Best Stable Coins and Crypto Interest Rates
In many ways, the speculative nature of cryptocurrencies has made them unappealing for regular commerce. But the crypto world is one of innovation, and stable coins arrived to solve this problem.
Since the beginning one of the major obstacles preventing cryptocurrencies from achieving mass adoption has been volatility. In general, businesses and regular people don’t want to hold an asset that can jump in price, up or down, 25% in a single week or a day.
Stablecoins combine the best of both worlds, price stability and using decentralized ledgers to transfer value.
In this article, we’ll explain what stable coins are, the difference between all the types, and the best ways to profit using them. It will be an exciting journey.
DISCLAIMER: The author is not a CPA or in any way a legally licensed financial advisor. This article provides analysis of technologies, not financial advice.
What Are Stable Coins?
A stable coin is precisely a type of crypto token that has a predictable exchange rate over time. To achieve this, it generally is pegged to the value of one of the major national currencies such as the US dollar, but also the euro, yen, and others. By mirroring the value of these currencies, stable coins can achieve a predictable value over time.
Interestingly, none of the stable coins in the market are actually crypto coins, instead all of them are tokens. In general, a crypto coin is the native asset of a network such as BTC, ETH, LTC, etc. Tokens are crypto assets that use an existing network like BAT, LINK, AAVE, and others. A more detailed description of the difference can be found in the link here.
The first stable coin in the market is Tether and was launched in 2014. It came out first for the Omni Layer Protocol and was pegged to the US dollar. But since then, it has expanded to Ethereum, Tron, Binance Smart Chain, and other networks. Additionally, Tether has created stable coins for euros, yen, and other global currencies.
There are different ways stable coins achieve their predictable exchange rate. We’ll discuss that later, but first.
Why Do Stable Coins Matter?
As we have explained before, the main problem stable coins solve is the high volatility experienced by traditional crypto currencies and tokens. As such, the highest adoption of these tokens is by crypto traders that use them to exit their positions.
For example, in order to secure profit quickly, a trader can exchange his/her volatile crypto token for a stable coin since it won’t lose value. This is especially the case when trading on a decentralized exchange that has no fast way to convert crypto assets into regular fiat money.
By allowing traders the ability to quickly exit their position, stable coins are already very useful. Yet, this is only one of the many use cases they have. In fact, they have the potential to transform the economy of millions of people in developing nations.
Crypto In Developing Countries
The monetary system of developing nations is very volatile. In these countries, people tend to save money in US dollars or euros to protect their purchasing power against inflation. Not only that, but purchases of houses, business loans, and even car loans are generally priced in US dollars.
Countries experiencing high levels of inflation often restrict access to foreign currency. This is the case in Venezuela, Argentina, and Zimbabwe, the countries with the highest levels of inflation in the world at the moment. Their citizens see their savings disappear and have little to no access to money markets for protection.
In these countries, stable coins are having a massive impact. As these tokens are traded on blockchains that cannot be blocked by governments, people are buying stable coins to protect themselves from inflation.
For example, Venezuela is the third largest user of cryptocurrencies in the world. Argentinians have bought more than 20 millions in stable coins in just 2021. The number will only rise as there doesn’t seem to be an end to inflation in both nations.
The examples above are still small if compared to the global forex market, but it’s a start. As blockchain keeps growing, more and more people from developing nations with weak currencies will turn to stable coins for protection and to save money.
Here is a List of The Top Stable Coins
One important detail to remember when choosing to use a stable coin is its total market capitalization (market cap). The market cap is a measure of the total value of the stable coin, in this case, shown in US dollars for convenience.
The higher the market cap of a stable coin, the easier it is to use, and the wider acceptance it has. There are hundreds of stable coins in the market, some are very niche or are used in new blockchains. So, it is important to be aware how big and accepted a stable coin is, especially for people new to the crypto economy.
The 10 biggest stable coins by market cap are:
|Coin name||Ticker||Market cap||Blockchain|
|USD Tether||USDT||$66.79B||Omni, Ethereum, Tron, BSC|
|USD Coin||USDC||$27.75B||Ethereum, BSC, Polygon|
|Dai||DAI||$6.43B||Ethereum, Polygon, xDAI|
As we can see, most stable coins are on Ethereum. It is by far the most popular blockchain for decentralized applications, so the economic activity is there. Of course, many of the stable coins mentioned are cross-chain and work on several networks.
Fiat-Backed Stablecoins vs Algorithmic Stable Coins
Now there is an important distinction in the world of stable coins, those that are fiat-backed and others that are algorithmically managed. At first it was not a very important difference, but as the market for stable coins has grown, regulators are starting to notice and are trying to intervene in it. Let’s look at the difference.
Fiat Backed Stable Coins
The first type of stable coin created and launched was Tether and used the fiat-backed model. The model for these stable coins is very simple, each token in circulation is (theoretically) backed by a real US dollar kept secured by a financial third party.
To mint these tokens, a user would send US dollars to the account of the third party and receive in return an equivalent amount in the token. Of course, regular people don’t have access to the service, normally large institutions like exchanges mint stable coins to support trading on their markets. Regular consumers then simply trade for the stable coin by depositing Fiat or using other crypto assets.
Now, this would mean that for every token of USDT, USDC, etc. there is a US dollar in some bank account. But that has not been the case, the audits of some of these coins have shown their reserves don’t actually support the circulating supply.
For these reasons, regulators want to intervene in this type of stable coins and make them fully collateralized assets.
**Note, always do your research and check into the transparency and reputability of these companies.***
What is USDC?
USD Coin may be the second largest cryptocurrency by market cap but it is the most popular. It started as an initiative from the crypto exchange Coinbase, but now it has become a company of its own. The name of this new entity is Circle, and it is in charge of minting USDC and making sure there are enough reserves to back the supply.
Also, USDC is one of the most active stable coins. The token started on Ethereum, but it has expanded to five other blockchains, making it one of the most used stable coins out there. For these reasons, and the fact that it is a Coinbase product, USDC is very popular among crypto traders.
What is USDT?
Tether as we have said is the biggest stable coin by market cap. It was also the first, launched back in 2014 on Omni Layer, even before the launch of Ethereum. For these reasons, USDT is the most used stable coin out there. It is accepted virtually anywhere crypto is used and it is often used for payments, and saving, so there is adoption beyond trading.
Yet, Tether is partially responsible for the regulatory scrutiny now falling on stable coins. Audits to the Hong Kong based company that holds the US dollars backing USDT have shown the reserves do not fully back the circulating supply.
What is GUSD?
Gemini dollar (GUSD) is another stable coin backed by dollar reserves. It is the product of Gemini Exchange, which is very popular in the Northern Hemisphere, and has a market cap of $213,345,679 which is not enough to make it to the top 10 largest stable coins, but because it is tied to a popular exchange, the token has a very wide use.
GUSD is mainly a trading instrument that was created for crypto traders. It doesn’t have much market use beyond trading, but it is a good example of a popular stable coin in a very specific niche.
Algorithmic Stable Coins
A different method to create a token that has price stability is to use a basket of crypto tokens that become the backing of a stable coin. All the crypto assets in the basket are themselves subject to variation, but by combining them in a group stability can be achieved.
To ensure the stability is sustained a complex set of pricing algorithms makes sure that the ratio between all the assets is in balance. Most stable coins of this type use the US dollar as a price target. It is a target because these stable coins never are worth exactly 1 dollar. Instead, the price hovers around a narrow band of 1 dollar. This is known as a soft pegg.
What is DAI?
DAI is the first of the crypto backed stable coins. It’s the result of a project called MakerDao and has a longer history than it would initially appear. In 2014, a Danish entrepreneur Rune Christensen founded MakerDao with the objective of creating a stable asset. They looked at the first generation blockchains, but there were problems wanting to run custom code on those networks that could only handle one asset.
In 2017 DAI was launched on Ethereum as it was the best blockchain for their project. Now to generate DAI a person needs to lock as collateral one of the tokens accepted by the platform. In fact, the user needs to provide a higher collateral than what he/she is getting back from the MakerDao smart contract.
