Stablecoins: How Do They Work? Best Stablecoin Interest Rates

Stablecoins are a category of cryptocurrency. They have become very popular in recent years, owing to certain characteristics which set them apart from other crypto coins and tokens.

Stablecoins, as the name implies, are recognized 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. In addition, cryptocurrency traders often trade against a stable asset, such that when their target price is achieved on their preferred crypto coin, capital and profit are converted to one of the many stablecoins.

How Do Stablecoins Work?

Stablecoins operate under an interesting model. Sometimes, they are regarded as the ‘fiat’ of the cryptocurrency market due to their relationship with traditional fiat currencies. Stablecoins are backed by reserve assets ranging from the US dollar to gold and cryptocurrencies.

They maintain a 1:1 peg 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 an equivalent of $1 in reserve. Ideally, investors can redeem their USDT for fiat dollars. Also one of the popular stablecoins is Australian Dollar token(AUDT) which is linked to Australian dollar and is backed by an Australian bank. With the Crypto Exchange service TimeX, 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 offer a safety net for crypto investors and traders that other crypto assets do not. Investors prefer to earn yields or interest on their stable assets by depositing them in a decentralized finance (DeFi) protocol. In contrast, while investors can earn yields on other cryptocurrencies, they usually have 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. One characteristic common to all stablecoins is that they are backed by a reserve asset. However, these reserve assets may vary. Thus, 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;

Fiat-Collateralized Stablecoins

Fiat-backed stablecoins are the most widely used stable assets. These include Tether (USDT), USD Coin (USDC), Binance USD (BUSD). This category of stablecoins has its reserve assets as fiat currencies such as the US dollar, euro, and pound. In addition, they are controlled and issued by centralized entities.

Crypto-Collateralized 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-Collateralized Stablecoins

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

Algorithmic Stablecoins

Algorithmic stablecoins maintain price stability using an algorithm that allows more coins to be issued when prices surge. However, when prices decline, the coins are bought from the market to keep prices up. Examples include the now-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 earn the best interest rates on their stable assets.

Nexo offers instant cryptocurrency-backed loans 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 they deposit their stable assets on Nexo. These assets are given to borrowers as loans for a period until they are returned to actual owners. Usually, borrowers will deposit 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 are also given special benefits when they hold Nexo’s native token— $NEXO.

Hodlnaut is another platform for earning stablecoin interest, as it offers significant returns, weekly interest payments, and no lock-in period, allowing users to withdraw at any time. 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 percent APY, while DAI is 4.07 percent APY.

Users automatically receive $30 USDC after depositing >1,000 USD in stablecoins or other crypto assets into their Hodlnaut account and leave 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 his account.

BlockFi is one of the first cryptocurrency lending and borrowing platforms. It has a reputation for being a user-friendly and safe site. BlockFi has built a solid reputation over the years and is frequently the first platform newcomers to the crypto industry use.

For stablecoin deposits, BlockFi offers a 7.5% annualized yield. Using the BlockFi interest calculator, investors may get an estimate of their stablecoin interest rate. Even though the return isn’t the highest, it’s still one of the top stablecoin interest rates, and the interface is user-friendly.

So, how do users get BlockFi’s best stablecoin interest rate? Using the interest calculator, they can simulate their potential earnings for up to 30 years. The higher the stablecoin yield, the longer investors may keep their assets locked on the platform. The interest accrues daily and is paid to users monthly. 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 a passive income on the platform. However, the stablecoin yields are determined by the coin a user chooses and the type of deposit he makes.

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

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

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

Users of the platform are granted access to financial services and benefits unavailable in traditional banks. Celsius Network aims to transform global financial institutions by making services available to a much bigger audience. Celsius has substantially better interest yields than banks, reaching 7.10% yearly.

The platform runs on the Ethereum blockchain and has a total of $21.5 billion in assets under management (AUM). Celsius enables deposits of 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.

Bottom Line

Stablecoins offer investors a safe way of profiting from cryptocurrency investments while avoiding price volatility risks. These assets can either be staked or lent to other cryptocurrency users. The platforms above provide rewarding yields on stable assets investors can leverage.