Best USDC Interest Rates

Find and compare the best USDC interest rates from the top crypto exchanges and lenders.

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What is US Dollar Coin (USDC)?

USDC is a stablecoin, which is pegged 1:1 to the US-Dollar. USDC is the ticker symbol of the US Dollar Coin. USDC is always equal to $1 in value. The companies behind USDC guarantee 1 US-Dollar backs every USDC in their reserves.

Who created USDC?

USDC was founded in September 2018 by Circle Inc, a payments company, in cooperation with Coinbase, a cryptocurrency exchange. Presented as a stable alternative to other cryptocurrencies, USDC was launched on leading exchanges Coinbase in October 2018 and on Binance in December 2018. Both events helped kickstart the coin's growth.

The boom of Decentralized Finance (DeFi) in 2020 contributed to further growth for USDC. As of April 2022, USDC is the second-biggest stablecoin behind Tether.

What is a stablecoin?

A stablecoin is the crypto representation of currencies like the dollar or the euro. Stablecoins are pegged to their real-world counterparts and should always be exchangeable at a rate of 1:1.

There are three distinct types of stablecoins in the crypto space:

  • Fiat-backed stablecoins
  • Examples of fiat-backed stablecoins are USDC and Tether. All USDC in circulation are backed by fiat currency, which can be verified by monthly reports on the founding company’s website. Therefore, USDC holders can at all times redeem their coins for actual US Dollars.

  • Crypto-backed stablecoins
  • Crypto-backed stablecoins use cryptocurrency assets as collateral. In contrast to their fiat-backed counterparts, they are issued by smart contracts and governed by their voters. The underlying crypto collateral can be volatile, which can present risks to the 1:1 peg of a stablecoin.

  • Algorithmic stablecoins
  • Algorithmic stablecoins do not have underlying collateral. Instead, they maintain their peg through smart contracts and algorithms, which take the role of a central bank. They issue new stablecoin and contract supply based on the underlying market conditions. In case of extreme price volatility during a black swan event, these coins can have reserve collateral to mitigate said volatility.

How does USDC stay pegged to $1?

Theoretically, each unit of USDC is backed by the equivalent of $1 in reserves. Thus, its price should never de-peg, but this could temporarily happen for a few reasons in practice.

USDC could fall below its peg. In that case, you would only get, for example, $0.98 for each 1 USDC. This could happen for two reasons: poor liquidity or concerns regarding the underlying collateral. In the first scenario, investors are happy to receive dollars even at a two-cent discount due to poor liquidity. In the latter case, there would need to be a reason for holders to doubt the credibility of the underlying securities. This has happened to other stablecoins but not to USDC.

USDC could also trade at a premium to the dollar. If there was a price crash in crypto assets, investors might rush into safe assets like stablecoins to cut their losses. They could accept a premium in this case, i.e., getting 1 USDC for $1.02.

In case of such price deviation, arbitrageurs step in. Say 1 USDC is trading at $1.02. Arbitrageurs are receiving two cents on every dollar they are buying. The parent companies behind the pegged coin could also mint new stablecoin to restore the peg. The opposite would happen if USDC were to trade at a discount, i.e., arbitrageurs would sell dollars to buy USDC and restore the peg.

Is USDC safe to use?

USDC is considered one of the most safe stablecoins in the crypto markets. This is due to the fact that the issuer of USDC is heavily regulated in the U.S. All U.S dollar reserves that back USDC are audited and transparent.

Having said that, USDC is still issued, transferred and used using blockchain smart contracts. If there are any undiscovered bugs in the USDC smart contract or the blockchain network is compromised, that could affect the $1 peg of USDC.

There is also risk that a government may pass laws that can adversely affect the stablecoin markets or ban them outright. Thus far, the U.S government has played nice with regulated stablecoin issuers, shown a willingness to learn more about the technology and encourage responsible innovation within the stablecoin markets.

Why should I earn a yield on my USDC?

USDC is a useful addition to the cryptocurrency space, but why should you earn a yield on your USDC? The two main functions of USDC will answer that:

  • USDC as a safe haven
  • Stablecoins like USDC act as a safe haven in case of price volatility in Bitcoin, Ethereum and other crypto assets. Without them, investors would find it hard to move money around, which would adversely impact liquidity, leading to more illiquid markets and likely even more price volatility.

  • USDC as spare cash
  • Spare cash for new investments is never a bad idea. While you wait for suitable investment opportunities, you could be earning yield on your USDC. It’s better than just having your USDC sitting there earning nothing.

Generating a passive income, even if you are not planning to invest your USDC, is a good idea. You avoid the opportunity costs of having spare cash and your money is working for you. Moreover, although stablecoins have the same value as dollars, the yields on the two of them are significantly different. USDC can earn you a significantly higher yield than a regular US dollar savings account.

What is a USDC savings account?

The alternative to providing liquidity to a liquidity pool, is investing your USDC in a USDC savings account. The principle is the same as for a regular savings account. You deposit money with a crypto lending company and earn a (much higher than usual) yield. The companies then lend out your USDC at a higher rate and profit from the spread in the interest rate paid to lenders and charged to borrowers.

What should I look for in a USDC savings account?

Before opening a USDC savings account, check the company's reviews online. Also, take a look at whether the company has proper regulatory licenses to operate a crypto business in your country. Big companies with a lot of assets under management are heavily regulated, which works in your favor. The bigger the company, and the longer it has been around, the smaller the chance that your assets will be at risk.

How do I open a USDC savings account?

