The high-yield trap of pegged stablecoins: The truth you need to know

The Sweet Lie of 20% Annualized Returns

Recently, some enticing stablecoin financial products have appeared in the market. Certain mainstream exchanges have launched a “Flexible Financial Plan” with USD1, claiming up to 20% annualized returns. At first glance, this figure is undoubtedly a deadly attraction for investors seeking stable income. But the reality behind it is much more complex.

Such high interest rates are not coming out of nowhere. In traditional finance, the yields on risk-free assets (like government bonds) are far below this number, let alone stablecoins pegged to the US dollar. The truth is: these generous interest rates mainly come from direct subsidies by the platform or project team, not from the assets’ natural earnings.

Why Are Exchanges Willing to Subsidize

The key to understanding this phenomenon is recognizing that this is a battle for capital. Major exchanges and project teams are fiercely competing to quickly accumulate liquidity and user stickiness, and they are willing to burn money in the short term.

Specific strategic goals include:

• Rapidly expanding the circulation of emerging stablecoins like USD1
• Countering the market position of existing stablecoins like USDT, USDC
• Attracting users to keep funds on the platform, increasing trading activity
• Building their own stablecoin ecosystem to enhance platform competitiveness

However, this subsidy model is inherently unsustainable. Once the incentive period ends, the yields will quickly drop, even returning to levels far below the market average.

The Issuance Mechanism of Pegged Stablecoins

USD1 is issued by World Liberty Financial Inc. (WLFI), positioned as a stablecoin pegged 1:1 with the US dollar. On the surface, it uses dollar deposits, US Treasuries, and other cash equivalents as reserves, claiming to be managed by professional custodians.

However, the critical issue lies in lack of transparency. Compared to USDC or USDT, USD1 currently lacks regular public audits and detailed reserve proofs. It is difficult for outsiders to independently verify whether its reserves are truly sufficient to support all circulating tokens.

Dual Perspectives: Opportunities and Risks

Pros:

USD1, as a new stablecoin option, indeed supports cross-chain transactions and DeFi applications. After launching on mainstream exchanges, it experienced rapid growth in the short term, with a market cap surpassing billions of dollars. Some large institutions even use it as a settlement tool, which to some extent validates its market demand.

Cons:

• Lack of reserve transparency: Difficult to verify whether the backing funds are truly sufficient
• Concentration risk: Some analyses suggest USD1’s circulation may be controlled by a few large holders, increasing volatility and manipulation risks
• Regulatory risk: As an emerging project, it faces uncertainty from changing regulatory environments
• Platform risk: The exchange’s own compliance history and operational risks should not be overlooked

How Should Retail Investors Decide

The answer depends on your risk tolerance and investment goals.

If you are a conservative investor:

It is not recommended to rely on USD1’s high-yield financial products as a long-term stable income source. The reason is simple—subsidies will eventually end, but risks persist. For those seeking asset preservation, choosing mature mainstream stablecoins (like USDC, USDT) combined with low-risk channels (such as mainstream wallets or legitimate deposit products) is more prudent. This sacrifices some yield but provides genuine peace of mind.

If you can tolerate higher risks:

You might consider participating during specific promotional periods to capture these subsidy bonuses. But be sure to understand:

• The activity limits and timeframes are often capped and on a first-come, first-served basis
• Once subsidies stop, yields will significantly decline
• If the stablecoin loses its peg or liquidity dries up, you may face withdrawal difficulties

Practical participation advice:

If you decide to participate, set a clear exit plan. Do not expect high returns to last indefinitely; view the yield as an extra reward rather than a primary income source. Also, only invest funds you can afford to lose completely.

Summary

USD1 represents an active attempt by exchanges and project teams to seize a share of the stablecoin market. The up to 20% annualized return is indeed tempting, but fundamentally it is a subsidy, not genuine earnings. It is crucial for any investor to understand this—there’s no such thing as a free lunch. Returns above the market average are usually accompanied by corresponding risks. In the world of pegged stablecoins, caution and rationality are the best investment partners.