While people’s interest in cryptocurrency has skyrocketed, crypto is still a new and speculative investment. Cryptocurrency has the ability to enrich some people in a short time, but it’s also a high-risk investment that’s extremely volatile. Stablecoins are a stablecoin that is tied to any tangible stable asset. This allows people to transact in cryptocurrency more easily. Stablecoins are designed to offer the best of both worlds – cryptocurrencies and traditional finance. You can lend out tokens for high APY.
Continue reading to find out everything about stablecoins. This includes the risks and benefits of this low-risk way to earn interest and how you can do it. Always consider the risks and rewards of investing.
What are stablecoins?
The stablecoins are digital currencies that have a reserve asset backing them to ensure a steady market price. There are three kinds of stablecoins.
- Stablecoins Backed with Fiat: This type of coin uses a fiat reserve to secure a set number of coins. Technically collateral could be oil, gold or any other commodity. However most stablecoins use dollars for their reserves. The US dollar is used to back Tether (USDT).
- Stablecoins Backed by Crypto: These coins use other cryptocurrencies as collateral, but because cryptocurrencies are subjected to volatility, crypto-collateralized stablecoins keep a larger pool of crypto reserve to issue a lower number of coins. DAI, for example, is backed mainly USD Coin and ETH but its price remains pegged to US dollars.
- Stablecoins that are not collateralized: These coins replace a reserve bank for a mechanism similar to central banks. Basecoin was an example of a system that attempted to preserve stability and adjusted the supply tokens automatically according to need.
Stablecoins: Why earn interest?
Due to their high volatility, some investors gravitate to stablecoins. Because stablecoins have a fixed price over time, investors can earn passive income from their assets. To compare, the best interest rate for traditional saving accounts in America only falls around 0.7% APY; the FDIC’s (Federal Deposit Insurance Corporation) national average interest rate is ten times lower at 0.06%. Instead, the interest rate you can earn from stablecoins is exponentially higher: 3.5% – 12%. Also, many stablecoins on the market have proved to be able to maintain a value extremely close to that of the assets they’re pegged to, so it’s unlikely that their owners will experience any major turbulence in price.
Stablecoins are also a good way to make interest.
There are some risks associated with investing in stablecoins. There is a risk that multiple investors may not be able to repay the loans due to market crashes. You can minimize this risk by spreading your capital over a number of platforms.
Cyber hacking can also happen to personal accounts and lending platforms. In the event of personal account hacks, it’ll be virtually impossible to retrieve the lost funds, so it’s entirely up to users to secure their personal accounts. There are several ways to prevent hacking. These include using separate email addresses for different platforms, creating strong passwords and two-factor authentication. Instead, hacks targeting the platforms are totally out of your control – they’ve happened before, so they’ill happen again. Platform hacks can be spread across several platforms, although it’s a great way to get crypto, but remember that you should only select companies with reliable security systems, good reputations and comprehensive insurance.
Stablecoins: How can you earn interest?
CeFi Platforms
Two types of platforms are available for the lending of stablecoins. CeFi is centralized finance and DeFi is decentralized finance. For CeFi lending apps, you’ll have to complete KYC procedures similar to traditional finance platforms. CeFi platforms store your private keys and manage the collateral. Some even provide insurance and cold storage.
Let’s take Nexo as an example to view the lending process in a CeFi platform:
- Visit Nexo’s official website, click “Create Account”, and go to “My Profile” to complete the KYC verification. Choose from basic KYC, advanced KYC, which includes crypto and fiat currencies.
- It’s highly recommended that you navigate to “Security” in the Profile section and enable two-factor authentication by scanning the QR code.
- Go to ‘Account’ to deposit stablecoins. Transfer funds to your wallet or exchange account, or buy them on Nexo with your bank account.
- After 24 hours, interest should start to show and be paid each day to your savings account. You can earn compound interest by doing this.
- Go to ‘Account’ then ‘Total Earned’ to view detailed info on your interest payments.
DeFi Platforms
DeFi platforms are different from CeFi as they use smart contracts and cryptocurrency to provide services, without any intermediaries. Although they do not provide any crypto asset insurance in the case of a hacker, users have access to their private keys as well as full control of their assets.
Different DeFi lending apps have different deposit methods.
- Get a Web3 wallet such as Metamask to transfer stablecoins into it.
- Go to the platform’s website/app and choose ‘Connect Wallet’. After you’ve confirmed the connection, the process will be almost instantly without registration.
- Select the stablecoin amount you would like to deposit. You’ll see all relevant information such as reserve size, usage rate, deposit APY, etc., and the withdraw option is usually available on the same screen.