“Stablecoin Lending Explained”

 

The decentralized finance (DeFi) industry is ever-growing at a fast rate. Because of this, stablecoins have been successfully applied to collateralized lending. On top of that, their yields have gone on to be a very profitable opportunity for alternative debt investors.

 

Thanks to institutional traders, crypto payment processors, and miners collectively demanding more liquidity, there is a substantial amount of interest rates being paid to borrow stablecoins on crypto lending platforms. The average yield is four times that of top savings accounts and twice the rate that is being offered by fiat-oriented lending platforms.

 

What are stablecoins?

 

‘Stablecoins’ are digital assets that are designed to emulate the value of fiat currencies. They allow users to transfer value around the globe cheaply and quickly while simultaneously maintaining price stability. Their creation derives from a desire to rectify the price volatility issue that cryptocurrencies are known for.

 

Technologically speaking, as exchange mediums, cryptocurrencies are excellent. However, their notorious value fluctuations have led to them being seen as incredibly risky investments and not ideal for payments. Once a transaction settles, the worth of a coin can be significantly more or less than what it was at the time it was sent.

 

Stablecoins, however, do not have the same fluctuation problem. These assets see minor price movement and keep a close eye on the value of the underlying asset or fiat currency they mimic. As such, they are seen as safe-haven assets in volatile markets, hence the “stable” in their name.

 

High returns on stablecoin loans

 

In peer-to-peer lending and borrowing, the interest rates are influenced by the supply and demand levels, regardless of if fiat or crypto is used. A high volume of loans and a low supply from lenders means that both the return for lenders and the interest rate for borrowers will be high. However, if the volume of loans is low and there is a high supply from lenders, then both the return for lenders and the interest rate for borrowers will be low.

 

Supply and demand being applied to a peer-to-peer loan market emphasize why stablecoin lending can produce annual returns in the double digits. An immensely high amount of the lending supply derives from stablecoins. This is most likely because people purchase stablecoins so that they can lend them on crypto lending platforms. With that said, stablecoins still make up less of the supply than the top cryptocurrencies on the market.

 

Furthermore, there is a huge stablecoin loan demand. The driving force behind this demand is mostly by large institutional traders and crypto payment processors. Institutional traders (ex. market makers and hedge funds) use cryptocurrency loans for speculation purposes. They use the capital as a way to either boost their leverage on certain cryptocurrencies or arbitrage trade between exchanges. For crypto payment processors taking in large amounts of cryptocurrencies from businesses via their processor, crypto loans are essential to reimbursing businesses as soon as possible.