Sendwyre announced today their product Wyre v2, which allows crypto purchases with super efficient KYC (know your customer regulations). On Wyre v2, users can purchase Bitcoin, Ethereum, Dai and USDC with Apple pay or Google pay.
Earning interest on crypto is in a sweet spot between profitability and ease of use. In a previous piece, I touched on some platforms that make the process of investing very simple, but exactly how risky can lending crypto assets get?
Coinbase holding risk
Coinbase is the most regulated of the options. CENTRE (Coinbase & Circle), who manages USDC, lists reserve bank partners and compliance organizations that ensure “checks and balances.” There, you can also find attestations from an accounting services firm, updated every month.
The biggest risk of earning through Coinbase is if suddenly, everyone sold their USDC and Coinbase had backed money in contracts that they couldn’t get out of. This scenario seems very unlikely. Still, there is not much information on how the interest is calculated on Coinbase, and it would be a good idea to follow them closely incase something changes.
DyDx lending Risk
DyDx puts borrowers in over-collateralized positions ranging from 125% to 150%. Margin traders collateral only needs to be 25% because they can’t withdraw their loan. Each borrower has a liquidation point to ensure the lender will be paid back.
If a borrower’s collateral becomes worth only 115% of their loan, it is liquidated. The other 15% goes to DyDx’s insurance fund. Everything is collateralized through Ethereum, so liquidation can occur if Eth becomes less valuable. DyDx says the insurance funds are there for times of “extreme volatility.”
So far there are no reports of the insurance fund running out of money.
Dharma lending Risk
Lending on Dharma means that you’re adding value to the Compound protocol. Like DyDx, Compound requires 125% collateralization for both USDC and DAI. Instead of building an insurance fund through a liquidation buffer, 1/10th or 1/20th of interest paid by borrowers is set aside for “reserves.”
Like DyDx, nobody has reported the protocol running out of reserves.
Still, there have been times of high lending pool usage. If someone puts millions of dollars into compound, which right now contains around 150 million, they could risk not being able to pull. out. If 96% of compounds funds were being lent out, only 6 million would be able to be removed.
Multiple people being afraid that they won’t be able to pull their friends could cause a “run on the bank” scenario where everyone pulls out and causes panic. Still, the higher the usage, the more interest lenders get paid. Users have to put trust in that system of incentives.
Risk between tokens
USDC risk has been summarized in the Coinbase platform section because of how closely the two operate. DAI on the other hand has a very complex system that is tied to the volatility of Ethereum.
To make it short, DAI has a system of checks and balances that hasn’t fallen apart yet. Still, it’s peg to the dollar is choppy. Throughout history, DAI has stayed within 5% of the dollar mark. This means that earning 5% APR could either put you at a total of 0% earnings or 10% earnings depending on the price of DAI when it is purchased and sold.
If passed, on November 18th, “Multi-Collateral Dai” will allow users to use more than Eth for collateral. Theoretically, the feature will give DAI a wider safety net for when extreme volatility strikes the market.
Remember, it’s new technology
Compound offers a “bug bounty” to encourage people to report issues rather than taking advantage of them. On the Dharma “risk” faq, they warn you that you are using new technology that is prone to bugs. Not all the kinks have been worked out of these systems and developers are aware.
With that being said, all protocols have been audited to an extent by third parties. There are no records of either 0x or Compound being hacked. Keeping up with news about the protocols should help mitigate risk as it is less likely for a whole insurance fund to be taken out in one day than it is over time.
Decentralized finance (DeFi) is a field in blockchain tech that has gained traction even throughout crypto’s price bubble. A primary reason for this is how everyone can identify with the urge to lend and borrow. There are many ways to earn interest on crypto assets, but these four polished platforms are safe (not financial advice) starting points.
Earning interest with USDC on Coinbase
Not all blockchain tech is decentralized, especially not Coinbase and USDC. The massive spot exchange seemed to follow the “earn interest on your coins” wave after DeFi lending had been long established. Regardless of whether or not this method is for blockchain purists, people are going to use it off the strength of Coinbase’s brand.
Coinbase is the easiest place to start earning interest. All you need to do is buy some USDC with debit card or bank account and Voilà! You are now earning 1.25% APR. It’s the least you’ll earn from platforms on this list, but probably more than your bank’s savings account will give you.
USDC is backed 1:1 by the USD and was founded by Coinbase and Circle. The two companies created what is called the CENTRE Consortium where they look for other institutions to “help change the global financial landscape.” Coinbase is able to offer interest likely because they are earning more than 1.25% with the cash that they back USDC with.
