Stablecoin lending is one of the most popular methods employed by crypto investors to yield on crypto assets. In this guide, you will learn how to earn interest on stablecoins using CeFi and DeFi platforms.
What Are Stablecoins?
Stablecoins are digital currencies that aim to maintain a 1:1 price peg with traditionally stable assets, such as the US dollar or gold.
They help to bridge the gap between traditional finance and crypto finance by providing the best of both worlds – the price stability of assets like fiat currencies and commodities together with the accessibility, transparency, and privacy of the crypto markets.
The crypto market’s leading stablecoins include Tether (USDT), USD Coin (USDC), Binance USD (BUSD), and Dai (DAI) – all pegged to the US dollar.
Stablecoins have become particularly popular in the crypto lending markets, as they enable investors to above-average earn yields on de facto US dollars while retaining their capital in crypto.
The Rise of Stablecoin Lending
The crypto markets are known for providing a plethora of opportunities to earn investment income, provided investors are willing to take the risk. Beyond trading and HODLing digital assets, dozens of crypto lending platforms have emerged to enable investors to earn interest on their crypto holdings.
In light of the high borrowing demand for crypto assets, crypto lending rates usually vastly exceed interest rates in the traditional fixed income markets. A typical crypto lending platform offers interest from 4% to 10%.
Additionally, most platforms offer daily payouts on deposits, compounding interest rates for users on a daily basis. With compartively high interest rates, investors have been increasingly exploring ways to invest their money on these platforms over the last few years.
Stablecoin lending has since emerged as a way to enable investors to enjoy the benefits of crypto lending while escaping crypto market volatility.
Rather than leaving money idle in the bank, stablecoin lending offers a way to use them to earn above-average interest rates. Today’s plethora of centralized finance (CeFi) and decentralized finance (DeFi) lending platforms enable investors to earn higher interest than they bank them.
CeFi Lending vs. DeFi Lending: What’s the Difference?
Centralized finance (CeFi) lending is similar to lending in the traditional financial markets. Investors sign up with a lender, complete a mandatory KYC/AML verification process, and then start lending their stablecoins to receive daily or weekly interest payments.
The process generally requires users to deposit their stablecoins into the provider’s custodial wallets – a wallet whose private keys are managed by a third party. This enables users, especially those that aren’t conversant with cryptocurrencies, to avoid the hassles of managing their private keys.
Some CeFi platforms also provide insurance protection for the funds of users in case of a hack or crash. Additionally, most CeFi lending platforms often limit the number of stablecoins they allow to a few top projects with good market capitalization.
CeFi lending is typically more appealing to folks who are interested in crypto lending but want the structures of traditional banking.
Decentralized finance (DeFi) lending, on the other hand, has no central authority managing the process. instead, they are managed by smart contracts that are responsible for facilitating borrowing/lending activities among users.
Users don’t go through any form of KYC/AML verification as their wallet address is the only required form of identification needed to start earning interest on their stablecoins, enhancing financial privacy.
Unlike CeFi where users have to deposit their funds with a third party, DeFi lending occurs directly from the wallets of users without the need for trusting a third party with your money. Users are responsible for managing their private/public keys and bear the consequence in case of a wallet hack or any issues with the lending protocol.
Furthermore, many DeFi lending platforms allow users to leverage the same funds to earn interest from different protocols at the same time.
Crypto savvy folks are more inclined to DeFi lending as it satisfies their longing for earning interest in a decentralized and more private manner.
How to Earn Compound Interest in the CeFi Lending Markets
In this section, you will discover a step-by-step process to get you started on earning compound interest in the CeFi lending market using BlockFi, one of the largest centralized crypto lending platforms in the market.
The BlockFi Interest Account is a cryptocurrency savings account that allows you to earn interest of up to 8% APY (annual percentage yield) when you deposit either USD Coin (USDC) or Gemini USD (GUSD).
The steps below give you a headstart on earning interest in CeFi through BlockFi:
- Open your browser and go to blockfi.com.
- Click on Get Started. Fill in the necessary details and complete the KYC requirements.
- Click on the options button and choose Profile. Navigate to Security and enable 2FA (two-factor authentication) to add extra layers of security to your account.
- On the dashboard, select deposit. You’ll be presented with the option of depositing from other wallets or via your local fiat currencies. Follow through with the option that suits you. Once completed, your stablecoin holdings will appear on your account.
- Now, you can start earning interest on your stablecoins.
On your account dashboard, you can see your interest account balance, total interest paid, and the accrued interest. Your interest will accrue each month and is paid on the last business day of each month.
How to Earn Compound Interest in the DeFi Lending Markets
Now, let’s take a look at how to earn interest in the DeFi lending markets. In this step-by-step guide, we will use Aave, one of the largest DeFi lending protocols, to illustrate the process.
Aave offers 1.87% APY for Tether (USDT), 0.74% for Pax Dollar (USDP), 0.93% for USD Coin (USDC), and 2.10% for DAI at the time of writing.
Here are the steps you need to take to start lending your stablecoins on Aave.
- Open your web3 wallet, navigate to ‘DApps’ or ‘Browser,’ and enter the URL aave.com.
- Click on ‘launch app’ and connect your wallet.
- Choose the market you wish to lend to based on your wallets’ network – Ethereum, Polygon, Avalanche, Arbitrum, Fantom, etc.
- Click on the stablecoin you wish to lend.
- Navigate to “Your info” and click “Supply”.
- Input the amount you want to lend and sign the transaction using your wallet.
- You are now earning interest on your stablecoins using Aave.
While stablecoin lending provides exciting new opportunities to earn interest on your money, it’s, by all means, not a risk-free venture. Like all investing activities, crypto lending comes with risks, and investors shouldn’t invest more than they can afford to lose.
Do Stablecoins Pay Interest?
Stablecoins on their own don’t pay interest. However, you can deposit stablecoins in centralized lending platforms or decentralized lending protocols to earn interest on your stable assets.
Is Lending Crypto Profitable?
Lending cryptocurrencies, like stablecoins, can be very profitable if you are depositing your coins into a high-yielding lending protocol. However, high expected returns also comes with higher risk, making crypto lending a riskier affair than lending in the traditional financial markets.
How Do Crypto Lenders Make Money?
Crypto lenders make money in the same way as traditional lenders. They pay depositors interest and charge borrowers a higher interest, and earn the difference plus fees.