To open a USDC savings account, you have to pass the KYC (know your customer) process on these sites. When you open an account, the company will ask you for an ID, proof of address (this can be a utility bill or a bank statement), and often a selfie with your ID and the current date written on a piece of paper. This is all standard procedure of KYC and nothing to be worried about.

Can the interest rate on a USDC savings account change?

Stablecoins are a relatively safe and stable asset, in contrast to cryptocurrencies like Bitcoin and Ether. Therefore, the companies will only change their interest rate if the general market sentiment changes. More people borrowing stablecoins to invest in Bitcoin could lead to an increase in the interest rate. However, don't expect this to be a frequent occurrence.

What is DeFi?

DeFi is short for decentralized finance. The multitude of financial applications and protocols being built on Ethereum and other blockchains all belong to decentralized finance. DeFi aims to create a better financial infrastructure than exists today. Its premises are building an open, permissionless, and censorship-resistant systems.

DeFi removes the intermediaries that are customary to legacy finance. It does so by using smart contracts in peer-to-peer networks and decentralized applications. Most DeFi applications and projects are, for now, on the Ethereum blockchain, making it one of the fastest-growing sectors in the entire crypto space.

Stablecoins are one of the reasons why the DeFi space has been growing at breakneck speed. Lending protocols, applications allowing users to borrow money in crypto assets by using cryptocurrencies as collateral, are another very popular feature of the DeFi space. So are decentralized exchanges, which enable users to trade cryptocurrencies in a peer-to-peer way without an intermediary.

How do I use DeFi to earn a yield on my USDC?

Protocols in the DeFi space don't rely on custodians or intermediaries and, therefore, rely on the market to provide them with liquidity for their solutions. In practice, anyone can operate as a bank and generate profits the same way banks generate returns. Earning a passive income by using your crypto assets in such fashion is called liquidity mining.

You can also mine liquidity with assets like bitcoin or ether. However, these coins are volatile, but stablecoins are not. In short, liquidity mining means locking up your assets and providing them as liquidity in return for a yield.

Lending protocols and decentralized exchanges in the DeFi space rely on so-called liquidity pools if market participants want to trade. Anyone with spare cash can provide liquidity to such pools. Your reward is a yield that is calculated based on the pool's transaction fees. As an added reward, many protocols also distribute their native token to liquidity providers. You can hold it and hope the price appreciates or sell it for another asset.

What is the difference between using DeFi to earn yield and a USDC savings account?

Mining liquidity on DeFi protocols and using a savings account comes with trade-offs.

A savings account is much easier to use. You simply open an account at one of the platforms, pass the KYC (know your customer) requirements, and deposit USDC to earn interest. In DeFi, however, you can choose from a multitude of opportunities for liquidity mining. Due to the way DeFi works, most protocols offer an opportunity to generate yield on your stablecoin. For a newcomer, it can be a tough task to identify legitimate projects. In addition, even trustworthy projects can have a poor user interface, and you need to know your way around setting up a wallet, depositing money, and correctly providing liquidity.

Second, a USDC savings account can be safer than using DeFi protocols. The major DeFi protocols have been on the market for up to three years, a long time in DeFi, and are considered safe without major risks. That being said, there is a residual risk of having a bug or the protocol being hacked.

Lastly, with DeFi, it is certainly possible to generate a much higher return on your assets if you're an expert liquidity miner. Even with the added risk, shrewd investors can easily outperform the interest rates offered by savings accounts, provided they manage their risk correctly.

Overall a USDC savings account is suitable for most investors. So long as you trust the company you are depositing with and they have a good track record, you can generate passive returns. When it comes to DeFi, you can potentially earn higher returns but you must actively manage your liquidity positions and take precautions to securely manage your crypto.

Why is the interest rate higher on USDC than a traditional savings account?

Even though 1 USDC equals $1, USDC allows you to invest in crypto assets with much higher yields than traditional savings accounts. These companies charge a much higher rate to borrowers than banks, enabling them to offer a better interest rate. Because borrowers are willing to pay a higher interest rate to invest in risky high-yield crypto assets, lenders benefit from earning more interest.

Do I have to pay taxes when earning interest on USDC?

Crypto taxes are a delicate issue. Keeping up with the quick evolution in the crypto space is a challenge for tax authorities. You need to determine if your investment can be classified as a business or a hobby in the US. A significant income from your USDC savings account would be considered a business, and you would need to declare that income.

In the EU, each member state has different regulations with regards to taxing crypto. Some will tax any income generated from cryptocurrencies, while other countries are more crypto-friendly. However, you can assume that generating yield from a stablecoin will be subject to tax in most countries. For the exact rules and regulations, it is best to research the latest information in your native language.

What’s the difference between APR and APY?

APR stands for annual percentage return, while APY stands for annual percentage yield. There is a mathematical difference between the two:

APR = Periodic Rate x Number of Periods in a Year

APY = (1 + Periodic Rate) x Number of periods – 1

If that sounds confusing, it simply means that APY accounts for the effect of compounding. Let’s assume you have 1% APR:

APR = 1% * 12 months = 12%

The APY is going to differ depending on how often your initial deposit is compounded. For example, here are the different APY for daily, weekly, and monthly compounding.

Daily compounding: [(1 + 0.01)^365 – 1 = 3678.34%]

Weekly compounding: [(1 + 0.01)^52 – 1 = 67.76%]

Monthly compounding: [(1 + 0.01)^12 – 1 = 12.68%]

Ⓒ 2021

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