Our DeFi experts share their knowledge and answer your questions about decentralized finance, covering topics like dApps, DEXs, DAOs, yield farming & staking, DeFi protocols, and more.
Unstable Stablecoins: Can Stablecoins Crash?
Yes, stablecoins can crash. While they are designed to be a less volatile form of cryptocurrency, the TerraUSD crash in May 2022 is the latest of many stablecoins that didn’t live their purpose. Investors panicked when the TerraUSD price started losing its peg against the US dollar, causing a run on its reserves, eventually leading to a “death spiral.” Before jumping into examples of stablecoins that have crashed, let’s briefly discuss the types of stablecoins: Fiat-backed stablecoins They maintain equal reserves of their underlying assets, e.g., the USDC stablecoin.Crypto-backed Similar to fiat-backed stablecoins, but use cryptocurrencies as underlying assets, e.g. the Dai stablecoin.Algorithmic stablecoins They use algorithms to control supply and demand and maintain their price to the US dollar, like the Ampleforth stablecoin. Examples of Stablecoins that Crashed The little-known example of a stablecoin that crashed is Basis Cash, launched in 2020 and quickly vanished. At its peak, it recorded a market cap of $30.74 million. However, it could not maintain its peg and fell from $1 to $0.30 within one month. The Basis Cash developers used a “seigniorage algorithm” in their project. Simply put, in a seigniorage system, two or more coins are created: one acts as a stablecoin, while the other operates like standard cryptocurrencies. When the price of the stablecoin falls below $1, the investors of the sister token rush to buy it at discounted prices, pushing the price back to $1. Likewise, if the price exceeds $1, the project owners issue more stablecoins to lower their demand and move the price to its peg. Interestingly, Terraform Labs leveraged the same method in their TerraUSD stablecoin. Keep reading to know why these two stablecoins with a high potential crashed. Why Stablecoins Crash Since the TerraUSD crash is still fresh in our minds, let’s use it to explain why stablecoins crash. As mentioned, the TerraUSD stablecoin relied on the seigniorage algorithm to mint new or burn existing LUNA tokens to achieve its peg to the US dollar. When the Terra stablecoin fell below $1, the algorithm minted new LUNA tokens to buy it. Again, when the stablecoin rose above $1, the algorithm sold it and burned the existing LUNA tokens. Now, as TerraUSD’s price continued to decline, the algorithm minted more LUNA to maintain the peg. But, as the algorithm continued minting more LUNA, the value of the underlying asset of TerraUSD also declined. Consequently, the LUNA Foundation Guard—the organization established to support TerraUSD—bought billions of dollars in Bitcoin reserves as a backup. The foundation used some of its reserves to buy TerraUSD, but the experiment didn’t hold.
Asked 8 months ago
Here's How Stablecoins Earn So Much Interest
Stablecoins have received huge admiration in recent years because of their utility. Crypto investors can now de-risk positions while dodging fiat conversion rates, securely move assets between marketplaces and protocols, make payments, and even generate passive income by lending idle stablecoins. Tether (USDT), USD Coin (USDT), Binance USD (BUSD), and Dai (DAI) are some of the most popular stablecoins. Of these all, DAI is the one that’s not collateralized by the US dollar but by digital currencies. In this regard, it doesn’t always maintain a 1:1 peg and swings up to 8 cents for short intervals of intense volatility. However, DAI is fully decentralized. It’s issued by a MakerDAO protocol, establishing a trustless alternative to investing in stablecoins. How Stablecoins Earn Interest Stablecoins earn interest by lending them on decentralized finance (DeFi) and centralized lending and borrowing platforms for Annual Percentage Yields (APYs). Cryptocurrency lending or yield farming is among the biggest use cases of DeFi currently. Stablecoin lending and yield farming are superb investment strategies you can leverage, especially during bears or long-term plans, to profit from them instead of being idle in your wallet. These strategies yield