Why USD-backed stablecoins have a higher APY than a CD or savings account?

[Abiky]

This may look like a stupid question (please pardon my ignorance), but I never understood why "De-Fi" lending platforms are able to offer higher rates for USD-backed stablecoins than what banks offer for ordinary USD deposits? I mean, USD-backed stablecoins are collaterized by USD. So they should have the same aspects as their pegged currency (inflation rate, etc). Banks offer lower rates, but are often considered a more reliable/trustworthy option than "De-Fi" apps.

Please enlighten me. Thanks in advance.

[Hispo]

This may look like a stupid question (please pardon my ignorance), but I never understood why "De-Fi" lending platforms are able to offer higher rates for USD-backed stablecoins than what banks offer for ordinary USD deposits? I mean, USD-backed stablecoins are collaterized by USD. So they should have the same aspects as their pegged currency (inflation rate, etc). Banks offer lower rates, but are often considered a more reliable/trustworthy option than "De-Fi" apps.

Please enlighten me. Thanks in advance.

I am not very familiarized with Defi, but rather yield offered by exchanges for deposits of stablecoins. In the case of exchanges which offer yield, the main difference is that those APYs are not fixed (unlike banks, where the percentage is fixed), exchanges change the yield according to the demand people have for stablecoins in the form of loans and also in the form of leverage in the future markets, the latter is the main difference for exchanges to offer better yield than banks.
When the price of main coins are going up, then there are more reckless traders who ask for leverage and the demand for stablecoins increase, this means the stablecoins being kept by other users for the sake of yield will be lended to those degenerate traders so they can make whatever they want, the fee is split between the exchange and stablecoins holders.

Banks do not like risk, so they they do not offer dynamic yield according to risky tools they could offer to their clients. They prefer to focus on reliable, steady returns with little fluctuation.

That is the difference.

[TastyChillySauce00]

USD backed stablecoins APY actually vary, if you want to know historical APY from these stablecoins, pendle's chart for YT is a good way to know since they recorded historical APY after all it's a yield market.

From my experience they can be giving 6-10% APY and 0% APY the next day. As for the stables that have relatively stable APY, it's because they are backed by short term bonds and sometime there's those kind of event where user can give up yield in exchange for point that can be converted to airdrop in TGE so the stablecoin issuers can give that APY to the people who choose yield therefore higher APY than usual.

Or the stablecoin issuers are smart enough to put the money where there's high APY such as lending platform, etc.

[Hispo]

...

Or the stablecoin issuers are smart enough to put the money where there's high APY such as lending platform, etc.

Right, but there is still risk associated with those issuers seeking to get good yield out the money they use to keep the peg of their stablecoins, though. They do not think it is enough to get small yields by depositing those assets in a bank, get seek for more risk, and risking liquidity, as they assume very few people will come to them with tokens in order to exchange for actual money, but a bank run is never impossible.
Tether could have their peg intact, but being the most popular stablecoin it means they need to ensure there is enough liquidity in their bank accounts so they can honor their promise to anyone who chooses to withdraw money from to Blockchain to a bank account in the USA.

In many cases, institutions are willing to block their assets to their own money so they can get more yield, which is a mistake, in my opinion.

[nelson4lov]

This may look like a stupid question (please pardon my ignorance), but I never understood why "De-Fi" lending platforms are able to offer higher rates for USD-backed stablecoins than what banks offer for ordinary USD deposits? I mean, USD-backed stablecoins are collaterized by USD. So they should have the same aspects as their pegged currency (inflation rate, etc). Banks offer lower rates, but are often considered a more reliable/trustworthy option than "De-Fi" apps.

Please enlighten me. Thanks in advance.

1. It depends on the stablecoin. Most stablecoins don't offer any yield eg: USDT, USDC. There are no native yields that accrue to holders of those tokens from "just holding". Only Ethena (USDE) and a few other stablecoin offer native yields for their stablecoins. For instance, Ethena uses a popular trading strategy called delta neutral that allows them to long and short crypto assets with size and earn funding fees while at it. It might seem small but sometimes funding fees and arbitrage alone can range between 50% APY to 1000% APY and Ethena captures those yields and some of it get distributed to their holders at the end of the day..

2. Defi. For lending and borrowing, I typically just assumes that:

• Demand is high, hence high rate
• Lending money to people you don't know personally is a high risk scheme. So it's a high risks, high rewards scheme. I can't be taking all those risks for 1% apy. Sounds absurd.

