What is a Stablecoin?
A stablecoin is a cryptocurrency whose value is pegged to an external asset. The pegged asset may be in the form of a regulated entity such as the US Dollar, or even to the price of a barrel of crude oil. For instance, an investor who bought a stablecoin pegged to the US Dollar at 1:1 ratio would own a stablecoin worth $1 US Dollar, and he is able to exchange the stablecoin at the current value of the US Dollar at any time.
Stablecoins are a variation of alt coins; when pegged to a national currency, they are the closest asset class to fiat as they may be used in financial transactions in the Crypto. Compared to the much more stable prices of assets such as fiat and gold, the unpredictable nature of cryptocurrency prices often rouses a sense of uncertainty amongst investors. Stablecoins offer a form of stability for investors in DeFi crypto space, allowing investors to perform crypto lending and earn passive income in the process.
What are Stablecoins used for?
In fintech, stablecoins are used to facilitate payments through global remittances, as well as a stable currency hedge against hyper-inflation. Being on the blockchain allows for high speed of transaction, transparency and its ability to be transferred across borders digitally.1. Global Remittances
With an online network, both retailers and financial institutions can enjoy the privilege of remitting money across the world. Stablecoins are a medium of exchange and a mode of storage of value as price stability is fiat-pegged. A blockchain transaction removes the need for a third party to verify the transfer, hence remittance payments for invoices are not just fast, but transparent too. Both businesses and financial institutes enjoy the ease of a seamless transaction when payments are facilitated through stablecoins.2. Hedge against Hyper-Inflation
Retail investors use stablecoins to protect their finances against inflation, especially in countries with huge local currency volatilities. In inflationary economies such as Argentina and Venezuela, a savings account has become a meme due to its uncertainty to hold its value; In 2020, Venezuela’s’ national currency has seen a bizarre 2,358.5% of inflation. Stablecoins prove useful in these countries as they provide retail investors a safe haven of stability. In Argentina, citizens have turned to DAI, a stablecoin pegged to the US Dollar, to acquire it as an indirect form of dollarization. In Venezuela, the USDC stablecoin is accepted for payments as it is more stable than its native bolivar. Stablecoins serve as an asset class which protects against market swings.
Are Stablecoins A Good Investment?
One might wonder – why invest in stablecoins, when you can invest in the asset it is pegged to instead? When investing in stablecoins, investors are not looking to derive gains from the increase in valuation of the pegged asset, but rather to leverage on the advantages of owning a price-stable, less volatile form of cryptocurrency. Furthermore, it is easy for investors to earn passive income from crypto lending or staking using stablecoins. Crypto lending or staking are ways investors can participate in DeFi crypto liquidity pools to grow their crypto assets as they offer consistent yields in the form of interest rates or token drops.
2 ways to earn from stablecoins: Crypto Staking
Some blockchain networks run on the proof of stake methodology, where the blockchain assigns the miner or node the right to validate a transaction based on the amount of crypto the node has. The greater the number of crypto, the more likely a miner or node is selected. After validation, miners are rewarded with a token for securing the network. For investors, crypto staking meant pledging money to a mining pool to help secure the blockchain network. By pledging money, they help to increase the chances of the node being selected to validate transactions. In return, investors are rewarded with tokens based on the amount they have committed.
For instance, P2P exchanges such as UniSwap allows anyone to swap ERC20 Tokens on the Ethereum blockchain. However, decentralized exchanges often require large amounts of liquidity to facilitate more efficient trades. By becoming a liquidity provider, investors are rewarded with a token each time new ETH/ERC20 tokens are contributed. These tokens have a market value as they may be traded on crypto exchanges. Larger mining pools generate more consistent rewards, giving an incentive to investors to stake crypto with their platforms to earn passive income.
2 ways to earn from stablecoins: Crypto Lending
With stablecoins, investors loan crypto to liquidity pools, and earn interests based on the rate offered by the company. These companies utilize the liquidity pools to offer a platform which enables various kinds of specialized services, bypassing centralized intermediaries. A straightforward process, investors without prior knowledge to crypto investing can earn passive income almost immediately upon participation.
There are several DeFi protocols which are used by traders to take advantage of market swings. In essence, traders collaterize or lend their crypto (BTC, ETH etc.) to borrow stablecoins. In this manner, traders are able to leverage their digital assets to gain more liquidity without selling. This is deemed as a riskier form of investment as their digital assets may be liquidated under extreme market swings, which is common in cryptocurrency. Earlier in 2021, the market volatility caused by China’s crackdown on crypto mining forced BTC traders to liquidate $12 Billion worth of leveraged positions.
In general, interest rates of stablecoins ranges from 2% up to 25% on most exchanges. Taking the example from lending DAI, a popular stablecoin, it has generated an average of 6.71% interest rate based on a 30-day average.
Why are stablecoins interest rates so high?
While it sounds too good to be true, there are two reasons justifying the high interest rates of stablecoins:1. Networks require the support of a well-funded liquidity pool to back their specialized services.
In the DeFi crypto space, there is a lack of fiat currency assets to support the network, and high interest rates incentivize investors to contribute their stablecoins into liquidity pools. It is a win-win situation for both companies and investors as a well-funded liquidity pool allows for the execution of specialized services, while providing passive income to investors when they lend crypto.2. There are no 3rd party intermediaries involved in the process.
In traditional financial transactions, banks are usually involved to finance or facilitate remittances. With the involvement of blockchain, transactions are recorded on the public ledger and therefore, no longer require a 3rd party to validate transactions. This reduces the need for additional transaction fees, keeping stablecoins interest rates high. , while providing passive income to investors when they lend crypto.
