DeFi provides several new options for earning interest, or yield, and much more attractive rates. Earnings depend on a number of factors and can reach upwards of 200% APY, though are most likely to be found in the 2-20% range. In rare cases you might see 1,000% APY or more. High doesn’t mean better, these sorts of rates are indicative of a scam.
While you’re likely to earn more than the paltry 0.1% interest or less offered by most major bank’s savings accounts on average, you probably won’t see astronomical returns if the crypto asset you’re using to earn yield is a stablecoin. You may, however, reduce your risk.
What is Yield and How is it Generated?
In traditional finance, money is loaned out to borrowers who pay interest. The money that the lender gets from the borrower is called interest. DeFi uses the term yield, and while it can mean the same as interest, there are additional ways to earn on your crypto assets beyond just lending them out. Yield is typically spoken about in terms of Annual Percentage Yield (APY). This is a percentage that indicates the amount of growth you should expect in a 12 month period.
There are three major ways to generate yield: staking, liquidity mining, and lending your assets to someone else.
- Staking: Assets are locked or “staked” on a network which contributes to its security. As a result, staked tokens are rewarded with more tokens at a particular rate. Ex. 12% APY
- Liquidity Mining: Assets are provided to a decentralized exchange that charges a fee for every trade. That fee is collected and distributed amongst liquidity providers. The rate is constantly fluctuating but is typically between 2% – 20% for stablecoins.
- Lending: Assets are loaned to other users that pay interest on the debt. Lending markets are used to balance the interest rates. More lenders (supply) than borrowers (demand) results in low interest rates for lenders. Less lenders than borrowers results in higher rates for lenders. Lending can be riskier than the other two methods but lenders are protected against debt default if the loans are overcollateralized.
Check out this article for more details on earning yield through staking, liquidity mining, and lending.
Popular Platforms for Earning Yield
There are hundreds of DeFi and CeFi platforms that allow users to earn yield in the ways outlined above. Some popular platforms include Uniswap, Balancer, Curve Finance, PancakeSwap, Crypto.com, Binance, BlockFi, and Kraken.
Most of the platforms mentioned offer a variety of ways to earn yield, so we suggest heading to their sites and checking them out or reading our reviews to decide what method and interest rate aligns best with your abilities and goals.
Yields are typically, but not always, higher for altcoins than for stablecoins. The highest yields are found with new altcoins, which are the ones that can reach hundreds or thousands of percent APY, or even higher. But with such high earning potential comes high risk. Typically, newer and lesser known projects looking for lots of liquidity for their coin will offer the highest APYs but they don’t last long and after a few months, the protocol often fails and their coin goes to zero.
Altcoins usually return around 4-20%, stablecoins in the 2-20% range, and bitcoin and ether near 2-5%. That said, these ranges are averages, so depending on the coin (or pair), platform, and yield method, they might be higher or lower.
Are Stablecoin Yields Really That Low?
When you compare stablecoin yields to the astronomical but short-lived yields of new tokens and protocols, they can look small and unappealing. But when you remember that most banks and traditional financial services don’t offer higher than 3% interest on cash for their most high value investors, you might reconsider.
Stablecoin yields are either a result of liquidity mining or lending. There really isn’t a way to stake stablecoins. Since these are the only two ways to generate a yield with stablecoins, much of how the APY is determined is left up to supply and demand. As we explored above, more lenders and less borrowers will result in low yields and vice versa.
A typical savings account at a bank will give you between 0-2% interest on your cash. Compare this to stablecoin yields which start at 2% with the potential to see double digit returns. From this perspective stablecoin yields are not low at all. They are very high when compared to the interest rate people get for cash at the bank.
Final Thoughts: Stablecoins Play an Important Role in Crypto
Why earn yield with stablecoins if they’re lower than other altcoins? Well, that really depends on what you want your portfolio to look like and what your risk appetite is.
Stablecoins are typically considered lower risk than altcoins but there are caveats. Algorithmic stablecoins have lost their peg before as we’ve recently seen with TerraUSD. Be sure to research the stablecoin that you are investing in before you buy them or use them to earn a yield. The two most reputable are USDT and USDC.
All in all, passively earning yield is a great way to continue to increase your holdings, especially in a bear market.