There are more readings but I'd stop here for now.
[/list]

[TastyChillySauce00]

Right, but there is still risk associated with those issuers seeking to get good yield out the money they use to keep the peg of their stablecoins, though. They do not think it is enough to get small yields by depositing those assets in a bank, get seek for more risk, and risking liquidity, as they assume very few people will come to them with tokens in order to exchange for actual money, but a bank run is never impossible.
Tether could have their peg intact, but being the most popular stablecoin it means they need to ensure there is enough liquidity in their bank accounts so they can honor their promise to anyone who chooses to withdraw money from to Blockchain to a bank account in the USA.

In many cases, institutions are willing to block their assets to their own money so they can get more yield, which is a mistake, in my opinion.

AFAIK most of the stablecoin that offers yield usually have yield bearing version of the stablecoin. For example ethena's staked sUSDe. Any stablecoin that bring yield usually staked version of the stablecoin.
As for the money to mantain the peg, it's there and usually never touched so the peg can be mantained.

Frankly there are actually many kind of stablecoin, the one that get backed by reserve directly and the one that gets minted in exchange for USDC/USDT. These stablecoin that get minted from other real reserve backed stablecoin exist like an LST. The money used to mint the LST stablecoin which usually is USDC/USDT in this case get looped through something like morpho or aave to create an even bigger yield with the risk of liquidation when LTV threshold reached.

[Abiky]

USD backed stablecoins APY actually vary, if you want to know historical APY from these stablecoins, pendle's chart for YT is a good way to know since they recorded historical APY after all it's a yield market.

From my experience they can be giving 6-10% APY and 0% APY the next day. As for the stables that have relatively stable APY, it's because they are backed by short term bonds and sometime there's those kind of event where user can give up yield in exchange for point that can be converted to airdrop in TGE so the stablecoin issuers can give that APY to the people who choose yield therefore higher APY than usual.

Or the stablecoin issuers are smart enough to put the money where there's high APY such as lending platform, etc.

That's the thing. APY constantly changes at a given rate. Let's say I deposit some stablecoins at a "De-Fi" lending platform which has an APY of 5%. But then, the rate decreases all the way down towards 3%. Will I still get the initial APY of 5% after the term expires (or if I decide to withdrawal)? Or will I get 5% up until the time the APY was changed? It's all confusing to me.

At least, you get better returns staking/lending with "De-Fi" than a investing in a CD or putting your money in a savings account. I think the main reason why "De-Fi" platforms offer higher rates for stablecoin deposits is because they cut off the middleman. No middleman = lower costs = higher earnings to users. The biggest risk is lack of insurance. If the "De-Fi" platform gets hacked, it will be "bye-bye" to your money for good. Not even audited platforms are 100% safe. As it's said in the real world, "you get what you pay for". For less risk, banks remain the most viable choice.

[pooya87]

why "De-Fi" lending platforms are able to offer higher rates for USD-backed stablecoins than what banks offer for ordinary USD deposits?

The two cannot be compared. What a bank pays as interest is affected by a lot of things like how they are earning profit with your money that is in their hand and political and national economic situation. If they pay you more interest, it is more "income" for you that leads to more money in your pocket which you'd spend entering it into circulation and increased money supply creates inflation!

What some centralized organization pays you is different. Their interests could be generated from their higher profit (in the pump and dump shitcoin market) all the way to being a scam (Ponzi schemes) that pay a lot to attract investors. They are not regulated either, so they can do whatever they want.

[Taskford]

why "De-Fi" lending platforms are able to offer higher rates for USD-backed stablecoins than what banks offer for ordinary USD deposits?

The two cannot be compared. What a bank pays as interest is affected by a lot of things like how they are earning profit with your money that is in their hand and political and national economic situation. If they pay you more interest, it is more "income" for you that leads to more money in your pocket which you'd spend entering it into circulation and increased money supply creates inflation!

What some centralized organization pays you is different. Their interests could be generated from their higher profit (in the pump and dump shitcoin market) all the way to being a scam (Ponzi schemes) that pay a lot to attract investors. They are not regulated either, so they can do whatever they want.

In short Bank offer low interest to protect their profit margin. With that they can manage their liquidity efficiently and can comply with the policies set by central banks.

Also DeFi platform doesn't need any middle man or intermediaries and usually they operates in more riskier market that's why they need to offer that high rates to attract lots of people to invest on their platform.

