what are stablecoins and why does its interest rates come from

Forget low yield bank accounts. Here’s how I earn 8-19% interest with stablecoins

Stablecoins have been one of my favorite investments for the past few years.

I like them so much that I hold most of my excess cash in stablecoins now. They yield anywhere from 8-20% APY, which is more than offset the risk of letting money rot in a traditional bank account that pays less than 1% (if you’re lucky).

Why I love stablecoins, from an investment perspective: average stock market returns are 10%. This average is over a long period of time, during which prices could change a lot. Stablecoins match stock market performance, but you get those returns now and with less risk. (I’ll get into the risks later though).

If people could get such high interest rates in bonds and savings accounts, they’d take a lot more money out of (comparatively riskier) stocks and put them there. This is why I’ve put almost all of my excess cash into stablecoins.

If you’re not already sold on stablecoins as an investment, I got you. I’ll dive into…

  1. What are stablecoins
  2. How do stablecoins provide such high interest
  3. The risks of stablecoins
  4. How to buy stablecoins

What are stablecoins and what are they good for?

Cryptocurrencies, like any other investment asset, can fluctuate up and down a lot in price. Stablecoins are a special class of cryptocurrencies that stay constant in price.

There are many types of stablecoins (crypto grows so fast), but for this conversation we’ll focus on dollar pegged stablecoins worth 1:1 with the U.S. dollar. If you own 1 USDC (“USD Coin”), that’s backed by $1 real USD.

  • USDC: Created by Circle and Coinbase. The one I use and trust the most.
  • GUSD: Created by Gemini, a trusted exchange. This is less common but I use it on BlockFi and Gemini.
  • USDT: Tether created the most used stablecoin, but has faced controversy for not having sufficient reserves or its crypto pegged 1:1 to a fiat currency. They’re working on their transparency. I own zero USDT.

You can buy these stablecoins and earn interest on them through a variety of crypto platforms, which we’ll get to later.

Stablecoins are like normal money, but with blockchain superpowers

To use finance apps, you’d normally need to jump through multiple hoops. Slow bank transfer times, invasive identity verification, and credit checks just to name a few. The U.S. dollar (or “fiat”) is tied to this antiquated banking system.

Imagine removing all of these barriers, and you get decentralized finance. You can simply connect your crypto wallet into a DeFi app like Yearn.Finance (my guide here), and boom—you’re using it. No permissions of any other kind required.

Then imagine that people who use DeFi apps still want the power of crypto, but with a stable value that can translate back to the traditional finance world. Stablecoins offer a digital dollar equivalent that doesn’t need to go through as many middlemen.

As such, stablecoins act as a “settlement layer” in crypto. Go and earn money across the DeFi universe, but exit out of your positions into stablecoins. Rinse and repeat.

The use case for stablecoins increase for big financial players that want to do complex transactions. High frequency trading, automatically rebalance treasures, arbitrage across multiple networks…this is all possible because crypto is programmable money. The efficiencies, price stability, and opportunities unlocked by crypto help drive the mouth-watering interest rates we see in stablecoins.

We’ve covered the utility for stablecoins. Where does the interest come from?

How do crypto businesses pay such high interest on stablecoins?

At first I thought such high interest rates must be too good to be true, but they’re not. Crypto businesses earn even more yield than what they provide to their users.

The business model of banks is to use money to make money. Crypto’s no different—user funds are used to lend, trade, arbitrage, leverage, and do market making activities. Because opportunities in crypto are newer and the space is less mature, sophisticated crypto businesses can easily earn high yields—then pass on the difference to their users.

Example 1: Stablegains is a crypto startup offering a 15% interest on USDC. They use Anchor, a savings protocol on the Terra ecosystem yielding ~19% interest. While anyone can set up anchor on their own, it’s a lot of steps. Stablegains makes this easy, and makes money on the difference.

Example 2: Midas Investments is able to offer 19% on USDC and 23% on Ethereum. They generate higher yields from DeFi activities as explained in their article.

That doesn’t even get to the lending side of things…Traditional banks don’t consider crypto as collateral to give out loans (yet). This creates demand for crypto lending, which then creates yields in crypto.

Stablecoin risks: no free lunch

Crypto does not have something like FDIC insurance yet. But hey—if you’re investing anyway, then none of your stocks are insured either.

A good stablecoin is issued by a company that manages its reserves well. Most of the risk lies in mismanagement, like:

  1. Use of reserve assets that could fall in price / become illiquid
  2. Failure to safeguard those reserve assets (bad security)
  3. Reliability of redeeming stablecoins (due to not having enough funds)

Outside of these risks, the interest offered on stablecoins can change any time. The average interest paid is pretty high right now around 8%, but it could change just like your normal savings accounts can change at any time.

While I’ve been enjoying stablecoin rates for over a year, I don’t think it’s going to last forever. IMO, that’s even more reason to get that yield now rather than later.

How to buy stablecoins and start earning interest

The shortcut: read my guide on getting started with BlockFi. While it doesn’t offer the absolute highest rates, it’s the safest and most user friendly “crypto savings account” out there.

Here’s a quick illustration of how stablecoin investing works on a crypto platform like BlockFi:

  • Deposit $5000 into BlockFi, and that deposit automatically gets converted into an equivalent amount of stablecoins: $5000 GUSD.
  • Earn 9% and have $5450 in stablecoins in 1 year.
  • When you go to withdraw that $5450 in stablecoin, it automatically converts 1:1 to US dollars back into your regular bank account.

This seamless process (which honestly feels like a normal savings account, in a good way) is why I point people to BlockFi first.

What about those higher interest rates?

Typically, the higher the yield, the higher the risk. This risk comes in the form of smaller and newer crypto platforms that aren’t as established yet, and are willing to offering higher yields. They also don’t typically have as many account features. But here goes, if you’re feeling adventurous:

Stablegains offers 15% on USDC. You have to buy USDC from somewhere else first and transfer it in.

Midas Investments offers 19% on USDC. You also have to transfer crypto you’ve already acquired elsewhere first.

Anchor offers 19% on UST. It’s relatively difficult to do this process: UST is not offered everywhere, so you have to get it at an exchange like Kucoin, then transfer it to a Terra Station Wallet.

You can also check out my updated list of crypto signup bonuses here.

_ _ _

It’s an interesting world out there (not sorry for the pun). Lucky for crypto beginners, the options to earn higher interest rates and beat inflation is only growing.

1 thought on “Forget low yield bank accounts. Here’s how I earn 8-19% interest with stablecoins”

  1. Great post, Oz! I’m trying to better understand the risk involved of using high interest crypto accounts like Blockfi.

    What would happen if one of these companies went under. E.g. I use Wealthfront, and the stocks that I purchase through them are held and titled in my own name such that if Wealthfront went under, I would still retain my stocks. I just may not be able to trade them for a while until I transfer them to a new broker. What would happen if Blockfi went under. Would I lose my principal, or is the principal being held in an independent wallet, etc that I would still maintain control over?

    Related to this, do you know how the loans Blockfi make are collateralized? E.g. If all of the borrowers defaulted at the same time, is it sufficiently collateralized that Blockfi would be okay? I’ve heard about smart contracts being used in defi such that it effectively works like a margin loan, and there’s an automatic margin call if the margin asset loses too much value. However, I saw that Blockfi allows people to borrow and then invest in things like real estate, which would not be amenable to a margin call.

    Thanks in advance!

Leave a comment

This site uses Akismet to reduce spam. Learn how your comment data is processed.

%d bloggers like this: