How to Stake Stablecoins [2022]
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How to Stake Stablecoins [2022]

2 months ago

This week, CoinMarketCap Alexandria explains ways to stake stablecoins on different platforms and avoid potential risks.

How to Stake Stablecoins [2022]

Table of Contents

With the world economy taking a turn for the worse in recent months, many cryptocurrency holders are beginning to take a risk-averse approach to their investments — favoring secure, low-risk returns over wild speculation.

One of the simplest ways to accomplish this is by staking stablecoins to earn a yield. This helps to minimize volatility while in some cases allowing investors to earn inflation-beating interest rates without taking on undue risk.

A large number of platforms, including both decentralized and centralized options, now offer relatively attractive returns on stablecoin deposits. Unfortunately, due to the immense competition in the stablecoin staking space, there is no clear one-size fits all platform for investors. Instead, it is best to have a broader grasp of the landscape as it stands to find the platform that best fits your desired risk profile and other requirements.

Though there remains at least some risk with using any platform that promises to grow your investment, we’ve found some that have stood the test of time. That said, it is important to do your own due diligence before investing with any platform since they can vary considerably in the mechanism by which they deliver their returns. Moreover, absolute security is never guaranteed.

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Decentralized Platforms

Over the last three years, a number of decentralized yield platforms have appeared, each of which allows users to stake their digital assets to earn rewards.
Being decentralized, these platforms can generally be accessed by anybody, anywhere, and at any time, and allow users to retain full control of their private keys. This often comes at the compromise of lower returns.

Curve

As an automatic market maker (AMM) designed specifically for stablecoins, Curve is an option among traders looking to exchange one stablecoin for another with minimal fees and slippage.
Being an AMM, the platform allows users to contribute their stablecoins to one or more liquidity pools, known as "curve pools." Each of these pools currently has a 0.04% fee on each trade that draws liquidity from it. Half of this is shared among the liquidity providers while the other half is shared among veCRV holders.
Users also receive rewards in the form of CRV tokens, and sometimes additional rewards in the form of an associated project token — such as Synthetix (SNX) for the sUSD pool.

Image courtesy: Curve

The exact yield provided by each pool varies over time based on trading volume and TVL. It can range from less than 0.5% APY to well over 10%. Higher yields are generally associated with more volatile pools.

PancakeSwap

By far the most popular AMM on BNB Chain by trading volume, PancakeSwap can be considered a cornerstone of decentralized finance (DeFi) on the platform.

Like most AMMs, PancakeSwap allows users to contribute their assets to one or more liquidity pools to earn a share of the transaction fees they generate. Though the platform is primarily designed for trading volatile assets, it also supports a large number of stablecoin-specific liquidity pools. These include USDC-USDT, USDT-BUSD, DAI-BUSD and TUSD-BUSD.

Exact yields vary by pool, but currently range between 1-3% APY. This can reach as high as 10% APY during particularly bullish periods.

Image courtesy: PancakeSwap

These yields are formed of both standard trading-fee-derived rewards as well as an additional supplement in the form of CAKE tokens. PancakeSwap often changes the multiplier associated with the CAKE rewarded supplement, which can significantly increase/decrease the total yields for the associated pool.

Yearn Finance

Yearn Finance is different from the other options on this list in that it allows users to optimize the yields they receive from other platforms rather than directly providing a yield-bearing service of its own.

The platform takes advantage of the economies of scale to bundle user funds together to automatically boost their yields by minimizing transaction fees and employing both conventional and unconventional strategies that could be difficult to achieve manually.

These include a flashmint folding strategy for Compound, a Tokemak reinvest strategy and a similar reinvest strategy for Notional Finance. These are designed to be low-risk, but not risk-free.

By depositing assets to one or more Yearn Finance vaults, users give the platform permission to use their funds while executing strategies associated with the pool. These strategies can change over time, as can the yields expected from each vault.

Like most platforms, Yearn Finance supports both volatile and stable assets. Stable assets tend to provide lower yields, with approximately 0.01% to 2% APY expected during a bear market, and roughly 1-10% expected during a bull one. These fees are net of the 2% management fee and 20% performance fee applied to each vault.

Image courtesy: Yearn Finance

Compound

As an open lending protocol, Compound allows users to deposit assets to one or more liquidity pools, which are then used to fund overcollateralized loans. The interest borrowers pay is then shared between liquidity providers based on their share of the liquidity pool.

The platform supports a wide variety of digital assets, including popular stablecoins like DAI, TrueUSD (TUSD), USDC Coin (USDC) and Tether (USDT). Each of which provides a different yield depending on the amount of supply available and borrow-side demand.

Besides rewards derived from the interest paid by borrowers, most pools also receive a fraction of the Compound (COMP) token emission — providing an additional source of returns. Most of these COMP tokens are currently shared between the DAI and USDC pools.

Image courtesy: Compound

Compound makes use of a risk management layer known as the Comptroller, which can subject borrowers to forced liquidation if their collateral ratio falls below acceptable levels. This is designed to protect lenders while ensuring borrowers are only liquidated if absolutely necessary.

Uniswap

As by far the most popular AMM by trading volume on the Ethereum blockchain, Uniswap is well-known for its liquidity pools and efficient trading experience.

Since the platform allows for the creation of two-side liquidity pools formed of any two assets, it allows users to contribute liquidity for whichever assets they choose — and earn a share of trading fees as a result.

In most cases, Uniswap trading fees are set at 0.3% of the trade size. However, a handful of additional fee levels are also available — including 0.01% (typically stablecoin pools) and 1% (typically more exotic pairs). Right now, 100% of the fees are shared among liquidity providers, though a fraction may be directed to the Uniswap reserve, if enabled in the future.