Also Bank and DeFi platform is incomparable since they are operating in different model.

[mu_enrico]

It's not that they are "able to offer," but that they must offer higher rates to attract deposits. According to the CAPM formula, expected return = risk-free + risk premium, platforms that are more risky, such as DeFi, must offer higher rates due to their risk premium. If no risk premium were included, no one would deposit in their platform.

The more interesting question, then, is how they can afford to offer higher rates. Many people think these platforms would eventually rug, especially in a bear market.

[TastyChillySauce00]

That's the thing. APY constantly changes at a given rate. Let's say I deposit some stablecoins at a "De-Fi" lending platform which has an APY of 5%. But then, the rate decreases all the way down towards 3%. Will I still get the initial APY of 5% after the term expires (or if I decide to withdrawal)? Or will I get 5% up until the time the APY was changed? It's all confusing to me.

Stablecoin staking mostly just like flexible saving, your profit depend entirely on daily APY. They don't usually have expiration because they don't have maturity. Profit generated determined based on your capital purely.
That's why yield bearing token are rebasing instead of being offered like discounted bonds which have maturity date. Usually calculation done once a day and you get your profit immediately.

At least, you get better returns staking/lending with "De-Fi" than a investing in a CD or putting your money in a savings account. I think the main reason why "De-Fi" platforms offer higher rates for stablecoin deposits is because they cut off the middleman. No middleman = lower costs = higher earnings to users. The biggest risk is lack of insurance. If the "De-Fi" platform gets hacked, it will be "bye-bye" to your money for good. Not even audited platforms are 100% safe. As it's said in the real world, "you get what you pay for". For less risk, banks remain the most viable choice.

Yeah the lack of insurance is a concern, not to mention some reckless defi project manage the staked stablecoin by looping until it reached max to pursue APY which means a slight depegging or oracle error could make the money vanish.
That's why I always read thoroughly about the risk of certain yield bearing stablecoin before getting in.

[FinneysTrueVision]

When banks loan out the money you deposit, they only redistribute a tiny amount of the interest they are earning back to their users. Banks keep more than 90% of the yield that is earned, while DeFi lending markets typically only charge around 10–15% of the interest generated as a performance fee.

Utilization rate also has a lot to do with interest rates in DeFi. If borrowing demand is too high, interest rates will start rapidly increasing. On markets with low liquidity sometimes you can see rates spike up above 20%.

Banks are definitely more trustworthy. They are usually insured and don’t have smart contract risk. The downside is that they are not a great place to invest your savings if you want to earn anything meaningful.

[Abiky]

It's not that they are "able to offer," but that they must offer higher rates to attract deposits. According to the CAPM formula, expected return = risk-free + risk premium, platforms that are more risky, such as DeFi, must offer higher rates due to their risk premium. If no risk premium were included, no one would deposit in their platform.

The more interesting question, then, is how they can afford to offer higher rates. Many people think these platforms would eventually rug, especially in a bear market.

Usually, when the amount deposited is higher than the amount borrowed, APY rates lower down. A "rug pull" can only happen if the creator of the smart contract has access to funds contained within it. It's why we should analyze the "dApp's" source code to prevent any undesired situation with our money in the long run. Some projects are even audited by reputable security firms. But of course, most people aren't tech savvy enough to check the code or even verify if the smart contract is audited by a reputable company. They just deposit their coins on a platform without thinking it twice (due to greed).

At least, regulators are paying close attention to the industry. One would hope the number of "rug pulls" would be reduced because of increased government scrutiny. We'll see what happens in the long run.

[retaur]

The difference is the risk you're taking on. If you're in it for the long term there's less risk but all coins can be affected by depegging (especially during crashes) and not all liquidity providers are able to fully handle defi liquidations (in extremely rare circumstances, there's still a level of risk to this).

What happened to terra Luna can happen to other coins and when most new stablecoins are backed by an underleveraged/over-collateralised "pot" of assets those assets can turn unstable if a large enough coin fails.

Sure there are some onramps for fiat to usdc and usdt and market makers are often responsive to try to return pegs when needed but that doesn't always happen.

It's worth noting too, defi is international, interest rates are specific to a certain area. I might be quoted 8% on aave for usdc but 4% (-fees) on government bonds from a developed country. Equally a country with high inflation might pay interest at 8% but have inflation at 12%.