Stablecoins: how do they work? Best Stablecoin Interest Rates

Stablecoins are a category of cryptocurrency. They have become very popular in recent years, due to some characteristics that distinguish them from other crypto coins and tokens.

Stablecoins, as the name suggests, are known for their price stability, unlike volatile crypto assets. Thus, many investors in the cryptocurrency market often convert assets like Bitcoin and Ethereum into these stablecoins, especially when a downtrend in the market is expected.

In other cases, investors convert crypto assets into stablecoins to mitigate losses. Additionally, cryptocurrency traders often trade against a stable asset, so that when their target price is reached on their preferred cryptocurrency, the capital and profits are converted into one of many stable coins.

How do stablecoins work?

Stablecoins operate on an interesting model. Sometimes they are considered the “fiat” of the cryptocurrency market due to their relationship to traditional fiat currencies. Stablecoins are backed by reserve assets ranging from US dollars to gold and cryptocurrencies.

They maintain a 1:1 parity with these reserve assets to ensure price stability. USDT, the most popular stablecoin, is backed by the US dollar; for every 1 USDT in circulation, there is the equivalent of $1 in reserve. Ideally, investors can exchange their USDT for fiat dollars. One of the popular stablecoins is also the Australian dollar token (AUDT), which is pegged to the Australian dollar and backed by an Australian bank. With the Crypto Exchange TimeX service, you can buy any amount of AUDT. Which makes it more user-friendly for Australian users and enables the efficient and secure transfer of funds to and from the blockchain ecosystem. Here you can see the current Bitcoin AUD chart.

Stablecoins provide a safety net for crypto investors and traders that other crypto assets do not. Investors prefer to earn returns or interest on their stablecoin assets by depositing them in a decentralized finance (DeFi) protocol. In contrast, while investors can earn returns on other cryptocurrencies, they generally need to worry about price volatility. Price volatility causes cryptocurrencies other than stablecoins to lose value.

Types of stablecoins

Not all stablecoins are the same. There are different types of stablecoins. A common feature of all stablecoins is that they are backed by a reserve asset. However, these reserve assets may vary. So, we have stablecoins backed by the US dollar while some are backed by a combination of the fiat dollar and other cryptocurrencies. Types of stablecoins include;

  • Stablecoins backed by Fiat

Fiat-backed stablecoins are the most widely used stablecoins. These include Tether (USDT), USD Coin (USDC), Binance USD (BUSD). This category of stablecoins has its reserve assets in the form of fiat currencies such as US Dollar, Euro, and Pound. Moreover, they are controlled and issued by centralized entities.

  • Crypto-backed stablecoins

Crypto-based stablecoins are backed by other cryptocurrencies. A perfect example is DAI, which is backed and over-collateralized with Ethereum. DAI is over-collateralized because ETH is another volatile crypto asset.

  • Commodity-backed stablecoins

Gold is a commodity and reserve asset for stablecoins such as PaxosGold and DigixGold. Both stablecoins can be exchanged for gold.

  • Algorithmic stablecoins

Algorithmic stablecoins maintain price stability by using an algorithm that allows more coins to be issued when prices rise. However, when prices fall, coins are bought from the market to keep prices high. Examples include the defunct Terra USD (UST), Abracadabra MIM and Near USD (USN). They are also called algo-stables.

In this article, we have identified CeFi and DeFi platforms where crypto investors can get the best interest rates on their stablecoin assets.

Nexo offers instant loans backed by cryptocurrencies as a lending platform. It relies on smart contracts and an Ethereum-based oracle to manage loans. Nexo provides loans on up to 39 crypto assets, including stablecoins.

Lenders can earn up to 10% APY when depositing their stablecoin assets on Nexo. These assets are granted to borrowers in the form of loans for a period until they are returned to the beneficial owners. Usually, borrowers will post collateral in another cryptocurrency before they can claim their loans.

Stablecoins supported by Nexo include USDC, USDT, UST, DAI, USDP, TUSD, USDX, EURX, and GBPX. Nexo has over $12 billion in assets under management (AUM). Users also get special benefits when holding Nexo’s native token, $NEXO.

Hodlnaut is another platform to earn stable interest, as it offers high returns, weekly interest payments and no lockup period, allowing users to withdraw anytime. USDT, USDC, and DAI are three stablecoins offered by Hodlnaut and three other cryptocurrencies (BTC, ETH, and WBTC).

The interest rate on USDT and USDC is 9.41% APY, while DAI is 4.07% APY.

Users automatically receive 30 USDC after depositing >1000 USD in stablecoins or other crypto assets into their Hodlnaut account and leaving it there for at least 31 days.

One thing to keep in mind with Hodlnaut is that if a user deposits large amounts of USDT, USDC will be added to their account.

BlockFi is one of the premier cryptocurrency lending and borrowing platforms. It has a reputation for being a user-friendly and safe site. BlockFi has built a strong reputation over the years and is often the first platform to hit the crypto industry.

For stablecoins, BlockFi offers an annualized return of 7.5%. Using the BlockFi Interest Calculator, investors can get an estimate of their stable interest rate. Even though the yield isn’t the highest, it’s still one of the best stable interest rates and the interface is user-friendly.

So how do users get the best stable interest rate from BlockFi? Using the interest calculator, they can simulate their potential income for up to 30 years. The higher the yield of the stablecoin, the longer investors can keep their assets locked on the platform. Interest accrues daily and is paid monthly to users. BlockFi offers yield on the following stablecoins: USDC, USDT, GUSD, USDP, and BUSD.

Crypto.com is a popular centralized cryptocurrency exchange that accepts various digital currencies. Stablecoins can also be used to earn passive income on the platform. However, stablecoin returns are determined by the coin a user chooses and the type of deposit they make.

Users can, for example, make a flexible deposit with the lowest interest rate or lock their money for one or three months using the platform app.

Users can access maximum stable interest rates by choosing locked deposits and depositing a certain amount of cryptocurrency. The maximum stablecoin return is for deposits of $4,000 or more (8%). There are many levels with different incentives. Supported stablecoins include BUSD, USDT, and USDC.

Celsius Network is also a centralized cryptocurrency platform. Established in 2017, Celsius provides lending and borrowing services to thousands of users.

Platform users have access to financial services and benefits unavailable in traditional banks. Celsius Network aims to transform global financial institutions by making services accessible to a much wider audience. Celsius has significantly better interest yields than banks, reaching 7.10% per annum.

The platform runs on the Ethereum blockchain and has a total of $21.5 billion in assets under management (AUM). Celsius allows deposits of a wide variety of stablecoins such as USD Coin (USDC), TrueUSD (TUSD), TrueGBP (TGBP), TrueHKD (THKD), TrueCAD (TCAD), TrueAUD (TAUD), Tether (USDT), Paxos (USDP), Gemini Dollar (GUSD), Binance USD (BUSD), Z.com USD (ZUSD) and DAI.

Conclusion

Stablecoins offer investors a safe way to profit from cryptocurrency investments while avoiding the risks of price volatility. These assets can be staked or loaned to other cryptocurrency users. The above platforms offer attractive returns on stable assets that investors can mine.

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Maria D. Ervin