One of the most attractive facets of the cryptocurrency sector is the ability to earn a high yield on a variety of digital assets. Whether through staking, mining, or lending, there are a variety of ways to earn interest on your crypto assets.
Stablecoins, such as USDT, USDC, and DAI are some of the most popular assets to earn yield on. Their stable value means that there is little risk of value loss while earning yield, and their demand from borrowers often means the interest rates are pretty high for stablecoins.
In this guide, we’re going to compare the various ways you can earn a return on your stablecoins, such as using centralized options or decentralized ones, in addition to letting you know the risks associated with each method. We’ll then compare these stablecoin yields to more traditional fiat dollar yields that you would get through high interest savings accounts or something like a treasury or government bond. Let’s jump in.
Centralized Options
Crypto Exchanges (Coinbase, Binance, Kraken, etc.)
Though most centralized crypto exchanges do offer staking, not all of them offer it for stablecoins. Coinbase, arguably the most popular exchange in the USA, offers a very compelling yield on USDC and it’s extremely simple to get. You simply hold USDC on the exchange and you will receive rewards (currently around 5.6%). That’s it.
Binance and Kraken also offer yield on stablecoins. Binance’s stablecoin staking option where your principal is protected doesn’t even get you 2% APY, though they have a more risky option that could get you up to 173% (but with no principal protection).
Kraken has a much more attractive rate on their stablecoin yields, with 5% for both USDC, USDT, and just fiat-USD held in your account. The 5% is a flexible return, but you can also lock your assets for 30 days to earn 6.5% instead.
Risk When Using Centralized Options
There isn’t too much risk when earning yield on your stablecoins through crypto exchanges, unless you’re doing the riskier, non-principal protected options. The main risk with using centralized options is something like an FTX collapse, where the platform fails and the users lose a lot of their assets, but this is much less likely nowadays with proof of reserves and much more oversight.
Decentralized Options (DeFi)
Decentralized Exchanges (Uniswap, PancakeSwap)
Decentralized exchanges (DEXs) tend to have two different ways for you to earn yield on your stablecoins. The first is through simple staking, which is often very low return and low risk. For a platform like PancakeSwap, the APR is currently 0% for USDT or USDC simple staking, whereas Uniswap doesn’t offer simple staking for stablecoins.
The second way to earn yield on your stablecoins is by providing liquidity in a trading pair to a pool. This means staking both your USDT or USDC, and another asset such as Bitcoin or Ethereum. In this situation you’re earning trading fees that are prorated to your contribution to the pool, and can earn very high returns.
For example, providing liquidity to the USDT and Binance Coin (BNB) pool on PancakeSwap can get you up to 114% return, and the USDT and Bitcoin pool can get you up to 29%. There is much more risk in these options, and definitely no principal protection thanks to something called impermanent loss, but we’ll discuss this further in a couple sections.
Lending Platforms (AAVE)
Lending platforms like AAVE or Venus Protocol are another way to earn yield on your stablecoins. With lending platforms, the rate you get when staking your stablecoins depends on the demand to borrow them by other users.
If there is little to no demand to borrow that stablecoin (or any other crypto asset), then it will have a very low interest rate. But, if there is lots of demand, there will be a high interest rate for supplying the asset. Borrowers then pay an interest rate which is what you earn.
For example, currently on AAVE you can get a little over 4% for supplying either USDC or USDT, but to borrow either asset costs you almost 6%.
Risk With Decentralized Options
There are two main risks when it comes to decentralized options, the first was already mentioned and that’s impermanent loss. Impermanent loss happens when the value of the two assets you provide for a liquidity pool trading pair changes.
For example, if you provided liquidity to a USDT and BTC liquidity pool, the ratio of your deposit has to remain the same (say $100, $50 of each asset). If the value of BTC is 10% higher when you withdraw your contribution, then the amount of USDT you withdraw will be 10% higher than what you started with, and you’ll get 10% less Bitcoin. As long as the yield outweighs whatever loss value changes create, it’s worth doing liquidity pools.
The other risk only happens if you’re borrowing from a lending platform, and that’s liquidation. Much like when using leverage on a crypto exchange, if you’re providing stablecoins to AAVE but also borrowing, then your assets can be liquidated if you’re borrowing exceeds your supply.
Comparing Crypto Yields to Traditional Options
Now that we’ve discussed yields from crypto sources for your stablecoins, let’s see what you could get for simply holding USD in various traditional investment vehicles starting with a savings account.
Savings Accounts
We’re going to use US Bank as our example here for savings accounts. For US Bank users, the interest rate for holding USD is 0.01% for any balance under $25,000. As long as you hold a balance over $25,000, then you can get 4.25%, but it seems unlikely that many regular Americans are carrying $25,000 daily balances so most are probably getting that 0.01% unless they’re pretty well off.
High-Yield Savings Accounts
These days there are a number of compelling high-yield savings accounts offered by companies like Wealthfront, Robinhood and SoFi that offers APYs in the range of 5-6%.
It’s important to note these yields are directly linked to the interest rates decreed by the fed. That means they will rise and fall over time. Right now they are at all-time highs so they are likely to fall in the future.
Treasury or Government Bonds
Treasury and government bonds aren’t giving all that much more than the rate you’d get for having a $25k+ daily balance in a savings account. Treasury yields in the US currently top out at a little over 5%, and that’s for a 3 month. The longer holds are lower and average about 4% or a little less, while Treasury Inflation Protected Securities (TIPS) won’t even get you 2%.
Risk with Traditional Options
There isn’t much risk with traditional options unless you’re holding funds over $250,000 and the bank collapses, as that’s the limit of FDIC insurance on bank accounts. US treasury bonds are considered some of the most secure investments in the world.
Closing Thoughts
When you compare yields for stablecoins versus just holding USD-fiat in a savings account, it becomes pretty clear that though the rates aren’t that different (unless doing the riskier options), the barrier to entry is.
There are plenty of ways to achieve a relatively high amount of yield through traditional methods these days. The benefit of traditional high-yield savings accounts is that they have none of the risk involved with cryptocurrency.
That’s not to say there aren’t some benefits of using stablecoins. You can move stablecoins whenever you want, whereas something like a treasury bond is locked liquidity. It also gives you the opportunity to immediately swap for cryptocurrencies like Bitcoin and Ethereum when the mood strikes.
The big question is whether you want crypto exposure. Make sure you do your due diligence before doing any of the options on this page, and happy investing.
