How to beat inflation with stablecoins • Benzinga Crypto


Record inflation worries Americans. Market turbulence, high gas prices and soaring grocery prices have left consumers with less purchasing power. Typical inflation hedges such as gold disappointed amid the panic. The way to defeat inflation could potentially be in a new technology known as stablecoins.

What are Stablecoins?

Stablecoins are cryptocurrencies pegged to a country’s fiat currency or other stable assets. In most cases, stablecoins are pegged to the US dollar. A few big players dominate the US dollar stablecoin industry. Some of the biggest names are Tether, USD Coin, Binance USD, and DAI.

Stablecoins use different methods to maintain their peg to the dollar, usually using an algorithm, holding collateral, or both. Good stablecoins back their token dollar for dollar with durable assets. Relying strictly on an algorithm has proven unsuccessful. More recently, the failure of algorithmic stablecoins was displayed by Terra (Luna), a stablecoin that recently collapsed.

Inflation: rising prices

Fiat money is naturally in a state of inflation. Whether constant inflation is a sound economic model or not has been widely debated. What is certainly not a good model is extraordinarily high inflation. High inflation increases prices for consumers and decreases the purchasing power of citizens.

The inflation rate in the United States reached 8.5% in 2022 year-over-year, far from the Federal Reserve’s target of 2% inflation per year. A number of factors are driving up inflation, including COVID-19 stimulus checks, quantitative easing and low interest rates.

With inflation at the top of the Fed’s agenda, a tightening cycle began. This process includes gradual rate hikes and reduced quantitative easing. However, there is no guarantee that these measures will be enough to stop record inflation.

Inflation hedges proved disappointing; gold and bitcoin crashed in 2022. This circumstance could be the result of a rush for liquidity in the market as investors assess the tightening cycle. This proves that inflation hedging is a complex task.

Stablecoins are a promising new technology. While interest in stablecoins is less profitable in an economy with inflation peaking at 8.5%, staking stablecoins can still help nullify inflation. Staking pools for stablecoins offer a higher return than holding dollars in the bank. However, these staking pools also come with some risks.

How Can Stablecoins Cancel Inflation?

Begin

securely through the MyConstant website

Best for

earn passive income

Exam in 1 minute

MyConstant is a US-based peer-to-peer lending platform that strives to connect borrowers with investors. The service offers a variety of different investment products with interest rates of up to 15% APY. This option allows investors to generate returns that potentially exceed the most competitive interest rates offered by financial institutions across the country.

An international group of developers launched MyConstant in January 2019 with the aim of building a stablecoin. However, soon after the creation of its stablecoin, CONST, the team quickly turned to offering crypto P2P lending, an area they believed was ripe for innovation.

Since then, MyConstant has been featured as a recommended money app on numerous financial and tech news apps and publications, including Forbes, Entrepreneur, Inc Magazine, and Zero Hedge.

Best for

  • Newbie investors who need quick access to their money
  • Experienced investors who can commit to a fixed term for a higher rate
  • Crypto holders wanting new coins or cash without selling their existing assets
  • Long-term cryptocurrency investors who want to earn passive income on idle assets
Advantages

  • 2-factor authentication
  • Much higher APY than traditional savings option
  • Withdrawals at any time
  • No fees for depositing and withdrawing funds
The inconvenients

  • Cryptocurrencies are inherently volatile
  • Complex investment options with over five different loan plans that may confuse novices
  • Limited currency supply

Holding stablecoins will not beat inflation – they are pegged to fiat currency, which inflates. To beat inflation, you need to stake your tokens, which in turn will earn you a return. There are many variables associated with staking crypto, including APY, risk, pool size, staked asset, and staking platform.

The number of variables can be confusing, but stablecoins help simplify the process. By keeping their dollar peg, you won’t have to worry about volatile price movements. Staking tokens that are not pegged to a dollar could offer higher returns; however, the price of the token might be worth nothing at the time your money is withdrawn.

