Stablecoins Interest Rates Comparison
Key Takeaways
- Stablecoin lending is just one of the lending options that crypto users have when it comes to earning passive income on their assets.
- While there are numerous platforms to choose from, CeFi lending comprises 60%-70% of loans made with crypto — including stablecoin loans.
- While DeFi lending isn’t as popular, there are perks to lending stablecoins with a decentralized platform, including greater control over your assets.
What Is Stablecoin Lending?
Stablecoin lending refers to loaning out your stablecoins, like $USDC (Circle), $USDS (Sky) or $USDT (Tether) to earn interest. Stablecoins are cryptocurrencies that are designed to keep a stable value tied to a fiat currency such as the US dollar or Euro, so when you loan them out you don't need to worry about their prices fluctuating.
You can loan them out, earn a decent interest rate, and easily swap them back to fiat ($USD) at a 1 to 1 rate.
This makes it one of the lower risk strategies for earning yield on your crypto.
How Do You Earn Interest By Lending Stablecoins?
The mechanics of earning interest on stablecoins works similar to putting your fiat currency in a saving account at a bank.
When you make a deposit the bank takes those deposits and loans them out to borrowers. Over time the borrowers pay back the principle loan amount plus interest. The bank takes their cut of the interest paid by the borrower and passes the rest to you, the lender.
Lending stablecoins follows the same process except there is no central entity of a "bank". It's all automated by smart contracts.
There are 2 major ways you can lend your stablecoins - in a centralized (CeFi) or decentralized (DeFi) manner. There are pros and cons to both DeFi and CeFi stablecoin lending which we'll cover shortly.
How Do I Know Borrowers Will Pay Back My Stablecoins?
Unlike traditional finance loans that may be unsecured and rely on a person's credit score or credit history to get a loan, loans in the crypto space nearly always require that the borrower put up collateral before they can take out a loan.
A common reason people will do this is to access cash without needing to sell their crypto assets. They can use their crypto assets as collateral and take out a loan against those assets.
So how much collateral does a borrower need to deposit in order to take out a loan?
It varies from exchange to exchange, but it's commonly in the 50% to 70% LTV range. If a borrower had $10,000 worth of Bitcoin or other digital assets for collateral, the most they could borrow is between $5,000 and $7,000 against those assets.
CeFi Stablecoin Lending
Most users, especially if you're new to the crypto industry, opt to lend their tokens on CeFi platforms. These platforms are typically the most user-friendly option.
One big difference between centralized and decentralized platforms is that CeFi platforms require users to complete a Know Your Customer (KYC) verification process.
This process is required by law, but it can feel somewhat intrusive and laborious.
The KYC process typically requires you to verify your identity with official government identification like a drivers license or passport. They may also require you to turn on your webcam or take a picture of yourself to confirm your identity matches your official documents. Fortunately, you usually only have to do it once per exchange.
The upside is that once you create your account on a centralized platform, it usually only takes a few clicks to deposit your tokens and start earning interest.
Depending on the platform, you may have to agree to lock your tokens up for lending for certain periods of time. Fortunately, when you lock your tokens for a longer period of time, you typically earn a higher interest rate.
There are multiple CeFi lending platforms to choose from such as SALT. This platform give the lender access to simple crypto collateral lending with stablecoins. Stablecoin lending rates of return vary from platform to platform, but can be as high as 7% to 16%, depending on the token and the exchange.
Nexo is another option when it comes to stablecoin lending. It doesn’t neatly fall into either the CeFi or DeFi camp. From crypto-backed credit lines to crazy APYs of 15%, Nexo operates as a platform to generate wealth.
Pros And Cons Of CeFi Stablecoin Lending
Pros
- Easy to use, no matter your experience level
- Stablecoin interest rates tend to be pretty high
- Customer support is available
Cons
- Limited lending options
- The platform temporarily takes custody of your crypto
- No liquid token representing the user's position
Pros Of CeFi Stablecoin Lending
Easy To Use For Any Experience Level
The main benefit of lending stablecoins on CeFi is that these types of platforms are typically user-friendly. All you have to do is find a CeFi platform that offers lending and then complete the initial KYC process. From there, it’s typically smooth sailing.
Stablecoin Lending Rates Are Typically High
Stablecoin lending rate are usually high because people who borrow crypto usually can't access TradFi loans. With no alternative, they’re less sensitive to high interest rates, which in turn allows lenders to earn more.
