A Beginner's Guide To Earning Interest On Stablecoins (CeFi and DeFi)

Lending crypto is risky due to the intense market fluctuations. Investing in stablecoins, you can earn without worrying about your assets losing value.

Bishal Kumar Chanda5 min read
A Beginner's Guide To Earning Interest On Stablecoins (CeFi and DeFi)

The Crypto Interest Market is on a Rise

With the emergence of various cryptographic assets, the development of crypto interest markets is at an all-time high. The crypto interest market comprises multiple DeFi (decentralized finance) and CeFi (centralized finance) platforms that allow users to borrow and lend crypto assets. These platforms attract such a massive crowd of investors and borrowers because they provide a higher APY (annual percentage yield) and lower interest rates than traditional banks.

Crypto lending is becoming more popular day by day as investors can earn an extra yield on the crypto assets they are holding without selling them. Due to this increase in demand from the users, leading crypto trading platforms like BlockFi, MakerDAO, CoinLoan, Celsius, YouHodler and Compound have added features for lending and borrowing. Today, there are several lending applications and protocols in both DeFi and CeFi markets to serve the growing hunger of crypto investors. Even El Salvador has plans to provide crypto-backed loans for small and medium-sized businesses.

However, the volatility associated with crypto assets hinders the crypto lending and borrowing market. In a volatile market, lenders can lose money even with substantially higher APYs. For example, if you invest in Bitcoin at $40,000 at an APY of 20% and after one year, let's say Bitcoin's price falls to $20,000. You would be expecting a profit of $4,000 from the annual yield but making a total loss of $16,000 due to the price dump. Stablecoins have become the best assets to lend in the crypto market, addressing this volatility issue.

What are Stablecoins?

Although Bitcoin (BTC) remains the most traded cryptocurrency, it suffers from high volatility in its valuation. For example, Bitcoin rose from a $5,000 valuation in March 2020 to its all-time high of $64,88 in April 2021 before falling to nearly $30,000 in June 2021. Even Bitcoin's intraday price swings are very volatile and can change more than 10% within a few hours, and this kind of high short-term volatility makes Bitcoin a precarious investment.

Stablecoins are cryptocurrencies backed by reserved assets, like the US dollar or gold to provide price stability. Stablecoins have gained much traction in the crypto lending and borrowing space as they offer the best of both worlds- decentralized cryptocurrencies and stable valuations of fiat currencies. Using stablecoins, investors can earn through lending their digital assets without facing the volatility of crypto assets like Bitcoin (BTC), Ethereum (ETH) or any other altcoin.

Using the DeFi and CeFi platforms, investors can earn higher interest rates with stablecoins than what is offered by traditional banks. Most existing banks provide as low as 1% annual interest rates, whereas stablecoins can generate interest of 4% to 12% per annum. Users can avail themselves of daily interest payouts on many lending platforms, enabling them to earn compound interest on their principal investment.

Want to learn more about DeFi and CeFi? Read our Blog at Bitcompare, where our team has written blog posts spanning across the DeFi and CeFi industry to help you make better financial decisions.

If you are ready to earn better interests using stablecoins, Bitcompare will guide you through two of the most popular crypto lending platforms.

A Step-By-Step Guide to Earning Interest in Stablecoins Using CeFi

The lending rules of the CeFi platforms are very similar to the management of existing financial institutions. To prevent illegal activities from bad actors, CeFi platforms generally require users to go through procedures such as anti-money laundering (AML) and know their customers (KYC). In most cases, the CeFi platform holds your private keys, manages your account, and ensures that your collateral is safe. With CeFi platforms, you can avail various insurances to prevent loss of funds from attacks and operational errors. Most of the assets in the CeFi platforms are kept in cold storages under the platform's custody.

In this article, we will guide you through the process of earning interest on stable coins on one of the largest CeFi lending platforms, Nexo. With Nexo, you get lucrative interest rates on stablecoins (up to 10%). For example, if you invest $10,000 worth of USDC on Nexo, by next year, you will enjoy a profit of $1,000.

Read our detailed review, Nexo Review: The Good, Bad and Whether it's Safe.

The steps for you to start earning on Nexo are as follows:

  1. Create your Nexo account.
  2. Next, select the profile icon at the top right of the screen and select the "My Profile" button for carrying out 3. your KYC verification. Users have two options: Basic KYC, which allows you to earn interest on all stablecoins and other cryptos, while with Advanced KYC, you can get support for fiat money. 
  3. In the "Security" section, you can enable two-factor authentication. Click on the Enable button and scan the QR code with your Google Authenticator or Authy.
  4. After your KYC process is complete, go to the "Account" option and choose the stablecoin you want to invest in. You can either buy it directly on the Nexo platform or transfer it from a wallet or exchange. 
  5. After 24 hours of making a deposit, you should notice the interests accumulating. The interest automatically gets added to your savings wallet, enabling you to earn compound interest on it by default.
  6. To check the total interest you earned on your investments, go to the "Accounts" section and select "Total Earned" for detailed information about all interest payouts. 

A Step-By-Step Guide to Earning Interest in Stablecoins Using CeFi

Unlike CeFi lending, there is no central authority involved in DeFi lending for handling the transactions. Instead, smart contracts are utilized in DeFi to provide investors with autonomous lending pools. The independence from a central authority and smart contracts to hold assets in a non-custodial manner indicate that your investments are under your control.

This article will take a deep dive into the DeFi lending of Compound (COMP) to understand how you can earn interest in DeFi lending. As one of the longest-serving and largest crypto-lending platforms, Compound offers users competitive interest rates even though it is not as high as Nexo. TUSD: 7.35%, USDT: 3.39%, USDC: 4.7% and DAI: 3.74%.

Read our detailed review, Compound Review: One of the Most Ambitious Crypto Projects Yet.

Follow these following steps to start earning interest on Compound:

  1. Visit the official website of Compound (compound.finance) and open your Web 3.0 wallet (preferably Metamask).
  2. Click on the top right corner for a drop down menu and select the "App" button.
  3. Next, select the "Connect Wallet" option that you will find at the top right of your screen and choose the wallet you want to connect.
  4. Select the stablecoin of your choice and click on the "Enable" button.
  5. Enter the amount of stablecoins you want to lend and finish the process by signing the lending transaction using your Web 3.0 wallet.

Although earning interest on stablecoins mitigates the risks posed by the volatile crypto market, using DeFi and CeFi markets still carries certain risks. For example, if a user fails in completing his KYC or AML procedures, CeFi lenders can deny him access to his funds. DeFi platforms are also prone to hacks. In our article, Crypto Lending Safety, we have thoroughly covered all the safety issues related to CeFi and DeFi platforms. If you are looking to earn interest by lending your digital assets, do your research and weigh the potential earnings to its risk.

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