Want to jump straight to the answer? You can earn up to 8.6% interest on your stablecoins with BlockFi.
Stablecoins have gained an impressive amount of traction in recent years due to the utility that they provide. Investors are able to de-risk positions while avoiding transfers to fiat, move tokens between exchanges and protocols securely, send payments and even lend out idle stablecoins for the purpose of accruing interest.
Top 4 Stablecoins
Tether (USDT), USD Coin (USDC), Binance USD (BUSD) and DAI (DAI) are the most prevalent and well-known stablecoins. USDT, USDC and BUSD are directly backed by U.S dollars, and therefore have a higher chance of maintaining their 1:1 Peg. DAI, on the other hand, is a stablecoin that is not collateralized by USD but rather by crypto assets. As a result of this, DAI does not always maintain a 1:1 peg and has fluctuated by up to 8 cents for short periods of high volatility.
It’s important to note, however, that DAI is completely decentralized. The stablecoin is minted by a smart contract made by MakerDAO, creating a trustless way to invest in stablecoins. With other stablecoins like USDC and USDT, one must trust that the establishment actually has $1 in reserves for every stablecoin minted. DAI’s decentralization makes it the favorite pick among crypto enthusiasts.
Regardless of the source of their backing, these special tokens serve an extremely important purpose in the creation of new and innovative financial instruments built within the decentralized finance (DeFi) landscape.
How to Earn Interest on Stablecoins
Decentralized stablecoin borrowing and lending is quickly growing in popularity. Investors with extra stablecoins are able to lend them out for annual yields that those used to traditional banking might have a hard time believing. Crypto lending on the blockchain, or “yield farming” is one of the biggest applications of Decentralized Finance to date.
Stablecoin farming and lending are excellent strategies that crypto investors can use in times of market uncertainty or with a longer-term view, treating their activity as a high-yield savings account.
In crypto, typical stablecoin DeFi activity can yield anywhere from 4% to 20% APY, with some exceptions. Some dApps like Malt Protocol on the MATIC network yield DAI at upwards of up to a 450,000% annual percentage rate (APR). However, these high yields are often either scams or extremely volatile, making them poor investments over the long term. The lesson to be learned when it comes to yield in crypto is that “if you don’t know where the yield is coming from, you’re probably the yield.”
Projects promising massive passive income that’s seemingly pulled from thin air usually have a catch. Although similar, interest rates in crypto are affected by different factors than those in regular banks. Volatility in APY can occur to a small degree in a normal bank similar to the wide variations in crypto; however, risks inherent in using dApps to farm stablecoins include smart contract risk and risk of a stablecoin losing its 1:1 peg to USD. Additionally, costs to transact on Ethereum’s blockchain, referred to as “gas fees,” can also contribute to a lowered yield.
It’s always a good idea to do your own research and be familiar with the platform you are using to avoid the previously mentioned risks as much as possible. Choose position sizes based on your personal risk profile, and understand that volatility in APR is normal. Utilizing the yield opportunities available in crypto today can put idle assets to use relatively safely at rates far higher than in fiat savings accounts, which average under 1% in the United States.
Yield Accrual Methods
In an ecosystem as diverse as the crypto asset space, crypto traders can take advantage of countless ways to gain yield on assets, but the main vehicles are farming and lending. There are differences between the mechanisms of these 2 processes.
Lending in crypto is very similar to lending in traditional finance with the exception that the intermediary is typically a decentralized entity or company as opposed to a bank. Lenders earn interest that is paid on the borrower’s side of the transaction.
Platforms like Aave, MakerDAO and Compound are decentralized lending platforms that allow users to gain on average 4% to 16% APY on stablecoins while still maintaining custody of their coins. The tokens supplied are locked in smart contracts.
Blockfi and Crypto.com are examples of centralized, custodial platforms that pay 8.6% and 10% respectively on USDC deposits. It’s fairly simple to understand this process, as yield is coming from individuals or protocols looking to borrow stablecoins.
Yield Farming & Liquidity Provision
Liquidity Provision Farming in crypto is when users provide liquidity to decentralized platforms such as Uniswap, Sushiswap and Curve. Because these platforms are decentralized, they do not usually have their own large reserves of tokens allowing for liquid movements of funds through the orderbook of each individual trading pair. To get around this problem, DEXs incentive users with a percentage of exchange fees that is paid out in yield for their liquidity providing services.
This process is referred to as Providing Liquidity, often shortened to LP’ing. Once a user provides liquidity, they are rewarded based on the exchange fee and volume of transactions on the specific trading pair they LP’d. The reason that the APR varies while LP’ing is that depositors in a liquidity pool share the rewards with the other depositors. The larger the number of individuals LP’ing, the more the yield gets diluted.
Is Yield Farming Worth it?
Yield farming with stablecoins allows you to profit passively with very little risk, benefits traders and investors, and protects from market drawdowns. Yields on stablecoins are available on various platforms at the following APYs:
DeFi Protocols for Stablecoin Lending
- AAVE: Up to 6% depending on the stablecoin used, plus extra APY paid in MATIC
- Compound: Up to 3% for Stablecoins, more for normal cryptocurrencies
- Curve: Up to 28% (up to 55% in experimental vaults)
- Cream: Up to 10% APY on stablecoins
- Yearn Finance: Up to 9% (up to 20% with stacked rewards in sUSD)
Centralized Finance Products for Stablecoin Lending
- BlockFi: Up to 8.6% on stablecoins, less for other cryptocurrencies.
- Crypto.com: Up to 14% on stablecoins
- Celsius: Up to 8.8% annual interest on stablecoins
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