Image courtesy: Uniswap

As with all AMMs, the yield you can expect to earn as a liquidity provider varies based on the pool, total liquidity available, trading volume and fee parameters. But in general, expect to earn between 1-3% APY per year by contributing to popular stablecoin liquidity pools on Uniswap.

Centralized Staking Platforms

Though decentralized platforms have gained a great deal of traction in recent years, centralized platforms remain the most popular for investors — largely due to their accessibility, better brand recognition, and oftentimes higher interest rates.

That said, they do generally require users to trust them with the custody of their funds and management of their private keys, which some can find unacceptable.

Nexo

Currently the largest crypto loans provider, Nexo, has an AUM of more than $15 billion and serves more than 4 million users worldwide. The platform is known for the high returns it provides on stablecoin deposits and the wide variety of assets it supports.

Like most lenders, the platform passes the return it receives from its lending business on to its depositors and pockets a small % for its operations.

Nexo currently has a base rate of 8% APY on popular stablecoins like USDT, USDC, DAI, and USDP, and also provides 8% interest on fiat deposits — including U.S. dollars (USD), euros (EUR), and British pound sterling (GBP).

Users have the opportunity to increase these rates further, unlocking up to 10% interest on stablecoin and fiat deposits by holding NEXO tokens. The highest reward tier (Platinum) requires users to hold at least 10% of their portfolio in NEXO tokens, such that a $100,000 portfolio would need to include at least $10,000 in NEXO.

Nexo recently introduced maximum balance limits and lowered yields for deposits above this limit. The current limits for base tier users are shown below:

Image courtesy: Nexo

Binance

When it comes to cryptocurrency service providers, Binance is as multi-faceted as they come, given the sheer range of features it provides — including an exchange platform, OTC desk, launchpad, crypto debit card and earn dashboard.

Binance's Earn platform features a wide variety of savings and staking products, which allow users to earn a yield on both volatile and stable assets. Due to the large number of assets it supports and its competitive interest rates, it is among the most popular choices for those looking for savings products.

For stablecoins, Binance offers flexible term and fixed-term investment vehicles, giving users either the freedom to withdraw their assets whenever they want or commit to a fixed-term for a higher APY. It also enforces a tier-based yield model, whereby deposits above a specific threshold receive lower returns.

The amount you can expect to earn varies based on the coin, the term and the size of your portfolio, but in general, between 1-10% APY is standard. These figures fluctuate based on supply, demand and market conditions.

Image courtesy: Binance

Coinbase

Besides its popular cryptocurrency exchange platform, Coinbase also offers a non-custodial wallet, a crypto debit card, derivatives trading platfrom and a brokerage solution.

Coinbase is unusual in that it doesn't provide an independent asset staking dashboard, but instead allows users to earn rewards by simply topping up their account with supported digital assets. That said, users may need to opt-in to this feature to begin earning rewards on their deposits.

Image courtesy: Coinbase

Right now, the platform primarily offers staking rewards on volatile assets, like Ethereum (ETH), Cosmos (ATOM) and Tezos (XTZ), but also supports stablecoins, like USD Coin (USDC) and DAI.

The yield provided varies over time based on a range of factors but currently sits at around 0.15% APY for DAI and USDC. This counts among the lowest rates in the industry.

Bitfinex

One of the longest-running cryptocurrency exchange platforms, Bitfinex has close ties with Tether — currently by far the most popular USD stablecoin in operation — since Tether Limited is owned by Bitfinex’s parent company, iFinex.

Since it launched in 2012, Bitfinex has seen its exchange offering grow in scope and usage, and it now offers a margin trading platform, OTC desk, lending service, securities exchange and more.

Like many popular exchanges, Bitfinex allows users to earn a relatively safe return on their deposited assets by staking (for proof-of-stake assets) or through its lending platform — where users can earn a flash return rate (FRR) on their contributed assets. The FRR is the interest rate paid by borrowers, less the 15-18% commission taken by Bitfinex.

As always, the amount you can expect to earn on your stable assets varies based on supply and demand. But right now, around 2.99% APY is available for USDT deposits. A full list of supported assets is provided below.

Image courtesy: Bitfinex

Crypto.com

Crypto.com is a platform that allows users to buy, trade and earn a yield on cryptocurrencies through a dedicated mobile app.

The platform is known for its crypto-powered debit card and cryptocurrency savings plans, which allow users to earn a fixed return on their deposited assets.

As of writing, Crypto.com's savings product supports more than 40 different cryptocurrencies and stablecoins. Yields vary from asset to asset, but right now users can earn up to 8% APY on their stablecoins.

Like most cryptocurrency savings providers, Crypto.com allows users to increase their rewards by staking the platform's native token (CRO) and by committing to a fixed-term. It also enforces a maximum quota per user, which depends on the user’s card tier (determined by the amount of CRO locked).

Right now, reward rates for USDC and USDT range from 0.4% for flexible term users with under $400 in CRO staked, to up to 8% for those with >$40,000 CRO staked and committed to a three-month term.

Image courtesy: Crypto.com

Stablecoins Staking: Risks and Considerations

As with any investment, there are risks that you will need to consider when using a platform to earn a yield on your stablecoins.

First and foremost is the risk of theft. While most platforms have several defense mechanisms in place to protect users, such as Binance’s principal protection and Nexo’s insurance policy, these aren’t necessarily comprehensive and may not protect all users under all circumstances.

Likewise, it isn’t uncommon for platforms to be hacked or their business model to simply fail — potentially leaving your funds at risk.

Because of this, it is important to do your due diligence and investigate the reputation and security system of your chosen platform, and potentially take additional protective measures on your side — such as decentralized insurance or diversification.

Be wary of offers that seem too good to be true, and never invest more than you can afford to lose.

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