Cryptocurrencies are very volatile, so to protect the value of DAI, the protocol requires a collateral ratio 150% at a minimum. It is better to provide an even higher ratio to have a wide enough margin to prevent the liquidation on the contract. *Your contract will auto liquidate if it falls below the 150% threshold. This happened to our founder, Mark a long while back. Here’s a DIY video explaining the saga.
Right now, DAI supports 18 different tokens as a valid form of collateral these are: ETH, BAT, USDC, WBTC, TUSD, KNC, ZRX, MANA, PAX, USDT, COMP, LRC, LINK, BAL, YFI, GUSD, UNI, and RENBTC.
The above tokens were voted by the people holding MKR tokens and were chosen in a decentralized process. Any future additions must follow the same procedure.
How To Earn Interest On Crypto Currency
What is AMPL?
Another idea about algorithmic stable coins is to make them somewhat price predictable without having to use a fiat currency as a reference. If crypto and stable coins are meant to go beyond niche assets they need to grow and be recognised as valuable on their own and not just a shadow for the US dollar. One project doing just that is Ampleforth.
Ampleforth is one of the few cryptocurrencies with an elastic money supply. IN a process called “Rebasing” The AMPL token automatically adjusts its supply based on the demand for it. Of course, an issue with this model is that new tokens minted generate inflation and dilute the value of those who are holding AMPL.
Yet, AMPL has a solution. The AMPL supply is not only adjusted for new tokens minted, but for tokens held in crypto wallets by AMPL users. This means that any day the amount of AMPL in a person’s wallet can change to meet market situations. This makes denominating contracts in AMPL stable, but holding AMPL speculative. It’s a mind bending and fascinating way to rethink the way money can work in this new crypto age. Here’s a video explainer we made for the AMPL company describing their project:
Of course, if your balance shrinks that may seem unfair, but that is not the case. AMPL tokens adjust up or down in proportions to the total circulating supply, so no matter the nominal quantity in your wallet, the amount you own in proportion to the total remains the same, as balances increase and decrease proportionally across all wallets.
With this mechanism AMPL can remain an elastic cryptocurrency and not dilute the value of its holders. In a way, AMPL may be the first stable crypto asset that is not pegged to some fiat currency issued by a national government or tethered to a basket of other crypto goods.
What is Terra Luna?
Terra Luna (UST) uses a dual crypto coin system to create stability. In the UST model, there are two interlink cryptocurrencies UST and LUNA. UST is a stable coin that has the same value as 1 US dollar. LUNA is used to create and support UST, if there is a rise in demand for UST, LUNA investors can convert their LUNA into UST and profit from the difference. The opposite is true should the price fall.
This means UST is stable without having to use a fiat reserve or a basket of other cryptos. UST and LUNA are the only two things needed to create a stable pegg against the US dollar. It is a closed system that is much simpler than other models.
This has made UST a very popular cryptocurrency. Especially in South Korea, the home of LUNA’s native Terra blockchain. In South Korea, it is possible to use UST to buy movie and concert tickets, pay for services, and pay for deliveries.
UST is one of the most used cryptocurrencies for everyday expenses. It is a true test of the power of stable coins and blockchain in general.
Origin’s innovative OUSD
Another interesting innovation in the stable coin ecosystem, OUSD is a stable coin that automatically gives out yield. First, to mint OUSD a user needs to lock DAI, USDT, or USDC into the platform. An equivalent amount of OUSD is then deposited to the user’s wallet, which is exchanged with the collateral at a 1 to 1 ratio.
As soon as the user receives OUSD he starts earning a yield for just holding the token. If he wants to get back the stable coin used as collateral, the reverse can be done and the exchange remains 1 to 1. So, the yield gained in the intervening time becomes net profit. Though the platform does charge a withdrawal fee, and of course there are gas fees to consider.
Similar to AMPL, the OSUD smart contract deposits the yields generated by the protocol directly to the user’s wallet. As the value of OUSD is always 1 US dollar, the gains are profit for those who hold the token long term. Of course, the mechanism behind the passive income, plus many other exciting uses for OUSD go beyond the scope of this article. In Origin Protocol (OGN) – Defi & NFTs there is a detailed description of the project.
