Why do some stablecoins pay 'interest'? Where does this interest come from?

Stablecoincryptocurrency interestdecentralized financeyield mechanismBlockchain Economy
Created At: 8/6/2025Updated At: 8/17/2025
Answer (1)

Why Do Some Stablecoins Pay "Interest"?

Hey there! As someone who's been in the crypto space for years, I'll break this down in plain terms. Stablecoins are fascinating—I remember wondering why some offer "interest," almost like a bank account. Don't worry, I'll keep it simple and jargon-free.

First, What Are Stablecoins?

Stablecoins are cryptocurrencies pegged to around $1, like USDT, USDC, or DAI. Unlike Bitcoin, their prices don’t swing wildly. They’re used as a safe haven or "cash" in the crypto world. Not all pay interest, but some do—for example, depositing USDC on certain platforms earns you a little extra. This isn’t the stablecoin itself "generating" money; it’s all about the mechanisms behind it.

Why Do They Pay Interest?

Think of it like depositing money in a bank: the bank lends your funds to others, makes a profit, and shares a slice with you as interest. In crypto, especially in decentralized finance (DeFi), some stablecoins work similarly.

  • Lending Platforms Are Key: Many stablecoins can be deposited on DeFi platforms like Aave or Compound. When you deposit, you’re essentially lending your stablecoins to others (e.g., traders borrowing to speculate). The platform matches borrowers automatically, and you earn interest as a "depositor." Rates aren’t fixed—they fluctuate with demand. More borrowers mean higher rates.

  • Not All Stablecoins Do This: USDT typically doesn’t pay interest directly, but you can earn by depositing it on supported platforms. USDC or DAI are more common for this, as they’re designed for DeFi. Some stablecoins (like algorithmic ones) even have their own "yield farming" mechanics, rewarding holders with extra incentives.

I’ve personally tried depositing USDC on Compound—it offered ~4-8% APY (depending on the market), way better than a bank savings account. But risks exist, like platform failures or market crashes.

Where Does the Interest Come From?

Interest isn’t free money! It mainly comes from two sources:

  • Borrowers’ Interest Payments: This is the biggest slice. Borrowers pay interest (e.g., 5-10% APY) to use your stablecoins. The platform takes a small cut, then shares the rest with depositors. It’s like P2P lending—you’re the lender earning from borrowers.

  • Reserve Investment Returns: Some stablecoins (like USDC) are backed by companies that invest reserves (e.g., cash or bonds) in low-risk assets. Profits are shared with holders, but this isn’t the norm—most interest comes from DeFi lending.

  • Other Minor Mechanisms: In some blockchain projects, interest may come from "inflation" or reward tokens. For example, MakerDAO’s DAI charges a "stability fee" (a form of interest) from system fees, indirectly distributed to participants. Others use "liquidity mining"—you provide stablecoins to boost platform liquidity, and the platform rewards you with its native tokens.

Ultimately, interest is your share of profits generated when others use your money. The sources are legitimate, but not risk-free—crypto markets are volatile, and platforms can face black swan events.

Quick Tip

If you want to try this, start small. Connect a wallet like MetaMask to a DeFi platform. Always research the APY and risks—don’t go all in. Got more questions about specific stablecoins? Feel free to ask—I’ve got plenty of experience to share!

Created At: 08-06 13:15:39Updated At: 08-09 22:29:26