Lending stablecoins is one of the ways to earn yield in the crypto markets, but it has one important advantage as it takes market volatility out of the equation.
Read on to learn how to earn interest on stablecoins.
The rise of the crypto interest markets
The emergence of cryptoassets has led to the development of crypto interest markets, composed of DeFi (decentralized finance) and CeFi (centralized finance) borrowing and lending applications that typically provide higher APYs (annual percentage yields) than fixed income securities and money market instruments.
Crypto lending is becoming increasingly popular in the crypto markets as more and more investors are looking to earn yield the digital assets they are hodling. As a result of this growing demand for yield, leading crypto trading platforms are adding features that enable investors to borrow and lend. What’s more, there are a plethora of lending applications both in the CeFi and DeFi markets.
However, the volatile nature of cryptoassets has been a hindrance in the crypto lending markets as market volatility can easily result in losses for lenders despite high-interest rates. To address this issue, stablecoins have emerged as one of the most popular lending assets in the crypto interest markets.
Stablecoins are digital currencies whose values are most often pegged to price-stable assets, such as the US dollar or gold. With stablecoins, investors can earn interest through crypto lending while avoiding the volatility of cryptoassets like bitcoin (BTC), ethereum (ETH), or binance coin (BNB).
Through CeFi and DeFi lending platforms, investors can earn above-average interest rates, higher than the prevailing rates in traditional finance. Most banks offer annual interest rates that do not exceed 1% whereas stablecoins interest rates go as high as 4% to 12% annually. Many lending platforms even offer daily interest payouts, enabling investors to earn on compound interest.
Now, let’s dive in and look at how you can deploy stablecoins to earn interest in two leading crypto lending platforms.
Earn stablecoin interest in CeFi: A step by step guide
Lending in centralized finance follows rules that are similar to traditional financial platforms. CeFi platforms will usually require you to go through anti-money laundering (AML) and know your customer (KYC) procedures to prevent bad actors from conducting illegal activities.
Typically, they manage your funds (ie hold your private keys) and ensure that your collateral is safe. Some CeFi lending apps even provide insurance cover to decrease the chance of loss of funds due to a hack or operational error and keep a majority of the assets in their custody offline in cold storage.
To practically demonstrate how you can earn interest on stablecoins in CeFi, we’ll be using Nexo, one of the largest CeFi lending platforms. Nexo offers interest rates up to + 10% on stablecoins, meaning USD 1,000 worth of USDC deposited on your Nexo account would accumulate to USD 1,108.68 after a year (minus fees).
Below are the steps you can follow to start 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
DeFi lending works differently from CeFi lending because, unlike in CeFi lending where transactions are handled by a central authority, DeFi uses smart contracts to provide autonomous lending pools to crypto investors. The whole process operates independently of a central authority and assets are held in a non-custodial manner in smart contracts, meaning they are under your control.
In this example, we will look at Compound (COMP) to demonstrate how you can earn interest in the DeFi lending markets. Compound is one of the largest and longest-serving crypto lending platforms in the DeFi space and it currently offers a competitive interest rate of 3.74% for DAI, 7.35% for TUSD, 3.39% for USDT, and 4.70% for USDC.
You can start earning on Compound by following these steps:
- 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.
Put in the amount of crypto you want to lend, and complete the process by signing the lending transaction using your wallet.
Earning interest on stablecoins in the CeFi and DeFi lending markets carries risks. CeFi lenders could hold onto your funds if you fail to meet (sometimes newly introduced) AML / KYC requirements while DeFi lending protocols are prone to hacks. If you are looking to earn interest on digital assets, you will need to weigh out the potential returns with the risks involved in deploying capital in the crypto interest markets.
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