Stablecoin Use Cases: Lending & Staking

Stablecoin lending refers to the process of lending stablecoins to borrowers in exchange for interest payments.

Stablecoin lending refers to the process of lending stablecoins to borrowers in exchange for interest payments. This lending process takes place on various platforms, including centralised (CeFi) and decentralised (DeFi) exchanges. By lending their stablecoins, investors can generate passive income while minimising the potential risks associated with cryptocurrency price volatility.

In stablecoin lending, lenders provide their stablecoins to borrowers who require funds for various purposes, such as trading, leveraging, or liquidity provision. The borrowers pay interest on the loaned stablecoins, which is then distributed to the lenders as passive income.

To mitigate the risk of default, borrowers are often required to provide collateral in the form of other cryptocurrencies. If a borrower fails to repay the loan, the lender can liquidate the collateral to recover their funds.
Stablecoin staking is another way to earn passive income from your stablecoin holdings. In this process, you “stake” or lock your stablecoins in a smart contract or a blockchain platform that supports staking. By staking your stablecoins, you contribute to the platform’s liquidity and receive rewards in the form of interest or additional tokens.

Both stablecoin lending and staking offer passive income opportunities, but they have some key differences:

  • Risk and Reward: Lending generally involves higher risks due to borrowers’ potential defaults, but it also offers higher interest rates. On the other hand, staking typically has lower risks and rewards as it does not involve lending to individual borrowers.
  • Platform: Stablecoin lending takes place on both CeFi and DeFi platforms, while staking mostly occurs on blockchain networks and DeFi platforms.
  • Control Over Assets: In lending, you often need to deposit your stablecoins into a platform that temporarily takes custody of your funds, whereas, in staking, you usually retain control of your assets through smart contracts.
  • Lock-up Periods: Lending may require you to lock up your stablecoins for a fixed period, while staking often allows more flexibility in terms of lock-up durations.

Why would you choose to stake or lend your stablecoins, or why would a business do the same?

  • Passive Income: Both lending and staking offer opportunities to generate passive income from your stablecoin holdings
  • Lower Volatility: Stablecoins are less volatile compared to other cryptocurrencies, making lending and staking less risky.
  • Diversification: Lending and staking can diversify your investment portfolio and provide additional income streams.

Stablecoin lending and staking are attractive options for those seeking passive income with lower risks compared to traditional cryptocurrencies. However, it’s essential to understand the differences between lending and staking. Keep in mind that CeFi platforms offer a more user-friendly experience, while DeFi platforms provide greater control over your assets. Lending out assets and generating a return is nothing new and with the inherent stability of a stablecoin, these rates are often far higher than your local bank can give you. These make stablecoins a safe haven for wealth, providing nothing goes wrong with the stablecoin itself, as recent times have shown.

Staking and lending are synonymous with each other, intertwined in their purpose but are often the main use case people associate with stablecoins.

You can find out more about Poundtoken’s own reserves for the GBPT stablecoin hereFor more information, visit our complete guide to stablecoins.

Published On: June 13th, 2023 / Categories: / Tags: /
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