Stablecoin Interest Rates: Stablecoin Guide 2024

Stablecoins like USDC and USDT are a popular part of the crypto market because they are less risky for investors. They tie themselves to stable assets like fiat currencies. Stablecoins are a good choice for earning interest, especially when regular savings rates are extremely low.

Stablecoin interest is the money you earn by putting stablecoins in a savings account or lending them out for interest. Investors lend their stablecoins to others through the platform, receiving interest payments in return.

Stablecoin yield typically comes from more active investment strategies such as yield farming or liquidity mining. In stablecoin yield farming, you can earn rewards by staking or lending stablecoins in a DeFi protocol. Rewards can be more stablecoins, different cryptocurrencies, or governance tokens.

The Basics of Stablecoin Interest

Interest rates for stablecoins can vary greatly, from 2% to over 20%, in some cases. Three main factors determine the rates: demand, risk management by the platform, and the stability of the stablecoin.

People’s desire for the stablecoin, as for any other crypto asset, plays a significant role in setting the rates. The platform’s ability to manage risk also influences the rates. The stability of the stablecoin is another important factor in determining the rates.

Varied Interest Rates: From 2% to Over 20%

One of the key concepts of earning income with your stablecoins is the difference between staking and lending them.

Stablecoin staking involves locking coins to support blockchain operations and earning rewards, often in a proof-of-stake system. Lending entails providing stablecoins to borrowers through a platform, generating interest from the loans. Staking supports network security; lending uses funds for liquidity.

Top Platforms: AAVE at 3%, Curve Finance at 13%

1. AAVE and Curve Finance are secure platforms that support stablecoins. AAVE offers up to 3% interest rates, while Curve Finance offers up to 13% interest rates.
2. Binance – Binance Loans offer users to borrow and lend USDT and other stable coins with flexible and stable rates. However, geographical restrictions may apply.
3. Nexo and YouHodler are platforms that offer different interest rates, some as high as 12.6%.
4. Vesper Finance – Offers one of the highest rates in the market at 16.45%.
5. Coinbase – yet another prominent crypto exchange. 5.10% APY on USDC and 20.65% on USDD; however, we could not locate APY on USDT, probably the most popular stablecoin in the world.

Most crypto exchanges let users earn money by staking or lending cryptocurrencies. However, terms and conditions, as well as interest rates and yields, can differ. So, if you have in mind earning some money by staking or lending, you should first take some time to do some research.

Stablecoin Leaders in 2024: USDT 16% APY, USDC 14% APY

As for May 2024, some of the most known stable coins offer the following interest on lending:

• Tether (USDT): Up to 16% APY
• USDC (USDC):  Up to 14% APY
• Dai (DAI):   Up to 14% APY
• First Digital USD (FDUSD): Up to 6.6% APY

For staking, one could have the following income:

• Tether (USDT): Up to 1% APY
• USDC (USDC):  Up to 1% APY
• Dai (DAI):   Up to 5% APY
• First Digital USD (FDUSD): Up to 7% APY

So this illustrates that lending earns greater interest, but as everyone knows, greater returns require greater risks. This example of differences in interest rates illustrates the difference between lending and staking. So, one with a higher risk tolerance can earn more than one willing to take less risk.

Factors Influencing Stablecoin Interest Rates

• Market conditions affect stablecoins. This can make them riskier than regular savings accounts. But they are less risky than popular cryptocurrencies like Bitcoin and Ethereum, which do not have a set value.
• When many people want stablecoins for loans, interest rates can go up because there aren’t enough stablecoins available.
• Platform Security: The trustworthiness and security measures of a platform can significantly influence the rates offered. Platforms with higher risk management standards often provide more competitive rates​ (sofi)​​ (Milk Road).

Navigating the Risks

Investing in stablecoins is not without risks. Potential risks to investors include stablecoin de-pegging and lending platform insolvency. Also, stablecoin investments do not have insurance from institutions like the FDIC, which increases the risk involved.

Passive Income Through Stablecoins

The high interest rates associated with stablecoins present a lucrative opportunity for earning passive income. Investors can choose between centralized finance (CeFi) platforms or decentralized finance (DeFi) platforms.

CeFi platforms regulate and offer customer support. DeFi platforms typically have higher rates and more control over assets. However, they require more learning and come with an increased risk of vulnerabilities in smart contracts.

How to Earn Interest on Stablecoin?

Earning interest with your stablecoins is a form of passive income. However, it significantly differs from the interest earned on your bank account. The main difference is not just in the type of asset or financial institution. The difference also lies in the methods of earning this passive income.

Here are some common methods to earn interest on stablecoins:

1. Crypto Savings Accounts

Some finance platforms like Kraken, Coinbase, and Binance offer crypto savings accounts. You can deposit stablecoins to earn interest. These platforms typically provide an APY and compound the interest. The APY may vary depending on market conditions and the platform’s rules. This method is the most similar to your savings bank account.

2. Lending Platforms

You can lend your stablecoins on platforms that connect lenders with borrowers. On CeFi platforms like BlockFi, Celsius, or Nexo, you can easily deposit stablecoins and start earning interest. These platforms manage the risk by performing credit assessments and requiring borrower over-collateralization.

3. DeFi Protocols

In the DeFi space, you can use platforms like Aave, Compound, or MakerDAO to lend out your stablecoins. These platforms operate on smart contracts without a central authority. Interest rates in DeFi can change based on how much people want to borrow or lend a stablecoin on the platform.

4. Liquidity Pools

Another method within DeFi is to contribute your stablecoins to a liquidity pool. Platforms like Uniswap or Curve let you put your stablecoins in a pool for trading. You can earn some of the trading fees and other rewards in the platform’s token.

5. Staking

Some stablecoins allow you to lock up your coins to help the blockchain network run smoothly and securely. In return, you receive interest as a reward. This is more common in stablecoins in a larger blockchain network with proof-of-stake (PoS) consensus mechanisms.

This normally refers to but is not limited to, the following coins: Theter (USDT), USDC (USDC), Dai (DAI), First Digital USD (FDUSD), PayPal USD (PYUSD) and others. As mentioned above, interest from 1% to even over 20%.

Conclusion

Stablecoin interest rates offer a compelling avenue for crypto investors to earn passive income. However, the varying rates and the associated risks necessitate a careful approach. Potential investors should conduct thorough due diligence, assess platform security, and consider the liquidity and stability of the stablecoin. Investors can navigate the crypto market better by understanding its mechanisms and risks and optimizing their investment strategies.