If you are looking to get into stablecoins, you can choose from a wide variety of options. If you’re looking to earn interest on a variety of stablecoins, MyConstant offers interest rates of around 12% per annum, which beats the competition. Below are some of the top US dollar stablecoins by market capitalization.

Tether (USDT)

The most commonly used stablecoin is USDT, which is backed by the company Tether. The stablecoin uses a mix of assets, including cash and treasury bills, to back its stablecoin. Tether claims to back its stablecoin dollar-for-dollar – meaning that even if there was a liquidity rush, everyone could be cashed out. However, Tether has not been forthcoming with its finances, and speculation has led many to believe that they don’t actually have what they claim. Tether offers high staking yields – around 12% – but this rate varies depending on the protocol.

USD coin (USDC)

The second market cap is USD Coin. The stablecoin is backed by two major companies, Coinbase Global Inc. (NASDAQ: COIN) and Circle. Together, the companies form the Center Consortium, which is open to new members. The main advantage of USD Coin is its openness with their finances. While Tether has been linked to speculation, USD Coin has proven its support and received US regulation. USD Coin has narrowed the spread on Tether’s lead over the past few years. Staking USD coins is similar to staking Tether, with similar APY offers.

Binance USD (BUSD)

Binance USD is the stablecoin created by the world’s largest cryptocurrency exchange – Binance. The company is based in China and is not legal for trade in the United States. This limitation, however, did not stop him from launching his own stablecoin. Binance USD has a similar staking return of around 12% per year.

AID

The most decentralized of the stablecoins on this list is DAI. It is governed by a Decentralized Autonomous Organization (DAO) called MakerDAO. MakerDAO uses on-chain collateral in the form of crypto assets to back the DAI stablecoin. DAI has remained incredibly stable and is gaining similar interest to the stablecoins listed here.

Best Platforms to Earn Interest on Stablecoins

Exam in 1 minute

Gemini is a cryptocurrency exchange and custodian that offers investors access to over 100 coins and tokens. Founded in the United States, Gemini is expanding globally, particularly in Europe and Asia. The offerings include both major cryptocurrency projects like Bitcoin and Ethereum, and smaller altcoins like Orchid and 0x.

Gemini is one of the only brokers that offers multiple platform options depending on skill level. New investors will love Gemini’s streamlined mobile and web app interface, while advanced investors might appreciate all the tools that ActiveTrader comes with.

In addition to a host of platform choices, Gemini users also have access to insured hot wallets to store tokens without worrying about digital asset theft. Learn more about what Gemini can do for you in our review.

Best for

  • New investors looking for a simple mobile and web app
  • Day traders looking to use technical analysis tools
  • Users looking for a one-stop-shop to buy, sell, and store all their cryptos
Advantages

  • Easy and fast registrations – can start in as little as 5 minutes
  • Multitude of platforms to accommodate traders of all levels
  • Hot wallets include insurance to protect against theft and hacking attempts
The inconvenients

  • Charges both commission and convenience fees for users who buy and sell through the desktop or mobile app

You can choose from a number of platforms to stake your stablecoins and earn yield. Some platforms you can try are MyConstant and Gemini. If you are looking for a decentralized app, Aave is a great choice.

Advantages and disadvantages of earning interest with stablecoins

Staking your stablecoins and gaining yield can be rewarding; however, it is not without its own set of risks.

Advantages

  • With a price pegged to the dollar, there is less fluctuation in the value of your return.
  • Some pools offer a high APY.
  • Staking allows your money to work for you at pre-determined annual rates.

The inconvenients

  • Stablecoins have crashed in the past, presenting more risk than the USD.
  • Less return is earned by staking stablecoins than if you were to stake a more volatile crypto.
  • Scams are rampant –– researching where you are betting is important.

Is earning interest on USDT, USDC, BUSD and DAI worth it?

Earning interest on stablecoins could be a great investment, but it comes with risks. Although annual returns may be higher than the S&P 500 average, you are in danger of crashing. When holders rush to sell, stability is tested. If you plan to stake stablecoins, prioritize the one that you believe backs its currency 1:1 with USD.


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