The evolving cryptocurrency market makes it easy for investors to make quick trades with minimal fees. However, the volatility of cryptocurrencies can make it difficult to use them as payment gateways, which may cause hesitation among investors.
Stablecoins help solve this problem by preventing volatility in cryptocurrencies. Stablecoins are tied to an underlying asset and are designed to maintain a fixed value, known as a peg. Therefore, unlike other crypto assets whose prices fluctuate, stablecoins are always fixed at the value of the less volatile asset.
The stablecoin you choose to invest in will greatly influence which lending platform is right for you. For example, Nexo offers the best rates for BUSD, so if you choose to invest in BUSD, this could be the right lending platform for you. Of course, you should also check the platform’s yield (see graph below) to understand what kind of profits you can get.
Here we will discuss the best stablecoin lending platforms and how much yield you can get from your stablecoin lending. The yield is the same as the dividend you get from investing in stocks. More specifically, yield refers to the return generated and realized by a particular investment (in this case, a stablecoin) over a period of time. A higher yield usually indicates higher income and lower risk. We will also explain the basics of stablecoins at the end of the article if you are new to this form of investing.
USDT USDC BUSD USDP DAI Nexo (Max) 16.00% (Max) 14.00% – (Max) 14.00% (Max) 14.00% Aave 4.11% 4.37% – – 4.18% Compound – – – – – Vesper – 8.01% – – 0.50%
Major stablecoins
The advent of stablecoins is great for trade as they are less volatile than traditional cryptocurrencies thanks to their backing by traditional fiat currencies and other assets. This stability allows more conservative investors to enter the market and participate in the cryptocurrency world.
The main stablecoins to consider are:
USDT (Tether)
Launched in 2014 as RealCoin, Tether is the world’s first stablecoin and the most liquid stablecoin on the market. Tether is also the largest stablecoin by market capitalization in May 2022, making it the third largest cryptocurrency overall after Bitcoin and Ethereum.
The goal of the Tether stablecoin is to peg its value 1:1 against the US dollar. This means that investors can buy and redeem one USDT for $1. Many stablecoin exchanges offer USDT as a fiat alternative, allowing investors to make quick trades without excessive fees. According to Tether, USDT is 100% backed by reserves, including traditional currencies and cash equivalents.
Tether also offers a three-pronged strategy. We have introduced three stablecoins to the market so far, the first being USDT. There is also a second stablecoin pegged to the euro (EURT) and a third stablecoin pegged to the Chinese yuan (CNYT).
Tether is a useful stablecoin for investors. This provides a solution to avoid extreme volatility, and holding USDT eliminates delays and transaction costs that can harm trading within the crypto market.
USDC (US dollar coin)
USDC was created by the Center Consortium, founded by Coinbase and Circle. Its goal is to make it easy for investors to invest in cryptocurrencies without worrying about market fluctuations.
Similar to Tether, USDC is tied to USD. Its supply is backed by US dollar reserves, and the Coinbase cryptocurrency exchange claims to have achieved regulatory compliance. USDC is accepted on most major exchanges. Initially an Ethereum-based token, it has since been bridged to many other blockchains, making it suitable for many DeFi applications.
BUSD (Binance USD)
Binance is one of the top cryptocurrency exchange platforms. The company developed the stablecoin to compete with its main competitor, Coinbase.
BUSD is an ERC20 token issued on the Ethereum blockchain. The company, founded in 2019 by Binance in partnership with Paxos, has supply limited by dollar reserves that are audited monthly. Since Binance is a founding member, users have the opportunity to exchange fiat/cryptocurrency to BUSD with zero exchange service fees. This makes it the recommended stablecoin for users interested in using the Binance exchange for crypto asset trading.
BUSD is pegged 1:1 to the US dollar and can be used in almost all cases compatible with the ERC20 Ethereum standard.
USDP (Paxos Island)
USDP is a fiat-backed stablecoin based on the Ethereum network created by Paxos, a New York State regulated financial institution.
Like BUSD, UDSP is approved by the New York State Department of Financial Services. The value of USDP is pegged at 1:1 to 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. When someone sends 1 USD to Paxos, 1 new USDP token is created and transferred to Paxos’ regulated bank account. USDP is not created without purchases, so supply depends entirely on demand.
