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Is Stablecoin Lending Safe?

Even though stablecoins are less volatile cryptocurrencies, that doesn't mean stablecoin lending is devoid of safety concerns.

One of the most popular ways to make money from digital assets without selling them is to lend them out. The crypto lender simply gives his crypto assets to a lending platform and authorizes it to give them out to those seeking crypto loans. The lender is then paid interest, which can be different depending on the platform.

However, because of the volatility of cryptocurrencies, some only lend out stablecoins. That way, they can predict precisely how much profit they will make from their digital asset since stablecoins are, as their name implies, stable.

But even though stablecoins are less volatile than other cryptocurrencies, that doesn't mean stablecoin lending is devoid of safety concerns. This article will address those concerns and discuss how to find a way around them. We will also give you some safe places to borrow stablecoins and safety tips about the matter.

What are Stablecoins?

Stablecoins are cryptocurrencies that peg their value to other assets to achieve price stability. They are important in the world of cryptocurrencies because they provide a strong place to hide from the storm of volatility.

Stablecoins are classified based on the type of asset to which they peg their value. The most common examples are fiat-backed stablecoins like USDC, BUSD, USDT, etc. There are also stablecoins pegged to other cryptocurrencies (like DAI, which is pegged to Ethereum), stablecoins backed by precious metals (like PAXG, backed by gold), and algorithmic stablecoins (like the infamous Terra USD).

Risks Of Stablecoin Lending

Now that we know what stablecoins are, let's consider some of the risks associated with stablecoin lending.

Counterparty Risk

This risk involves the individuals or crypto platforms you're lending to. If they fail to repay the loan, you may find yourself at a loss.

This risk is even more real when you think about how little regulation there is in the crypto lending field. Therefore, the borrowing party will likely not go through credit checks. In some cases, they may not even go through KYC verification.

So, it's easier for borrowers to elope with your stablecoins, especially if the value of their collateral is now worth much less than the stablecoins they borrowed.

To be honest, most lending platforms have mechanisms to ensure that things like that do not happen. Still, we are talking about cryptocurrencies here, aren't we? Stranger things have happened.

Lending Platform Risk

A stablecoin lending platform takes most of the stress away by connecting crypto lenders with borrowers. But, you must sacrifice custody of your stablecoins to benefit from the platform. Now, that could go wrong in two ways.

First, the platform itself may be fraudulent. It may only be interested in gathering funds from many crypto lenders and disappearing into thin air. If, unfortunately, you fall into the hands of such a platform, you may as well kiss your coins goodbye.

On the other hand, the platform itself may be legit but may go bankrupt. For example, people thought that the Celsius Network platform was one of the best places to lend stablecoins. However, it has been hit hard by recent market conditions and has filed for bankruptcy. So, even legit platforms can fail.

Risk Of The Stablecoin Itself

Stablecoins are meant to be stable. But with what happened to Terra's UST and what seems to be happening to USDD, that narrative may not always hold. As it stands, this seems to happen only with algorithmic stablecoins. However, the menace could yet spread to other stablecoins.

We are not saying stablecoins are lost causes. After all, recent crypto events have shown that stablecoin giants like USDC, BUSD, DAI, etc., are resilient in the face of danger. Still, stablecoins are only slightly less risky when compared with other cryptocurrencies. When compared with established currencies in a traditional bank account, they seem to fall behind.

Lack Of Regulation And Insurance

Not all stablecoin lending platforms are regulated by the appropriate authorities. This is evident from the recent $100 Million fine slapped on BlockFi (now insolvent) by the Securities and Exchange Commission (SEC) of the United States. Many more lending platforms are in breach of regulatory practices, which raises worthy concerns.

Insurance is also an issue with many crypto lending platforms. Only a few are insured, and this insurance is usually provided by private bodies. This is different from traditional banks, which usually have cash reserves insured by government agencies like the FDIC (Federal Deposit Insurance Corporation).

Benefits Of Stablecoin Lending

Stablecoin lending is risky, but that doesn't mean it isn't worth it. After all, there is no endeavor in the crypto industry, and in life itself, that doesn't come with risks. But, apart from the risks, it also has some unique benefits, which we will now consider.

Less Volatility

Compared with other crypto lending arms, stablecoin lending is the least volatile. So, when you lend stablecoins, it's easier to figure out how much you're spending and how much you're making.

For example, if you lend $10,000 in the form of BUSD to a platform giving out an 8% interest rate per annum, you know you will get $800 in profit after a year. However, if you lend out that same amount in the form of ETH, what you will get after a year may be either more or less than what you started with, depending on how the market goes.

Higher Interest Rates

Stablecoins are always in high demand because they are great ways for crypto exchanges and lending platforms to get cash quickly. Therefore, most crypto lending platforms will pay you more if you lend them your stablecoins than if you lend them other digital assets. For example, you can earn up to 12% APY if you lend stablecoins on Nexo.

High Demand

As mentioned earlier, there is a massive market for stablecoins. Therefore, you'll almost always find someone to lend your stablecoins to.

Safety Tips For Stablecoin Lending

Now that we have considered the risks and benefits of stablecoin lending, you may decide that you want to try it out. If that is the case, here are some tips you should keep in mind:

Use Trustworthy Platforms

The importance of this cannot be overemphasized. You need to choose a stablecoin lending platform that is legit and has solid footing. In most cases, you will find a good pick within centralized finance. Consider some of the following options:

Nexo

Nexo is regulated in most US states and four other countries. It is one of the most legit and secure crypto lending platforms, with an insurance fund worth $775 million. The insurance package is secured by three crypto-custodial giants: Bitgo, Ledger, and Bakkt.

CoinLoan

CoinLoan is also licensed in the United States of America as well as in the European Union. On top of that, it has a $250 million insurance fund secured by Bitgo and Lloyd's. It also stores its assets in cold wallets, safe from penetration by dubious hackers.

YouHodler

YouHodler mostly lends assets to institutions, so it is more likely that the institutions will pay back the money when it is due. Also, the platform stores part of their assets in fiat at reputable bank accounts, while the rest is stored as crypto funds locked in cold vaults. Therefore, it is one of the most secure places to lend your stablecoins.

Go For Flexible Over Fixed

If you choose a flexible lending program, you have more control over your stablecoins. That way, you can easily withdraw your funds at any time, together with interest. Even though this option may lower your earnings, you won't be locked out of your money if your stablecoins depeg and you need to exchange them quickly.

Diversify

You don't have to lend only one stablecoin. You can divide your stablecoin investments among various options so that you're not at a complete loss if one of them goes wild. It's best to go for stablecoins with large market caps, as they usually have a solid backing.

Final Thoughts

Stablecoin lending is one of the easiest ways to earn income with crypto assets. It is also one of the safest alternatives to active crypto trading. But it still has risks. We hope this article has opened your eyes to the dangers that accompany this crypto section and how to get around the

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