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Interest-yielding stablecoins drive crypto competition with fiat

Interest-yielding stablecoins and lending partnerships bring new possibilities to crypto.

Stablecoins could be getting one step closer to rivalling fiat currency. The launch of the Universal Euro stablecoin, and a new partnership between TrueUSD (TUSD) and lending platform Cred, will allow holders to earn interest.

Since Tether burst onto the scene in 2014, stablecoins have sprung up in all corners of the crypto ecosystem — with different revenue models, different positions on the spectrum of decentralization, and different mechanisms for maintaining stability. On Binance alone, traders can choose from five different dollar-pegged stablecoins — a small selection of those available on other exchanges, and the dozens more still in development.

By linking legacy finance with blockchain-based assets, these coins aim to combine the best aspects of crypto and fiat, and though regulatory difficulties have led some to fall by the wayside — like the algorithmic stablecoin Basis — many more have entered the market.

Of the three different stablecoin models — collateralised, algorithmically stabilised, and hybrid — collateralised fiat-backed stablecoins are taking the lead, and Tether (USDT), TrueUSD, and Circle’s (USDC) all frequently feature in the top 50 assets by traded volume.

With the added possibility of interest, these coins could now have even more of an edge in the emerging stablecoin market.

Interest-bearing stablecoins

The revenue model of fiat-backed stablecoins relies on the money of platforms using the coin, which is deposited into a bank account where it can accrue interest. Tether, for instance, is thought (by some) to hold $1.8 billion of customer deposits with its banking partner Deltec, which at an interest rate of one percent per annum would generate $1.8 million in revenue each year.

By forming partnerships with lenders, fiat-backed stablecoin issuers can earn additional income loaning out the funds in a similar manner to a bank. The return from these loans can then be shared with holders who are willing to store their stablecoins with the trusted partner.

TrustToken and Universal Protocol Platform are among the first stablecoin companies to implement this model. Both firms have formed a partnership with lending platform Cred that will enable their respective tokens — TrueUSD (TUSD), the newly launched TrueGBP (TGBP), and the Universal Dollar (UPUSD) and Universal Euro (UPEUR) — to earn interest when held in Cred wallets by those in eligible jurisdictions. The content of these wallets is protected by Cred’s custodial partner BitGo, which offers insurance of up to $100m through its partner Lloyds Bank, and at eight percent, Cred also offers a competitive annual rate of return — similar to peer-to-peer fiat lending platforms like Lending Club (US) and Funding Circle (UK).

But CredEarn is not focusing its efforts on Western markets, and instead on "unbanked" countries like Venezuela that have been crippled by inflation, and are likely to jump at the chance to achieve what would be considered average returns elsewhere: "Uphold and Cred service hundreds of thousands of users in developing and high-inflation countries. Many Venezuelans use Cred’s service, looking for the same returns and stability as the rest of the world. The difference is they are in a country with a 10 million percent inflation rate." said Cred president Dan Schatt at the launch.

Elsewhere, TrueUSD have struck up another partnership with crypto lender Nexo, which is enticing stablecoin holders to store funds with them in return for 6.5 percent interest per annum on Dai (DAI), Paxos Standard Token (PAX), USD Coin (USDC), Tether (USDT), and TrueUSD (TrueUSD).

Just like CredEarn, funds stored with Nexo are protected by custodial insurance, but unlike CredEarn — which requires funds to be locked up for a six month minimum — Nexo enables its clients to withdraw the cryptocurrency at any time, with no fees — turning the Nexo wallet into a what is effectively a savings account, with interest that exceeds most accounts currently available on the legacy market.

Another example is Origin Protocol which offers a decentralized alternative for a yield-bearing stablecoin: OUSD. Instead of using a 3rd party to earn yield on stablecoins, Origin Protocol optimizes yield between blue-chip DeFi protocols to earn users interest. Users can deposit DAI, USDC, or USDT to mint OUSD, and these stablecoins are then used to earn interest on Aave, Curve, Convex, and Compound.

Unlike other stablecoin lenders, Origin Protocol let’s users earn interest directly from their crypto wallets with automatic rebasing. Moreover, OUSD yield-generation strategies only involve stablecoins, so user funds are not subject to the market volatility of traditional cryptocurrencies.

Conclusion

If these models of stablecoin lending and storage takes off, it could not only start a competitive price war where major stablecoins compete for customers by raising interest rates as banks do, but also put crypto-lending on the map as an alternative possibility for mainstream investors.

And, with an additional lending-based model of revenue, we could see more companies creating fiat-backed stablecoins for the currencies of countries like Switzerland and Japan that have a negative central bank interest rate and wouldn’t have previously have been lucrative.

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