Paxos also has a partnership with PayPal, which could give it a competitive advantage in the future.
large
Dai, provided by MakerDAO, is a fully decentralized stablecoin. That is, there is no support from a centralized authority. DAI is not backed by the US dollar or any other fiat currency, but rather by MakerDAO’s cryptocurrency collateral such as Ether and USDC. However, it is still correlated at a 1:1 ratio with the US dollar.
This multi-collateral option helps increase the stability of DAI, and users can also vote for more collateral options through the MakerDAO community. DAI is also an Ethereum-based ERC20 token. DAI is also a partly algorithmic stablecoin. These stablecoins tend to be exposed to risk, but DAI offsets that risk by being partially collateralized with cryptocurrencies. Although this system can collapse in times of extreme market turmoil, DAI has already survived several market crashes.
Major stablecoin lending platforms
Once you have selected a stablecoin, start thinking about which lending platform to use.
That being said, here are some of the leading stablecoin lending platforms.
nexo
Nexo offers a large number of supported tokens and very attractive APYs. Stablecoins like USDT have APYs as high as 17%, and profits are earned in Nexo tokens.
Nexo offers both locked term holding and flexible term holding for cryptocurrency lending. Although flexible holdings have 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 assets under custody, making it a good choice for more conservative investors.
US customers are no longer accepted.
Abe
Aave is a DeFi liquidity protocol that offers a wide range of cryptocurrency loan options, including stablecoin loans. The protocol offers short-term fixed rate loans, unsecured flash loans, and regular crypto loans.
Aave allows users to earn interest on their crypto deposits and borrow funds by staking their assets. Additionally, interest rates are clearly displayed through the platform, making it easy to compare borrowing and deposit rates.
compound
Compound is another DeFi liquidity protocol that offers a variety of lending and borrowing options. The protocol lists many cryptocurrencies and stablecoins, and you can borrow or deposit any of them.
The protocol offers top-notch security and a live price feed that allows you to easily track prices on the platform based on liquidity availability.
vesper
Vesper allows users to earn interest on various stablecoins and cryptocurrencies. Previously, users could only earn interest on the same cryptocurrency as their deposit. For example, this means that interest on Ethereum deposits will only be paid in Ethereum.
Currently, users can earn interest by combining Ethereum, Wrapped Bitcoin (WBTC), DAI, and other stablecoins.
What is a stablecoin?
Stablecoins are a type of cryptocurrency that relies on more stable assets (such as fiat currencies or precious metals) for the basis of its value. Stablecoins are pegged to another asset and serve almost as a reserve currency, but in the realm of cryptography. Every time someone cashes out a stablecoin token, the same amount of assets is taken out of the reserve.
Because stablecoins are tied to an underlying asset, they are considered low-volatility cryptocurrencies and have the potential to mimic the types of currencies that people already use in their daily lives.
Why are interest rates on stablecoins higher than interest rates on traditional interest rate products?
You might think that a stablecoin pegged at a 1:1 ratio to the US dollar would have the same interest rate, but this is not the case. In many cases, interest rates on stablecoins can go up to 9-13% or even more.
The reason real dollar interest rates are so low is because the Federal Reserve has cut interest rates to historic lows, so banks have no reason to pay interest on deposits.
If you look at stablecoin interest rates, it’s more of a supply and demand equation, with demand always exceeding supply. As a result, those holding stablecoins can charge premium interest rates, and crypto exchange platforms seeking to attract stablecoin lenders will offer higher interest rates.
Stablecoin financing risk
Lending always involves risk, and this also applies to stablecoin lending. When you lend money through a centralized institution, there are usually safeguards and regulations in place to ensure you get your money back if the borrower is unable to repay the loan.
For example, if you take out a loan from a bank, the bank may ask you to post collateral (such as your car or home) if you default. Additionally, loans through banks are protected by government insurance.
Many stablecoins are unregulated or only lightly regulated, so there may be no guarantee that you will get your money back if the borrower defaults. Regulators are still figuring out how to oversee stablecoin lending. Additionally, there is a (slight) chance that the administrator could be hacked.
conclusion
If you are considering investing in cryptocurrencies but don’t want to be affected by their historical volatility, stablecoins are a great option. Before you start investing, it is essential to take the time to research the major stablecoins and stablecoin lending platforms.
For more crypto investment tips, subscribe to our free daily newsletter.
