Decentralized finance (DeFi) is not only cutting-edge financial innovation but also one of the hottest trends in the cryptoasset industry this year. Autonomous, open-source protocols that enable anyone across the globe to gain access to financial services have attracted billions of dollars since the start of the year, with yield-generation being the primary driver.
In this article, you will learn about USDC lending and the role of digital dollar stablecoins in the DeFi market.
The Popularity of USDC Lending
USD Coin (USDC) has emerged as one of the most popular borrowing and lending asset in DeFi.
With USDC lending APYs ranging from 2.22% to 9.99% on leading DeFi platforms, it is not surprising that crypto-savvy investors are ditching their US dollar savings accounts for digital dollar savings accounts.
But that is not the only reason.
USDC is a regulated, fully reserved digital dollar stablecoin — redeemable 1:1 for US dollars — that provides monthly third-party attestations of its dollar reserves. This level of trust and transparency, combined with the stablecoin’s extensive ecosystem, makes it a go-to asset among professional crypto investors.
Moreover, the price stability of USDC enables investors looking for yield to effectively “lock-in” the APY with a degree of certainty because the price volatility of the underlying asset will not affect the absolute returns.
Conversely, if you are depositing a volatility cryptoasset — such as ETH or BAT — into a yield-generating protocol, the absolute returns of your investment will typically be affected more by the underlying asset’s price movements than the yield it is generating.
For example, if the price of the underlying drops by more than the yield it generates, investors could easily walk away with a loss.
By using a digital dollar stablecoin like USDC, however, investors know that they will earn the yield that the protocol pays without having to worry about market risk.
USDC is also widely tradable in the secondary market. Almost all leading crypto exchanges support USDC trading. The easy access to the stablecoin has also added to its popularity among DeFi investors.
What’s more, USDC is a multi-chain stablecoin that also operates as an ERC-20 on the Ethereum network, the home of DeFi. Any Ethereum wallet that supports ERC-20 tokens can hold USDC, which makes it incredibly easy for Ethereum users to deposit the digital dollar stablecoin into Ethereum-powered lending DApps.
According to data compiled by LoanScan.io, almost 40% of deposits in Compound and dYdX - two leading DeFi protocols - have been made in the digital dollar stablecoin.
Moreover, 22% of newly originated loans in the past 30 days used USDC, and 10% of outstanding loans in Compound and dYdX are denominated in USDC.
USDC usage is on the rise in the DeFi market, driven by investors looking for predictable yield and a secure, trustworthy asset. As the DeFi market continues to grow, we expect to see more decentralized financial applications opt for USDC as one of the assets they support.
“As the world’s fastest growing, fully reserved digital dollar stablecoin, USDC offers investors a secure, transparent, and price-stable asset that can be used to invest in this new world of finance where autonomous financial protocols have taken on the roles of banks.”
—Jeremy Allaire, CEO at Circle
The deployment of USDC as a borrowing and lending asset in DeFi has also been one of the drivers of USDC issuance in 2020.
On September 13, 2020, total USDC issuance surpassed the $2 billion milestone, making USDC one of the top 15 largest cryptocurrencies by market capitalization. This also cements USDC’s position as the fastest growing, fully reserved digital dollar stablecoin.
USDC in Action: Earning Yield on Digital Dollars
Yield-generation is the primary reason why more and more crypto-savvy investors are entering DeFi. Unlike in the traditional markets - where interest rates are at historic lows — investors can earn substantial yield by placing their cryptoassets into decentralized lending or automated market (AMMs) protocols.
Currently, the top three largest yield-generating protocols — measured by US dollar amount invested — are Uniswap, Aave, and Curve Finance.
Aave is a money market protocol protocol that enables crypto holders to borrow and lend in a decentralized manner. Conversely, Uniswap and Curve Finance are decentralized trading pools that enable investors to convert one digital asset for another through the use of smart contracts instead of a centralized orderbook.
On the Aave platform, USDC holders can lend the stablecoin to earn interest. At the time of writing, USDC deposits earn 3.54% APR. To generate this yield, investors need to access Aave, connect their Ethereum wallet, and deposit their USDC.
Uniswap is arguably one of the most user-friendly DeFi applications. The decentralized exchange protocol enables USDC holders to deposit USDC in combination with another Ethereum-based asset into a trading pool, composed of a trading pair. USDC holders then receive trading fees as a reward for contributing liquidity to the trading pool.
In the case of Uniswap, liquidity providers typically earn 0.3% in trading fees that are shared with everyone who contributes to the trading pool. In addition, liquidity providers can “liquidity mine” the newly launched UNI token, which the protocol gives to liquidity providers as an added incentive to deposit funds in the protocol.
Curve Finance functions in a very similar way to Uniswap but its predominantly focused on stablecoins, which is why it has emerged as a favorite among yield-hungry USDC holders. USDC holders can deposit the digital currency in a trading pool of their choice to earn 0.04% in trading fees and earn additional yield in the form of CRV tokens, which are allocated to liquidity providers in proportion to the amount of funds they provide.
What’s more, there is the pioneering autonomous lending protocol, Compound, which enables investors to lend and borrow digital currency globally in a decentralized manner. Currently, USDC holders can earn 2.35% APR by depositing their digital dollars into Compound and earn the platform’s native token, COMP, for providing liquidity to the protocol.
“Stablecoins are the dominant form of [...] economy activity that we’re seeing [on Compound]. People like to borrow a stable asset [...] instead of a volatility cryptocurrency and earn interest on it. [...] It allows anyone in the world to have access to the same financial services.”
— Robert Leshner, Founder & CEO of Compound Finance
USDC has established itself as one the most-adopted cryptoassets in the DeFi ecosystem because of the trust that people have in its dollar parity. Learn more about USDC and its role in decentralized finance here.