Stablecoin Lending: Best Stablecoin Interest Rates
Evolving cryptocurrency markets make it easier for investors to perform quick transactions with minimal fees. However, crypto’s volatility can make it difficult as a payment gateway, leading to hesitancy among investors.
Stablecoins help solve this problem, protecting against crypto’s volatility. Stablecoins are tied to an underlying asset and are designed to maintain a fixed value, called a peg. So, unlike other crypto assets that fluctuate in price, stablecoins are always pegged to the value of a less volatile asset.
The stablecoin you choose to invest in will largely influence which lending platform is right for you. For example, Binance will provide the best rates for BUSD, so this may be the right lending platform for you if you choose to invest in BUSD. Of course, you’ll also want to look at the platform’s yield (as shown in the chart below) to understand what kind of profit you can make.
Here, we go over the best stablecoin lending platforms and how much you can earn in yield, from stablecoin lending. Yield is similar to the dividends you can earn from investing in stock. More specifically, yield refers to the earnings generated and realized on a particular investment (in this case, stablecoins) over a certain period of time. Typically, higher yields are an indication of higher income and lower risk. We also discuss some stablecoin basics at the bottom of the article for those new to this form of investing.
|BlockFi||–||(up to) 7.50%||(up to) 7.50%||9.5%||6.00%|
|Nexo||(up to) 12.00%||(up to) 12.00%||–||(up to) 12.00%||(up to) 12.00%|
The emergence of stablecoins has been great for trade, as they are less volatile than traditional crypto thanks to their backing by traditional fiat currencies and other assets. This stability allows more conservative investors to enter the market and take part in the world of crypto.
Here are the leading stablecoins to consider.
Launched in 2014 as RealCoin, Tether was the world’s first stablecoin and is the most liquid and transacted stablecoin on the market. Tether is also the largest stablecoin by market cap in May 2022, making it the third cryptocurrency overall, just behind Bitcoin and Ethereum.
The goal of the Tether stablecoin is to keep its value pegged at 1:1 to the US Dollar. This means that investors can purchase and redeem one USDT for $1. Many stablecoin exchanges offer USDT as an alternative to fiat currencies so investors can perform quick trades without excessive fees. According to Tether, USDT is 100% backed by reserves, including traditional currency and cash equivalents.
Tether also offers a three-pronged strategy. It has brought three stablecoins to the market, with the first one being the USDT. It also has a second stablecoin pegged against the euro (EURT) and a third stablecoin pegged against China’s yuan (CNYT).
Tether is a useful stablecoin for investors. It offers a solution for avoiding extreme volatility, and holding USDT removes delays and transaction costs that can impair trades within the crypto market.
USDC (USD Coin)
USDC was created by the Centre Consortium, which Coinbase and Circle founded. Its goal is to make it easier for investors to invest in crypto without worrying about fluctuations in the market.
Like Tether, USDC is tied to USD. Its supply is backed by US dollar reserves, and the Coinbase crypto exchange claims that it has achieved regulatory compliance. USDC is accepted on most large exchanges. While it was initially an Ethereum-based token, it has since bridged to a number of other blockchains, making it suitable for many DeFi applications.
BUSD (Binance USD)
Binance is one of the top crypto exchange platforms. It has developed its stablecoin to rival its main competition, Coinbase.
BUSD is an ERC20 token issued on the Ethereum blockchain. Launched in 2019 by Binance in a partnership with Paxos, it has a supply limited by dollar reserves audited monthly. Because Binance is a founding member, users have the opportunity to exchange fiat/crypto for BUSD with zero fees on exchange services. This makes it the preferred stablecoin for users interested in using the Binance exchange for crypto-asset transactions.
BUSD is pegged 1:1 against the US dollar, and it’s eligible for use in nearly any case that’s compatible with the ERC20 Ethereum standard.
USDP is a fiat-collateralized stablecoin based on the Ethereum network created by Paxos, a New York-regulated financial institution.
Like BUSD, UDSP has been approved by the New York State Department of Financial Services. USDP’s value is pegged at 1:1 against the US Dollar. Like other stablecoins, it aims to combine the reliability and stability of the US dollar with the benefits of digital assets.
USDP can only be created when new US dollars enter the Paxos system. One new USDP token is created when someone sends one US dollar to Paxos, which goes to the Paxos’s regulated bank account. USDP is not created without a purchase, so the supply is entirely dependent on the demand.
Paxos also has a partnership with PayPal, giving it a potential competitive advantage in the future.
Offered by MakerDAO, Dai is an entirely decentralized stablecoin, meaning it doesn’t have the backing of any centralized authority. Instead of being backed by US dollars or other fiat currencies, DAI is backed by MakerDAO’s crypto collateral, such as Ether and USDC. However, it still correlates to the US dollar at a 1:1 ratio.