between 4% and 20% APY, with few exemptions. For instance, the Malt Protocol on the MATIC blockchain yields DAI tokens at almost 450,000% APR. Importantly, projects promising huge interest rates that are confusing to comprehend normally have a hook. Expect wide volatility in APYs for such projects, just like the small swings in traditional banks. It’s recommendable to do due diligence with the lending platform you want to invest in to avoid rug pulls, smart contract risks, and stablecoin crashes. Best Platforms to Earn Interest on Stablecoins Putting your stablecoin assets into use will enable you to earn passive income as you hold for long-term gains and during market drawdowns. Here are the best platforms to profit from stablecoins: AAVE – Offers APYs of up to 6% based on the stablecoin investedCompound – Provides APYs of up to 3% on stablecoins and more for other digital assetsCurve – Guarantees APYs of up to 28% and 55% in risky vaultsCream – Offers APYs of up to 10% on stablecoinsYearn Finance – Provides APYs of up to 9% on stablecoins and up to 20% with stacked rewards in sUSDCentralized Stablecoin Lending Platforms Crypto.com – Provides APYs of up to 14% on stablecoinsBlockFi – Offers APYs of up to 8.6% on stablecoins
Asked 8 months ago
Fiat-Collateralized Stablecoins: A Quick Rundown
Stablecoins provide a solution to bridge the gap between fiat currency like the Chinese Yuan and cryptocurrencies like Bitcoin. Since they are price-stable cryptocurrencies that function essentially like fiat but facilitate the transfer and use of digital assets, stablecoins are undeniably an innovative solution to cryptocurrency volatility. Basically, stablecoins are cryptocurrencies issued on the blockchain and are distinguishable by their underlying collateral assets: fiat-collateralized, crypto-collateralized, commodity-collateralized, and algorithmic-based. Though the underlying collaterals differ, stablecoins always strive to offer stability. This article takes a deeper dive into fiat-collateralized stablecoins. What Are Fiat-Collateralized Stablecoins? Among the four types of stablecoins, fiat-collateralized stablecoins are the most popular. Fiat-collateralized stablecoins have fiat currencies, like the US dollar, as the underlying assets to their value. While there are other forms of collateral, such as commodities and precious metals, most fiat-backed stablecoins maintain reserves of US dollars. These stablecoins maintain their 1:1 peg through trusted custodians that hold the same amount of legal tender in reserves. As such, new coins are issued when someone deposits USD into the custodian’s reserve. Likewise, when a redemption bid is sent, the custodian releases USD and burns the redeemed stablecoin. Pros & Cons of Fiat-Collateralized Stablecoins These are the pros and cons of fiat-collateralized stablecoins: Pros Their 1:1 collateralization structure minimizes the chances of extreme volatilityThey are simple and easy to understand Fiat-collateralized stablecoins are not easily vulnerable to hacks as their reserves are stored off-chain They bridge the gap between standard crypto and fiat efficiently Are highly scalable since their structure can be expanded to back an extensive ecosystem Cons They are centralized in natureHighly regulated as they are bound to a central bank issuing the underlying assetLittle to no transparency due to lack of regular audits on their reservesThey require a custodian to store reserves, presenting custodial solvency and legitimacy risksLittle innovation to what traditional banks do Popular Fiat-Backed Stablecoins These are the top five popular fiat-collateralized stablecoins: Tether (USDT) The biggest fiat-backed stablecoin by market cap that runs on the Bitcoin network through the Omni Layer Protocol.USD Coin A completely collateralized USD ERC-20 token issued by CENTRE–a joint organization of Circle and Coinbase.Binance USD (BUSD) Collateralized by reserves kept in fiat currency in omnibus accounts at various US banks and /or treasury bills.Paxos Standard (PAX) Backed 1:1 by USD reserves and available via Paxos.TrueUSD (TUSD) An ERC-20 stablecoin that’s backed, secured, and verified by third-party agencies.
Asked 8 months ago
Can You Buy a Fraction of Bitcoin?