Customer Support Is Available
Unlike decentralized protocols, CeFi platforms offer access to customer support, which can come in handy if you’re in need of some assistance with your lending or other transactional needs on the platform.
Cons Of CeFi Stablecoin Lending
The Platform Takes Temporary Custody Of Your Tokens
When you lend on CeFi, you’re giving the platform temporary custody of your tokens. This may not be an issue with most platforms, but on the off chance that the exchange / platforms were to fold, you would lose your tokens in the process. That risk is typically minor, but it can be a big deterrent for some users.
Limited Lending Options
Unlike DeFi protocols, the token options can be limited on CeFi platforms — and that includes the lending options. Some exchanges may not offer the stablecoin lending options you want, or may offer rates that are lower than average for that type of lending. As such, you may have to search to find the right platform.
No liquid token representing the user's position
In DeFi lending, when you deposit assets into protocols like Aave or Compound, you often receive a liquid token (aDAI or cUSDC). The coolest bit is that you can use this liquid token for other DeFi strategies. Lending on CeFi platforms doesn't offer this flexibility. Once you lend your stablecoins, your funds are locked in.
Best CeFi Stablecoin Lending Platforms
4.3Trusted by over 7 million users worldwide, Nexo is a premier digital assets platform, offering one of the most comprehensive product suites for growing, preserving, and managing your crypto wealth. You can trade, borrow, and earn with your digital assets in a seamless and secure ecosystem.Clients who choose to receive their earnings in NEXO Tokens can unlock up to 2% in bonus interest — an exclusive Loyalty Program benefit designed to maximize returns. Depending on your tier, you can also access lower borrowing rates, enhanced crypto cashback, and free monthly withdrawals.
- Present in 150+ jurisdictions
- Flexible and fixed-term savings options
- Annual savings interest rates of up to 15%
- Low-interest credit lines from just 2.9%
- Personalized client care 24/7
- Comprehensive fiat on/off ramps
- A variety of top-up methods
- Institutional-grade risk management
- Robust infrastructure security
- Free withdrawals (limited by loyalty level)
4.4Specialised in Bitcoin-based lending and borrowing, SALT is a platform that lets you lend / borrow cash or other cryptocurrencies using your Bitcoin as collateral. Been in the space since 2016, individuals and business alike have trusted SALT to go about their $BTC lending and borrowing business.
- The original provider of Bitcoin-backed loans
- Attractive APYs
- Wide range of assets
DeFi Stablecoin Lending
DeFiplatforms are another option that you have for lending your stablecoins to receive interest .
One advantage of using DeFi platforms is that they aren’t required to validate customer identities — you simply connect your walletand swap, borrow, or lend your tokens.
While you don't need to go through the KYC process to use a DeFi protocol, you do need to be familiar with making transactions on a browser wallet or hardware wallet.
You’re also lending directly to other crypto users in many cases or taking part in a liquidity pool (a pool that combines users’ tokens and then allows borrowers to utilize them). That can make the transactions a little more complicated — and the options may be limited to certain tokens as well.
That said, there are a few different DeFi options that you can choose from Aave, and Compound — all of which offer different rates or returns on lending.
For example, Aave's current yield (interest rate) typically ranges between 1% to 3% (however, this range will fluctuate over time so it's better to find the APY directly on Aave).
Pros And Cons Of DeFi Stablecoin Lending
Pros
- Retain custody of tokens
- Hefty potential returns for lenders
- High demand from borrowers
Cons
- Difficult for new users to navigate
- Smart contracts may have exploits
- Tax reporting is more difficult
Pros Of DeFi Stablecoin Lending
Retain Custody Of Your Tokens
When you use a DeFi protocol to lend stablecoins, you aren’t giving up custody of your tokens to a centralized entity. The platform simply facilitates the lending transaction via smart contracts; it doesn’t act as a middleman during the transaction. As such, you retain greater control of your tokens throughout the lending process (as your assets are locked in a smart contract, rather with a centralized third party).
Demand Is High
One of the risks you take when lending your tokens to borrowers is that there won’t be much demand for the tokens. That isn’t the case with stablecoins. The demand for stablecoins is high — and the demand often exceeds the supply. This works out great for lenders, who don’t have to wait long for a borrower to come along like they may have to with other tokens.