What is IRON?
There are several options for stable coins, but not all are successful. One such example is IRON, an algorithmic stable coin on BSC and Polygon Network that suffered a bank run. The process is very long, but at the end of the day, the token supporting the IRON pegg to the US dollar lost all its value. As a result, the exchange rate of IRON collapsed and people lost a lot of money.
So, despite how impactful stable coins can be for the market, they are still risky assets and can have failures. It is important to research the project before using it in any capacity.
Where to Earn The Best Interest on your stable coins
Of course, as with any crypto token, stable coins can be used to generate interest over time. This is usually achieved by staking the stable coins in DeFi protocols. In fact, since they do not lose their value, the risks associated with stable coin deposits are much lower than when using a volatile asset.
For these reasons, many are turning to stable coins as a way to save money, especially in countries with high inflation, and where normal banks offer low returns for regular savings accounts.
Here, we may find the path for crypto mass adoption. As people forced to accept a weak national currency finally have an open, secure, and reliable alternative that cannot be controlled or manipulated, and can even earn interest.
Custodial vs Non Custodial Crypto Interest Platforms
In the land of crypto deposits there are basically two options, custodial and non-custodial platforms. The first option is where the platform takes possession of the stable coins in the same way a centralized crypto exchange does. We wrote about the two most popular and safe options for this Celsius vs BlockFi earlier.
For custodial services, the user opens an account with the service and deposits stable coins to a wallet whose private keys are in control of the platform. SOunds scary, but it’s similar to like a start up bank (and likely not FDIC insured)
The second choice, non-custodial, uses smart contracts and web3 to allow users access to the services without relinquishing ownership of the sable coins. The first option requires giving up ownership in exchange for cheaper fees, no gas fees, speed, and fast ways to exchange crypto for fiat money.
The second option offers more security, greater access to multiple DeFi services only possible on the blockchain, and keeping ownership. But as a downside for onchain options, there is network congestion, higher fees, gas fees, and the possibility the project used is a scam.
Custodial Crypto Interest Platforms
Here we have platforms that are centralized:
One of the oldest crypto platforms for deposits, Blockfi has a reputation for security and simplicity. The project is almost a decade old, making it practically ancient in the crypto economy. In that time it has grown very rapidly, and it is one of the first platforms people new to the ecosystem tend to start with.
On average, stable coin deposits on Blockfi make 7.5% APY. The yield may be on the low end of the spectrum, but you have to remember that when using a centralized platform there are no gas fees to worry about.
Celsius Network is another giant in the lending economy. It is a well established project with a long track record of working for its users. They offer a standard 8.88% annual yield for deposits using stale coins regardless of the token.
They are a growing project, and even have their own token to reward those using the platform.
Crypto.com is another well known platform for earning interest on crypto deposits. They offer a very impressive 12% APY for deposits on stable coins, among the highest in the centralized market. They do have one of the most strict KYC processes, so it is hard to start on that platform.
Non-Custodial Interest Platforms
On the other side of the spectrum, we have non-custodial protocols. These are free to access and have really good yields. But these yields are variable, and can change week to week, or sometimes, day to day.
Compound is one of the first decentralized money markets out there. It pioneered the idea of yield farming, which rewards both borrowers and lenders with tokens on top of the APY offered by the deposit.
Now, the APY of stable coin deposits on Compound are subject to market volatility. One day they can be above the market rate, and other times below. Most people use Compound not for the yield offered on deposits, but for the rewards in COMP token.
Aave is perhaps the biggest DeFi project on the planet. Again, APY on deposits is variable, so it is not possible to say if it is higher than the market average by the time you read this article. Instead, Aave works as a bridge to DeFi in general, and people use it more to earn from yield farming, flash loans, and liquidity mining than the yield offered by the platform.
The world of stable coins is a very exciting one. They are the premier way traders use to exit their positions when trading crypto assets. More than that though, they offer a way for citizens suffering with high inflation an asset that can safely store their money.
In time, stable coins have the power to transform the global economy. They can bring about a more open economy, and an inclusive financial system that cannot be manipulated by central actors.