Bitcoin is a digital currency that works without any central control or oversight by financial institutions and governments. Instead, it uses peer-to-peer technology and cryptography to function. According to the brief history of Bitcoin, it runs on a public ledger—a blockchain—to record and store transactions on distributed servers. Anyone with a computer and internet connection can create one of these servers as a network node operator. Consensus on bitcoin transactions is achieved cryptographically by these decentralized nodes instead of relying on a central point of trust such as a central bank. Every vitcoin transaction is publicly broadcasted to the network and shared among the nodes. After approximately every 10 minutes, miners group these transactions into a block and add them permanently to the Bitcoin blockchain, which acts as the definitive account book of Bitcoin. Is Buying a Fraction of a Bitcoin Worth It? First, how do you buy Bitcoin? Well, you can buy Bitcoin by following these three simple steps: Sign up with a crypto trading marketplace, like Binance, Coinbase, Kraken, FTX, etc. Set up your payment method by linking your bank account, credit/debit, Apply Pay, PayPal, etc.Follow the exchange instructions to buy Before making your first buy order, make sure you check these limitations of Bitcoin to make an informed decision. Now, let’s answer the question: is it profitable to buy fractions of bitcoin? Yes, it is worth it to buy a fraction of bitcoin. If its value doubles within a given period, the amount you invested will determine the profits you get, just like the person who bought a whole bitcoin. Importantly, you don’t have to purchase a whole bitcoin to own bitcoin. Satoshi Nakamoto, the anonymous Bitcoin creator, ensured you could buy a fraction of bitcoin as little as 0.00000001 BTC—1 satoshi. With that in mind, there are some considerations you should factor in when buying fractions of bitcoin: Exchanges typically don’t process buy orders of less than $5.Bitcoin transactions cost money. Though these transactions keep changing, spare at least $5 for that reason.Exchanges charge fees of up to $3 for buying bitcoin. Besides, payment processors like credit/debit card companies charge for using their services. Can You Buy a Whole Bitcoin? You can buy a whole bitcoin or a fraction of it. While most cryptocurrency marketplaces have a minimum buy limit, they are well below 1 BTC. The only limitation is that you can’t buy more than 21 million bitcoins because there’ll only ever be a maximum of 21 million bitcoins in circulation.
Asked 9 months ago
Convert Interest Rate to APY in Crypto
Annual Percentage Yield (APY) is the total amount of money or interest you earn on a bank or crypto account over one year. Importantly, APY includes compound interest. An interest rate is similar to APY in crypto, only that it doesn’t consider compounding the monthly interest earned. Since simple interest is not compounded, you earn the same interest each month throughout the year. But in compound interest, the interest made every month is compounded throughout. Can APY Be Fixed or Variable? APY can be variable or fixed, depending on your deposit account. If you use a saving or money market account, your APY will be uneven, which means it will be tied to a primary benchmark rate. When the benchmark rate increases or decreases, your APY will automatically comply. Basically, saving account rates adjust with the federal fund rate. When the Federal Reserve reduces interest rates, financial institutions also slash their APYs. Certificates of Deposit (CDs) accounts have a fixed APY. Since a CD is a time deposit account, you hold funds in the account for a given period. You earn a fixed interest rate instead of a variable rate until the CD matures. Once it matures, the new rate you will earn if you roll the CD over may increase or decrease, based on the benchmark rate. Nonetheless, this rule has some exceptions. For example, some financial institutions can increase your CD rates, permitting you to raise your rate and APY during your CD period. How to Convert Interest Rate to APY APR stands for the Annual Percentage Rate, and it refers to the interest rate lenders charge on the amount you borrow. In other words, it shows the yearly cost of borrowing money. Here is the formula for converting interest rate to APR according to a crypto APY calculator: Interest Rate = APR/n APY = (1 + Interest Rate)n – 1 n is the number of period, which is 12 months. APY is the Annual percentage Yield APR is the Annual Percentage Rate. Example If Taylor borrowed 8% interest rate on his investment for one year, what will be his APY? Answer: APR is 8% or 0.08. Number of periods (n) is 12 months. Then, Interest Rate = APR/n 0.08/12 Interest Rate = 0.006666667 APY = (1 + Interest Rate)n – 1 (1 + 0.006666667)12 – 1 = 0.08299951 Therefore, our APY is 8.299%
Asked 9 months ago
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