One of the options is earning interest with the help of cryptocurrencies, but the high volatility of the crypto market provides not only opportunities but also increases the risks. Earning interest on stablecoins may be the best option, which gives you some confidence in the expected return.
Resistance to fluctuations in the exchange rate of stablecoins is achieved by linking stablecoins to various instruments, including fiat currencies, precious metals and digital currencies. You can receive interest on your deposits, thereby increasing capital and increasing the chances of making a profit.
What are stablecoins?
To understand how to earn interest on stablecoins, you first need to know what it is. A stablecoin is a crypto token whose value is tied to the value of other, usually real assets. The earliest and most popular stablecoin is Tether (USDT). Other common stablecoins are USD Coin (USDC), Binance USD (BUSD), Gemini Dollar (GUSD).
Tether's value is pegged to the US dollar and as stated is backed by US dollar reserves. In theory, for every USDT in circulation, the stablecoin provider must have an equal amount in USD in their bank account.
Are stablecoins securities?
The US regulator, the SEC, has long tried to call securities anything that had anything to do with blockchain technology. However, in the future, the SEC focused only on a certain category of cryptocurrencies and wants to equate stablecoins with securities.
Coins, whose price is supported by certain financial mechanisms, can be considered by the regulator as securities. These stablecoins include coins, whose value is kept within a certain range by changing the emission. It can also be done by issuing or redeeming other assets tied to a stablecoin, as well as controlling the balance between supply and demand.
In such a case, when the value of an asset is completely dependent on the actions of one central party, the SEC may consider a stablecoin as security. A coin can also fall into the attention of the SEC if its buyer is promised a guaranteed income or keeping the price at the same level.
It is worth noting that none of the popular high-cap stablecoins in the market fall under the definition of securities from the point of view of the regulator. All of them are pegged to the US dollar and backed by it. Although, for example, in the case of Tether, this is not entirely true.
Tether, on its website, has openly admitted that there is no dollar amount required to cover the entire USDT supply. Instead, the company claims their stablecoin is backed by dollars, alternative currencies and assets, and debt obligations in favor of Tether.
Most of the other top stablecoins are audited monthly for fiat funds.
What are the types of stablecoins?
The community, as well as experts, identifies several types of stablecoins:
1. Tied to fiat currencies.
This is the most common type of stablecoins. Their value is usually backed by the most popular currencies such as the US dollar, euro, pound sterling, etc. When converting such stablecoins, the organization that manages them exchanges fiat currencies for stablecoins. In this case, the equivalent amount of stablecoins is destroyed or withdrawn from circulation.
These stablecoins include:
- Tether (USDT), tied to the US dollar and holding on average over 70% of the stablecoin market in 2021. It is the third cryptocurrency by market capitalization, and its daily trading volume is higher than that of any other cryptocurrency.
- USD Coin (USDC) is also pegged to the US dollar and is gradually gaining market share. Visa has launched a project to issue corporate credit cards based on USD Coin this year.
- There are other stablecoins on the market that are backed by fiat currencies around the world, for example, XSGD is pegged to the Singapore dollar rate, EURS to the euro rate, etc.
2. Tied to commodity markets
The value of these cryptocurrencies is backed by fungible assets such as precious metals, commodities or real estate. Often, such stablecoins are used for investment purposes.
Among them are:
- Digix Gold (DGX) token backed by gold, operating on the Ethereum platform. One DGX equals 1 gram of precious metal. The gold collateral is stored in Singapore, where the reserves are audited every 3 months. DGX holders can exchange cryptocurrency for bullion in Singapore.
- Tiberius Coin (TCX) is tied to the value of a basket of assets of seven precious metals used in the manufacture of high-tech equipment. The TCX is expected to rise in value as solar panels and electric vehicles proliferate.
- SwissRealCoin (SRC) is a crypto asset backed by a portfolio of properties located in Switzerland. The choice of such objects is determined by the holders of stablecoins through a vote.
3. Tied to cryptocurrencies
This type of stablecoins is backed by digital currencies, which leads to a high degree of decentralization. All operations are carried out through the blockchain. In order to mitigate risks due to high volatility, collateral is provided, usually one of the fiat currencies. At the same time, the cost of collateral significantly exceeds the current value of a stablecoin.
Operations in such stablecoins are safer and more transparent. To diversify risks, they can be linked to multiple cryptocurrencies. The most famous of this type of stablecoin is Dai, which has a par value at the dollar level but is actually backed by the Ethereum cryptocurrency.
4. Not tied to the value of other assets
This type of stablecoins is not secured, their turnover is based on the trust of users. The stability of the rate of such a cryptocurrency is due to the intervention of the issuer in the exchange rate formation process.
With an increase in demand for stablecoin, the currency is issued and distributed in the market, which causes a decrease in its value. When demand falls, the issuer buys out a stablecoin, which causes an increase in its value.
An example of such a currency is Ampleforth (AMPL), which was launched at the end of 2018.
The software algorithm underlying this stablecoin constantly monitors the exchange rate dynamics, the volume of demand and supply of the cryptocurrency. If necessary, carries out its purchase and sale to stabilize the exchange rate.
How to get income on stablecoins
The original way that investors made money with digital currencies was by acquiring assets and holding them in anticipation of price increases and then selling them. In general, this approach works, given that the cryptocurrency rate is constantly growing, despite temporary downturns.
However, the rise in popularity of stablecoins has changed the earning opportunities, if only because their rate is unchanged.
Earning interest through platforms
So, there was another way to get passive income from stablecoins. In this case, investors are using third-party crypto platforms such as BlockFi, YouHodler, and others. Investors are paid interest on deposits as a reward for depositing their coins on lending platforms, usually in excess of traditional bank rates.
Direct lending with stablecoins
Hardware wallet maker Ledger has announced a partnership with the Compound project to provide its users with access to crypto lending services of the latter.
Due to this, owners of Ledger wallets will be able to lend their assets in USDT, USDC and DAI to earn interest from them. As the company notes, this will allow users to build up assets without exposing them to the risks of price fluctuations inherent in cryptocurrencies.
If you own a stablecoin like USDT, you can get attractive returns like 9% per year on Binance.
This can be achieved without the need to freeze your capital as the 5% rate is available through the flexible option.
With that said, you have a chance to get even better returns if you want to earn interest on your fiat currency deposits. At a higher level, one can earn a 7-day interest rate of 5% on dollar (USDT) deposits, which is a huge advantage.
How to act to generate income on stablecoins
If you want to earn interest on stablecoins, you need to take certain actions.
1. To get started, register on one of the crypto-lending platforms of your choice after your own research.
2. Decide what amount of stablecoins will be used for the deposit.
3. Determine how long to keep stablecoins on the platform. Some exchanges offer the option to withdraw digital assets at any time.
4. Withdraw your stablecoins and interest at the end of the agreed deposit period. Alternatively, you can receive periodic interest payments, such as monthly or quarterly. You then receive the principal at the end of the period plus interest.
You also earn compound interest on your interest as most platforms calculate your interest on a daily basis. You have a great opportunity to reinvest your digital assets and make big profits that will constantly increase over time. However, you should choose your platform carefully to avoid any losses or big risks.
Against the background of the volatility of cryptocurrencies, stablecoins are actively gaining popularity, combining the advantages of both decentralized currencies and fiat money. This trend is reflected in the policies of the world's leading payment systems, which integrate stablecoins into their payment networks to maintain their positions in the competitive market.
We can talk about the significant potential for the application of this innovative tool. The high interest of investors in relation to this asset and the growth in the capitalization of stablecoins is a vivid confirmation of this. At the same time, you should not forget about the risks of this digital instrument.