This multi-collateral option helps to increase DAI’s stability, and users can even vote for more collateral options through the MakerDAO community. DAI is also an Ethereum-based ERC20 token. DAI is also a partially-algorithmic stablecoin. While these stablecoins tend to be more prone to risk, DAI offsets the risk by being partially collateralized with crypto. While this system could collapse during extreme market turbulence, DAI has already survived several market crashes.
Leading Stablecoin Lending Platforms
Once you’ve selected your stablecoins, it’s time to start thinking about which lending platform you’ll use.
That being said, here are some of the leading stablecoin lending platforms:
BlockFi is somewhat of a specialist stablecoin lending platform, with digital asset loans and investments sitting at the heart of what the provider offers. BlockFi offers up to 9.25% APY on certain stablecoins like USDT, USDC, and BUSD.
There are no lock-in periods or minimum or maximum deposits with BlockFi, and flexible withdrawals are offered. The Bermuda Monetary Authority licenses BlockFi, and it’s currently going through the regulatory process with the SEC.
If you require urgent cash, you can borrow funds from BlockFi by staking your stablecoins and borrowing at 4.5% APR. Opening an account with BlockFi is straightforward, as you only need to enter a few details to get started.
Nexo offers a large number of supported tokens and highly-attractive APYs. APYs can go as high as 17% for stablecoins like USDT, with earnings coming in Nexo tokens.
Nexo offers both locked and flexible term holdings for lending crypto. While flexible holdings offer lower interest rates compared to locked holdings, investors can benefit from free withdrawals with flexible holdings.
Nexo also offers $375 million in insurance on all custodial assets, making it an excellent choice for more conservative investors.
Aave is a DeFi liquidity protocol that offers a wide range of crypto loan options, including stablecoin loans. The protocol offers short-term fixed interest rate loans, uncollateralized flash loans, and regular crypto loans.
With Aave, users can earn interest on their crypto deposits and borrow funds by staking their assets. In addition, interest rates are clearly listed through the platform, so you can easily compare borrowing and deposit rates.
Compound is another DeFi liquidity protocol that offers a range of lending and borrowing options. There are many cryptocurrencies and stablecoins listed on the protocol, and you can borrow or deposit any of them.
The protocol offers top-notch security and a live price feed that allows you to track prices on the platform based on liquidity availability easily.
Vesper allows users to earn interest on various stablecoins or cryptocurrencies. Previously, users could only earn interest on the same crypto as the deposit. For example, this meant that Ethereum deposit interest was only paid out in Ethereum.
Now, users can earn interest through a mix of Ethereum, Wrapped Bitcoin (WBTC), DAI, and other stablecoins.
What are Stablecoins?
A stablecoin is a type of cryptocurrency that depends on a more stable asset (such as fiat currency or precious metal) for the basis of its value. Stablecoins are pegged to another asset and act almost as a reserve currency but in the crypto sphere. Whenever someone cashes out on their stablecoin tokens, an equal amount of assets gets taken from the reserve.
Because they’re tied to an underlying asset, stablecoins are seen as a less volatile cryptocurrency, and they have the potential to mimic the types of currencies people already use in their everyday lives.
Why Are Stablecoin Interest Rates Higher Than Traditional Interest Product Rates?
While you’d think that stablecoins pegged at a 1:1 ratio to the US dollar would command the same interest rates, this is not the case. Often, stablecoin interest rates can climb to 9-13%, or even more.
Interest rates on actual dollars are so low because the Federal Reserve has cut interest rates to historically low levels, so banks don’t have a reason to pay interest on deposits.
When looking at stablecoin interest rates, it is more of a supply/demand equation, where demand constantly exceeds the supply. As a result, people who hold stablecoins can charge premium interest rates, and crypto exchange platforms seeking to attract stablecoin lenders offer high interest rates.
Stablecoin Lending Risks
Lending always involves risk, and this is the case for stablecoin lending as well. When you lend money through a centralized institution, there are typically safeguards and regulations to ensure you’ll get your money back should the borrower default on their loan.
For example, if you take out a loan from a bank, the bank may have you put down collateral (such as a car or home) if you default. Additionally, loans through banks are protected by government insurance.
Many stablecoins aren’t regulated or only lightly regulated, so there may not be a guarantee that you’ll get your money back should the borrower default. Regulators are still figuring out how to supervise stablecoin lending. Additionally, there is the (slight) chance that the custodian gets hacked.
If you’re looking to invest in crypto but don’t want to be subject to crypto’s historical volatility, stablecoins are a great option. Taking time to research the leading stablecoins and stablecoin lending platforms is essential before you begin investing.
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