Earn even more on Dharma
Now, Dharma is a gateway into contributing USDC and Dai to the Compound lending pool. The change means that users can deposit and withdraw their tokens at any time. Earning interest on Dharma is as simple as purchasing DAI or USDC from a spot exchange and sending it to your Dharma address.
Right now, USDC earns 4.66% APR while DAI earns 7.39%. As the lending pool becomes more used, APR increases for lenders. As more lenders contribute or less is borrowed, interest decreases.
Compound is a decentralized protocol and Dharma is a centralized organization that acts as a forum for users to connect with the protocol.
Lend to margin traders
DyDx is one of the only decentralized exchanges that lets users trade with leverage. They are able to lend money to traders by using protocols similar Compound.
Interest rates currently don’t differentiate much from Dharma. This could change throughout time since it uses the 0x protocol and along with a proprietary one. It’s also worth noting that users can earn interest by holding Ethereum, but only a measly .06% right now.
Earning interest on DyDx might be appealing to someone who actively trades DAI/ETH pairs on decentralized exchanges. The liquidity on their DAI/ETH pair is pooled with Maker’s own Oasis exchange, so it’s not horrible compared to other DEXs.
DyDx requires one extra step that Dharma doesn’t have. You will need a MetaMask wallet with an Eth balance. Eth is required for gas fees when withdrawing from the wallet which usually costs 10s of cents.
So, in order to get your DAI or USDC onto DyDx there are a couple of steps:
- Buy at least $5 of eth for gas. Send that to your MetaMask wallet.
- Buy your DAI or USDC. Send that to your MetaMask wallet.
- Deposit DAI or USDC onto the exchange with the MetaMask wallet.
Now might be the best time to lend
These platforms are in their infancy and decentralized credit ratings aren’t in existence yet. If more people learn how to lend their crypto assets, the lending pools get bigger and interest earned will decrease.
Trading crypto is dangerous if you don’t have the time to learn, or aren’t in the position to take risk. Lending is a good way to earn interest without converting back to FIAT.
To learn more about risk on said platforms and currencies, check out our information on that here.
Today, Coinbase announced that some U.S. holders of USD Coin will earn 1.25% APR per coin on their platform. Earning interest isn’t new in the crypto space. Plenty of other websites offer more interest for holding the same USDC, but it is a debut feature for Coinbase.
Why am I able to earn interest on USDC?
Circle, who created the UDSC product claims on their website that U.S. dollars backing USDC are held in reserve by regulated financial institutions. This, along with there being no records of Coinbase being in the business of lending implies that the financial institutions holding the backing for USDC are paying Coinbase higher than 1.25% interest.
According to Coindesk, a Coinbase representative said that 1.25% interest is higher than most will receive from a savings account.
“Speaking to the inspiration behind the USDC Rewards program, Branzburg noted that a 1.25 percent interest rate on holdings of U.S. dollars is “15 times more than the national average or what people might get through a [traditional] savings account.”
So unless those regulated financial institutions are giving Coinbase a generous savings account, the money backing USDC is likely in a CD account. According to smartasset.com, there is only one online bank offering 6 month CD rates over 1.25%. There are zero big banks offering 6 month CD rates over 1.25%.
What this means is that the money backing up USDC is likely going to be tied up for more than six months to make paying interest profitable.
What is the benefit of using Coinbase rather than higher paying sites?
Most decentralized exchanges will pay more than double what Coinbase will pay you, but moving the money around takes longer. There are no decentralized exchanges where you can convert directly to USD like you can on coinbase.
A decentralized exchange is intended to be a forum to facilitate transactions between wallets.This can potentially make your transactions a bit slower and more time consuming.
The only way to get USDC onto DYDX, a popular lending and borrowing platform is to use the MetaMask wallet. MetaMask app doesn’t let you deposit USDC by default, so you have to find USDC and enable it.
From there, you deposit it into DYDX, but you will need to have some Ethereum in MetaMask to pay the gas fee. Once you would like to take the USDC out of DYDX, you need some more Eth for the gas fee. It will then be sent back to your MetaMask address, then you will pay another gas fee to transfer it to Coinbase. From there you can exchange it for fiat USD.
On Coinbase, you will only have to purchase USDC with cash and then they will pay you interest.
There are many people who won’t go to the trouble of learning how a decentralized exchange or even a crypto wallet works. For those people, they are still going to earn more interest holding USDC on Coinbase than they would keeping USD in their savings account.
As long as you can trust that the USDC product is in good hands, there doesn’t seem to be much to worry about. If something happened to where Coinbase needed to take out USDC backing and it was locked in a CD account, they would either have to dip into their personal bags or take out loans.