL, Franklin Templeton’s OnChain U.S. Government Money Fund, and Ondo Finance’s OUSG—offer freely tradable, yield-bearing tokens backed by U.S. Treasurys. They compete with stablecoins by providing:
Comparable Liquidity: Onchain tradability mirrors that of stablecoins.
Direct Access to Yield: Instead of an issuer retaining yield, holders earn returns from Treasury rates.
In theory, MMF tokens could displace traditional stablecoins as the default mechanism for onchain settlements, assuming they reach critical mass in adoption and regulatory acceptance. This possibility prompts stablecoin issuers to contemplate new models—potentially sharing yield with users or positioning themselves as fully regulated “digital cash” solutions.
Yet the most substantial risk differential arises not from comparing stablecoins and MMFs alone, but from the new breed of financial products that merge MMF exposure with high-risk alternatives, such as tokenized private credit.
The Risks of Blending Unique Issuer Yields into a Single Product
Innovations like Nest (offered through Plume Network) and other projects are introducing hybrid tokens that bundle MMF yields with more speculative exposures. On paper, these products promise the stability of MMFs combined with higher returns from risk-bearing assets. In practice, they present several key challenges:
Underlying Asset Risk: While MMFs are generally backed by U.S. Treasurys (considered a safe benchmark), private credit or other alternative assets are subject to higher default rates, lower liquidity, and greater sensitivity to economic cycles.
Liquidity Mismatch: MMFs and stablecoins typically hold ultra-liquid reserves. But riskier debt instruments may have lock-up periods or minimal secondary market depth. Meeting instant redemption demands could become impossible if these assets are not readily convertible to cash.
Marketing vs. Reality: Hybrid tokens often brand themselves as stable, leveraging the MMF component for credibility. But if holders are unaware of the riskier allocation, a market downturn could trigger depegging, “runs,” or broader contagion.
Regulatory Scrutiny: The regulatory outlook for these products is uncertain, with potential for heightened scrutiny if missteps or fraud harm investors. As the space grows, so does the likelihood of increased enforcement or newly proposed regulations.
Ultimately, liquidity can be created for almost any token, but that liquidity’s resilience depends on the stability of the underlying assets. Hybrid tokens that appear stable in normal markets may unravel under stress if the higher-risk portion underperforms or can’t be liquidated quickly.
Future Implications and the Need for Clear Risk Segmentation
With new financial products proliferating, the digital asset sector must develop clearer risk tier definitions. A concise framework might categorize offerings as:
Pure Stablecoins (or “Tokenized Cash”)
Fully backed by fiat cash and near-cash equivalents (e.g., short-term Treasurys).
Zero yield, but highly liquid and straightforward.
Tokenized Cash & Equivalents (i.e., MMF Products)
Provides yield via exposure to regulated Treasurys or similar near-risk-free instruments.
Designed for rapid liquidity while granting holders the direct returns of underlying assets.
Hybrid Yield Products
Combines “cash-equivalent” risk with riskier exposures, such as investment-grade or high-yield debt, private credit, or other alternative assets.
Potentially higher returns but subject to outsized volatility and deeper liquidity challenges.
Absent such transparency, the market may see another wave of mispriced assets, abrupt depeggings, and liquidity crises akin to the Terra UST collapse. Clear segmentation and robust disclosures help investors understand what they are buying—preventing stablecoins from morphing into high-risk funds under a misleading label.
Stability, Yield, and the Future of Digital Dollars
The stablecoin market is undergoing a profound transformation as tokenized MMFs challenge the zero-yield norms and new hybrid products push the envelope on risk. While MMFs represent a compelling alternative to traditional stablecoins, the greatest risks lie in products that amalgamate stable assets with speculative strategies, creating confusion about their true nature.
If “hybrid stablecoins” fail to disclose risk or set realistic liquidity expectations, they risk destabilizing broader markets. The future of digital dollars will hinge on investor education, regulatory clarity, and honest distinctions between safe, yield-bearing, and higher-risk allocations. Only by segmenting risk and resisting the urge to label everything as “stable” can the next generation of stable assets deliver both yield and resiliency—without revisiting the failures of the past.