Stablecoin lending is one of the ways to generate yield in the cryptocurrency markets, but it has one significant advantage over other methods: it removes the risk of market volatility from the equation.
Continue reading to find out how to earn interest on stablecoins.
The rise of the crypto interest markets
The emergence of cryptoassets has resulted in the development of crypto interest markets, which are composed of DeFi (decentralized finance) and CeFi (centralized finance) borrowing and lending applications that typically offer higher annual percentage yields (APYs) than traditional fixed income and money market instruments.
Crypto lending is gaining popularity in the cryptocurrency markets as more investors seek to make a return on their digital assets. As a result of this increased desire for returns, top cryptocurrency trading platforms are expanding their lending and borrowing capabilities. Additionally, there are numerous financing applications available in both the CeFi and DeFi sectors.
The volatile nature of cryptoassets, on the other hand, has been an impediment in the crypto lending markets, since market volatility can quickly result in losses for lenders, despite high interest rates. Stablecoins have emerged as one of the most popular loan assets in the crypto interest markets in order to address this issue.
Stablecoins are digital currencies that are typically pegged to price-stable assets such as the US dollar or gold. Stablecoins enable investors to earn interest on crypto loans while avoiding the volatility associated with cryptoassets such as bitcoin (BTC), ethereum (ETH), or binance coin (BNB).
Investors can earn above-average interest rates on CeFi and DeFi lending platforms, which are higher than those available in traditional finance. Most banks give annual interest rates of less than 1%, whereas stablecoins offer annual interest rates of up to 12%. Numerous loan platforms also pay daily interest, allowing investors to earn compound interest.
Now, let’s take a look at how you may use stablecoins to earn income on two of the most popular cryptocurrency lending services.
Earn stablecoin interest in CeFi: A step by step guide
Centralized finance lends according to comparable standards as traditional financial platforms. CeFi systems typically demand you to undergo anti-money laundering (AML) and know your customer (KYC) procedures to avoid bad actors from engaging in illicit activity.
They typically manage your finances (i.e., maintain your private keys) and assure the security of your collateral. Certain CeFi lending apps even offer insurance to mitigate the risk of cash being lost due to a breach or operational error, and store the majority of the assets in their custody in cold storage.
To demonstrate how stablecoins can be used to earn interest in CeFi, we’ll use Nexo, one of the major CeFi lending platforms. Nexo offers stablecoins at a rate of up to 10%, which means that USD 1,000 in USDC put in your Nexo account would accrue to USD 1,108.68 after a year (minus fees).
The following are the actions you can take to begin earning on Nexo:
- Open your browser and visit the URL nexo.io to create an account.
- After creating your account, click on the profile icon at the top right and choose ‘My Profile’ to carry out KYC verification. You’ll be presented with two KYC options: Basic KYC enables you to earn interest on all supported stablecoins and cryptoassets while Advanced KYC includes support for fiat currencies.
- Navigate to the profile tab again and select ‘Security.’ You’ll be presented with the option to enable two-factor authentication. Click on ‘Enable’ and scan the QR code using either Google Authenticator or Authy.
- When you’ve completed the KYC, click on ‘Account’ at the top menu and select the stablecoin you intend to deposit. Deposit the coin by transferring from a wallet/exchange or purchase directly on Nexo from your bank.
- After a minimum of 24 hours, you should start earning interest. The interests are automatically paid out daily to your savings wallet, meaning you’ll be earning compound interest on it automatically.
- To view the total interest earned on your active investments, navigate to ‘Accounts’ and click on the ‘Total Earned’ button to have detailed information on all your interest payments.
Earn stablecoin interest in DeFi: A step by step guide
This differs from the way that CeFi lending operates in that, unlike CeFi lending, where transactions are managed by a central authority, DeFi lending makes use of smart contracts in order to facilitate the creation of autonomous lending pools for crypto investors.
It is important to note that the entire process is decentralized and that assets are maintained in smart contracts in a non-custodial manner, which means they are under your control.
Using Compound (COMP) as an example, we will illustrate how you can earn interest on your loan in the DeFi lending markets.
As one of the largest and longest-running crypto loan platforms in the DeFi space, Compound offers a competitive interest rate of 3.74 percent for DAI, 7.35 percent for TUSD, 3.39 percent for USDT, and 4.70 percent for USDC at the time of writing.
You can begin making money on Compound by following the steps outlined below:
- Open your Metamask wallet or any other Web 3.0 wallet. Navigate to your browser and enter the URL “compound.finance.”
- Click on the three horizontal lines at the top right corner and press the ‘App’ button.
- Next, click on the ‘Connect Wallet’ button at the top right corner and choose your wallet from the options.
- Click on the stablecoin on which you want to earn interest and press the ‘Enable’ button.
You’ll need to enter the amount of cryptocurrency you’d like to lend, and then sign the loan transaction with your wallet to finish the process.
Earning income on stablecoins in the CeFi and DeFi loan markets entails a certain amount of risk. If you fail to comply with (sometimes recently adopted) AML/KYC regulations, CeFi lenders may be able to retain your funds, whereas DeFi lending processes are vulnerable to hacking. If you want to earn interest on digital assets, you’ll need to assess the benefits of earning interest against the hazards of investing your money in the cryptocurrency interest markets.