Returns Can Be Hefty
Rates on stablecoin lending vary, but can be quite high when there's an uptick in demand from borrowers on DeFi platforms. This can translate to a potential for big returns for lenders. Plus, there’s little in the way of volatility with stablecoins, so you don’t have to worry about the token losing value while borrowers are using it for other purposes.
Cons Of DeFi Stablecoin Lending
Possible Smart Contract Exploits
While the risks of lending stablecoins on DeFi platforms are limited, they do exist. DeFi lending protocols run on smart contracts, which are a web of complex codes that auto-execute when certain conditions are met. Since many DeFi protocols make their codes open-source, their smart contracts are at risk for malicious actors to find exploits and drain funds.
Always use a reputable platform that takes security seriously and does regular audits.
Difficult For New Users To Navigate
DeFi protocols aren’t as user-friendly. If you’re just starting out, check out our guide about how to swap onchain. We'll walk you through the whole process step by step.
Tax Reporting Is More Difficult
CeFi platforms keep records of the transactions that take place on the platform, which can streamline the tax filing process. On the other hand, DeFi protocols do not track transactions, which can make it difficult to keep track of profits, losses, and other necessary financial information. Fortunately there is crypto tax software that can make this process easier.
Best DeFi Stablecoin Lending Platforms
4.6Similar to Compound, Aave’s DeFi platform uses a series of smart contracts that allow lending and borrowing. Where Aave differs from Compound is in its range of blockchains and tokens; Aave supports 13 blockchains compared to the 7 on Compound. Aave also offers more token choices for lenders and borrowers.
DeFi without risk? There’s no such thing. But Aave offers a Safety Module, an investor-funded insurance pool that insures against shortfall events. For example, smart-contract bugs could cause lenders to lose money. Losses can also occur when the market moves quickly, slowing or preventing collateral liquidations.
- Aave supports 13 different blockchains.
- Easily swap cryptocurrencies on Aave to capture a better rates; if you see a chance to lend / borrow with more competitive rates, you can exchange your tokens for those tokens without leaving Aave.
- Biggest decentralized lending & borrowing platform in crypto
3.2Compound Finance is the OG lending & borrowing platform in the DeFi space. It's been around way before Aave was even born. Lending & borrowing rates vary based on demand. The platform supports lending & borrowing in $ETH, $WBTC, $USDC, and several other major cryptocurrencies.
• One of the OG platforms in the crypto space • Occasionally provides more competitive rates on stablecoins • Clean interface
Yield-Bearing Stablecoins
This new innovation is a game-changer. No more hunting for lending platforms, bridging funds, paying gas fees, or locking up your crypto for months. Now, you just make one swap - and boom, your stablecoins start earning yield automatically.
Yield-bearing stablecoins generate passive income without needing external platforms. For example, USDS currently offers a 5% yield. So, if you swapped $100 USDC into USDS at the start of 2024, you’d have $105 USDS by year’s end - without lifting a finger.
Wanna dive deeper into this cool-ass innovation? Check out our full report here.
Stablecoins Lending Taxes
If you’re earning interest by lending stablecoins to other users, you will likely owe taxes on the profits. According to the IRS, stablecoins are listed as “property” under Notice 2014-21 — so the interest you earn is considered to be income, just like any other type of income you’d earn.
Your crypto loan transactions are typically categorized one of two ways by the IRS:
- If you are earning the same crypto that you loaned to borrowers, you will be paying income tax on the profits.
- If you are receiving a different kind of crypto in return for lending, this is likely categorized as a capital gain and you will be paying a capital gains tax.
However, it’s always best to consult an experienced tax advisor who can work with you on the specifics of your situation.
Frequently Asked Questions
If you are looking for a lower risk investment and don't need instant access to your coins, stablecoin lending could be for you.
The primary risk of lending stablecoins are "platform risks". The lending platforms (CeFi or DeFi) may be subject to hacks, operational failures, or financial instability.
In general, lenders typically make anywhere from 5% to 20% on the tokens they lend, but it will depend on the platform, the stablecoin, and the demand by borrowers.
Yes, you can. For a more in-depth article about USDC lending, head here.
If you are making money on your stablecoin investments, there is a good chance you will owe taxes. That’s because the IRS sees crypto like any other source of income, and if you’re earning on it, you’ll owe taxes on it.
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