Can stablecoins generate yields?
Stablecoins can generate yields catalysed by interest rates.
A stablecoin interest rate is the amount holders can earn by depositing their money onto a platform. For example, a platform may advertise 3% yearly interest rates for all GBPT deposits. This would mean that if a user were to deposit £10,000, they would have received an additional £300 by the end of year.
A common colloquial saying in the crypto industry is that ‘if you do not know how the yield is generated, then you are the yield’ – so what are the common ways these payments are afforded?
There are a number of centralised and decentralised platforms available for stablecoin holders to generate a yield. To do this, holders deposit their funds onto the platform, which then lends out these coins to other investors for a fee. This cycle is maintained as the interest rate for borrowers is consistently higher than that of the lenders.
A real-world example:
You deposit money into your bank, your bank lends out your money for various reasons, and you receive a percentage from earning interest. Stablecoins, when lent out, operate in the same way. The common difference between fiat currency and stablecoins is that, more often, stablecoins have a higher yield rate. You may see rates from 5%-14% on stablecoins, compared to <3% on fiat banks.
Why are rates so much higher?
- One of the main reasons is risk tolerance. Due to the increased volatility found within crypto markets, interest-offering platforms face the need to incentivize their usage to offset this inherent risk, and higher rates often do the trick.
- The other reason is demand. Due to increased fluidity in handling compared with fiat, stablecoins are easier to borrow, use and pay back, meaning higher demand relative to supply.
The democratised level of access to stablecoins is also attractive to holders as those who use them to seek out yield generation opportunities can easily complete this process. Compare this to the steps, paperwork and assets needed to undertake a loan or a financial action of a similar nature, and you can understand why the appetite for stablecoins as a means of transacting is increasing with time.
It is often the case that people hold stablecoins as part of their portfolio for the increased action of preserving their capital as much as possible and retaining the maximum value within it. This is often associated with being a ‘hedge against inflation’ and also works to help keep the capital in the most stable position during volatile market downturns and conditions.
Those who choose to go the step further and lend these coins will often enjoy higher yields than if they were to deposit fiat currencies in traditional banks. This is due to the aforementioned inherently higher risk tolerance and the increased emphasis placed on self-sovereignty and being truly responsible for where you place your capital. Stablecoins can generate yields, and these yields are catalysed by interest rates.
You can find out more about poundtoken’s own reserves for the GBPT stablecoin here. For more information, visit our complete guide to stablecoins.