3 Best Stablecoins to invest
New use cases for stablecoins continue to emerge every day, as stablecoins play an essential role in the ecosystem of DeFi crypto. Each stablecoin has its own competitive edge, and here are 3 best stablecoins that fintech companies such as ShuttleOne accepts:1. Tether (USDT)
Tether is a fiat-pegged stablecoin, and its value is pegged against the US Dollar at a 1:1 ratio. It is backed by several assets including gold and traditional currencies. Previously launched as RealCoin in July 2014, it was rebranded as Tether in 2018. Its company Tether Ltd is responsible for maintaining the reserve amounts of fiat currency in order to back the stablecoin. It can be transacted on several coin exchanges such as CoinBase, Binance and Bitfinex.
Tether is one of the most well-known stablecoins as it was first developed for the bitcoin blockchain, and it has since been live on seven other networks including Ethereum. While Tether has its fair share of controversies including its alleged hack incident in 2017, it remains as one of the major sources of liquidity in crypto, with its daily volume more than its market cap. It was reported back in February 2021 that 57% of all Bitcoin (BTC) trades was executed using Tether. Furthermore, Tether has its inherent value in price stability, as well as acceptability amongst liquidity pools such as ShuttleOne.2. USD Coin (USDC)
USD Coin is a fiat-pegged stablecoin, and its value is pegged against the US Dollar at 1:1 ratio. Each USDC is fully backed by the US Dollar via companies Circle and Coinbase, and they are held in a reserve which is regularly attested. It runs on 4 blockchains including Ethereum, and it is widely transacted across several major exchanges.
USDC has instilled confidence among financial institutions to accept its legitimacy as a stablecoin. Its wide acceptance was fueled when Visa announced the use of USDC to settle transactions on its payment network. In DeFi crypto, it is also utilized across many Dapps and lending platforms, where investors may lend USDC to earn passive income through interest. A highly rated stablecoin with monthly attestations, USDC is definitely a favorite pick among both retail and institutional investors.3. DAI
DAI is a fiat-pegged stablecoin, and its value is pegged against the US Dollar at 1:1 ratio. Unlike Tether and USDC, which are backed by tangible assets, each DAI is backed by the Ethereum cryptocurrency locked in publicly viewable contracts stored on the blockchain. DAI is maintained and regulated by MakerDAO foundation, which uses the Maker (MKR) system to ensure price stability for DAI via a process of collaterized assets.
DAI’s innovative approach to maintaining its value has earned widespread adoption. It is the largest decentralized stablecoin governed by smart contracts, hence it cannot be seized or regulated by governments or financial institutions. Also, it is the most private stablecoin as it does not require account creation for transaction. DAI is highly valued by its investors due to its transparency and privacy. The MKR community which holds MKR, votes for the development of the ecosystem and has been working aggressively to attract more assets into the MKR ecosystem, including real-world assets. ShuttleOne has been given the green light by the MKR community to bring real-world tokenized assets to connect with the protocol.
Should you Invest in Stablecoins?
Stablecoins are worth including into investor’s portfolio, as they act as a shield against price volatility and lowers the portfolio’s risk profile. By holding assets in stablecoins, investors enjoy fast speed of transaction across nations, all on the public ledger. Furthermore, 3rd party financial institutions such as banks are no longer involved since there is no longer a need to transact via fiat currency.
Of course, the tradeoff in having stability would mean that a portfolio’s growth via capital gains become limited as well. As stablecoins are pegged to values of tangible assets, capital gains are only realized when the assets experience an increase in value. Investors looking to enjoy potential capital gains via stablecoins may have to remain vested for a long period of time. However, the beauty of stablecoin lies in its ability to generate interests via participation in liquidity pools. With stablecoins, investors can lend, stake, and earn interest by participating in DeFi crypto liquidity pools.
Best Practices with Stablecoins Investing
For investors looking to invest with a long-term outlook, one key strategy would be to dollar cost average by consistently buying into stablecoins. With periodic investments, it improves portfolio diversification as it takes advantage of market downturns with less capital, and offsets negative impacts of holdings caused by short term market swings. To further optimize their portfolio, investors then contribute to liquidity pools to earn passive income from crypto lending.
This strategy does not require deep technical knowledge, and here is the step-by-step guide to help you start earning from stablecoins without missing market opportunities:
- Set up a cryptocurrency wallet.
Commit to invest 100USD every month to
cryptocurrencies like Bitcoin or Ethereum for 1 year –
this investing periodically strategy is called dollar
cost averaging (DCA).
Sell part of the crypto by trading the underlying
cryptocurrency with stablecoins like USDC, USDT, DAI
to secure profit when the crypto has reached your
desired target price.
Put the profit in stablecoins to work and lend them to
DeFi crypto projects and earn interests. By putting
them into DeFi, you create a passive income stream
from your cryptocurrencies, earning more from the
Tip: There are many DeFi crypto projects that can generate good interests for your stablecoins. Check out our guide on “3 best crypto projects to earn passive income”.
- As crypto market moves, detect buying opportunities where your desired crypto reaches your target buying price. Withdraw the stablecoins accumulate from DeFi and trade for the cryptocurrencies that you wish to buy.
Start earning stablecoin with ShuttleOne
Shuttle One stablecoin lending solution is the one of the simplest earning solutions where you can start earning passive income from cryptocurrencies.
By lending DAI, USDT or USDC to ShuttleOne network, you are lending stablecoins to businesses and institutions and receive an earning from these businesses loans.
How to start earning passive income with ShuttleOne: Connect your crypto wallet to the ShuttleOne network and deposit the stablecoins. You will see your earning in a form of interest rate and additional SZO token. SZO token is ShuttleOne’s native token used as an insurance and additional reward when lending stablecoins with ShuttleOne.