How to use USDC in DeFi: 5 Ways to Earn with USDC

In the crypto space, you can earn on your digital asset holdings through various activities, such as liquidity provision, staking, and lending. You can also receive interest on stablecoins like USDC. 

But how does USDC interest work, and can you directly earn yield on your stablecoin holdings?

Let's find out in this article, in which we will explore what USDC is, how earning interest on USDC works, and the most popular ways to generate yield on your stablecoins.

What Is USDC?

USDC is a leading fiat-backed stablecoin issued by Circle. Since its launch in September 2018, it has become the second-largest stablecoin and the sixth-largest cryptocurrency by market capitalization.

USDC functions as a digital dollar, pegged to the USD and fully backed by physical collateral held in highly liquid cash and cash-equivalents. It is issued by Circle, a global financial technology company.

Circle regularly publishes information about USDC's circulating supply and reserves, which are audited monthly by an independent Big Four accounting firm. USDC is always redeemable 1:1 for USD, providing a seamless way to exchange value globally with near-instant transactions available 24/7.

Available natively on 15 blockchains, such as Ethereum, Solana, and Avalanche, and many other chains via third-party bridges, USDC works just like standard cryptocurrencies. 

Users can transfer the stablecoin without intermediaries or a bank account at minimal costs. It is also secured by public-key cryptography and can be transparently audited on the distributed ledger. The only difference is that it tracks the USD's price to minimise volatility-related risks for holders.

Beyond hedging against crypto market volatility, USDC's use cases include:

• Storing value

• Transferring funds across borders

• Unlocking new financial opportunities

• Accessing the crypto market seamlessly

• Interacting with decentralised finance (DeFi) protocols

How Does USDC Interest Work?

When you move your USDC to a third-party platform like an exchange, wallet, or a DeFi solution's smart contract, they'll pay you interest. It's similar to moving your fiat money to a savings account at a bank, who pays you interest.

For example, when you deposit your USDC into a crypto exchange, the exchange uses your money to make more money through things like lending it out or using it in trading. The exchange then shares some of that profit with you as interest. The amount you earn is typically expressed as an Annual Percentage Yield (APY) and can be fixed or variable.

You can take your USDC and the extra you've earned out whenever you want, but remember, USDC itself doesn't generate interest; rather, the yield comes from how the stablecoin is used within the exchange to help you earn more.

How Can You Earn Interest on USDC?

Now that you know how USDC interest works, let's see a few practical ways that could generate yield on your stablecoin holdings.

1. Lending

Lending is one of the easiest and safest ways to earn interest on USDC.

On a centralised finance (CeFi) or a DeFi lending solution, you supply USDC to the platform in exchange for a fixed or a variable Annual Percentage Yield (APY). After that, your USDC is lent out to borrowers, who deposit crypto collateral to borrow stablecoins. Until you withdraw your funds, you continuously earn yield on your supplied assets.

Loans on most crypto lending platforms are overcollateralised, meaning that borrowers can borrow less in value than what their collateral is worth. For example, with a 75% Loan-to-Value (LTV) ratio, you must deposit $100 of ETH to borrow $75 of USDC.

This over-collateralisation mechanism protects lenders against non-paying borrowers, defaults, and the volatility-related risks of the deposited collateral. This makes lending a relatively low-risk method to receive yield on USDC.

2. Savings Account

Multiple crypto exchanges and CeFi providers offer services that enable you to earn an APY on the USDC you deposit to their platforms. These solutions resemble savings accounts in the traditional finance (TradFi) world, as you only need to move USDCto their accounts to start earning yield.

However, you should be aware that centralised exchanges (CEXs) and CeFi providers are custodial services, meaning that you don't exercise complete control over your assets while earning yield on your USDC. As this increases counterparty risks, you should do your own research before interacting with any of these platforms to protect your stablecoins from losses.

3. Yield Farming

Yield farming is among the most popular DeFi activities. Here, you supply cryptocurrencies to a decentralised exchange's (DEX) liquidity pool to facilitate swaps. In return, you receive liquidity provider (LP) tokens, which can be staked or used on external platforms to generate additional yield on top of receiving a share of trading fees from the pool.

Stablecoins like USDC are often incorporated into yield farming strategies to provide farmers with much-needed stability. In most cases, pools combine USDC with other cryptocurrencies (e.g., wETH, UNI, wBTC) and stablecoins (like USDT or DAI) that you must deposit along with USDC to start farming.

While yield farming has the potential for lucrative income, most strategies are complex for the average investor. In addition to being aware of smart contract-related risks, you should also take impermanent loss into account. It refers to the situation in which you receive less yield from allocating an asset in a liquidity pool than what you would have earned by simply holding it. Impermanent loss can be minimised by supplying liquidity into pools with stablecoin pairs.

4. Tokenised Real-World Assets (RWAs)

Tokenised Real-World Assets (RWAs) offer you a seamless way to earn interest on USDC by investing in traditional financial instruments. Ranging from real estate and invoices to money-market funds and carbon credits, RWAs are tangible assets existing in the physical world that are later brought on-chain via tokenisation.

They can provide yield on your USDC without relying on crypto-native solutions (e.g., yield farming or lending platforms). However, it’s important to be aware of potential defaults and other risks associated with these investments that could lead to loss of funds.

5. Tokenised Treasury Bills (T-Bills)

Tokenised treasury bills (T-bills) represent government debt securities on the blockchain in a digital, crypto-native form. Most T-bills in the cryptocurrency market are tokenised versions of US Treasuries.

You can exchange USDC for T-bill tokens like Ripple's and OpenEden's TBILL to gain exposure to the tokenised versions of US Treasuries and start earning yield.

Buy USDC on VALR

USDC is a leading fiat-pegged stablecoin with a wide range of use cases in the cryptocurrency space. Among other utilities, you can use it to earn interest on your USDC holdings via third-party platforms and services. Some popular ways to earn yield on USDC include lending, savings accounts, yield farming, and investing in tokenised RWAs and T-bills.

With VALR, you can easily gain exposure to USDC. All you need is a verified account to purchase the stablecoin, which you can then use to earn yield through external platforms. 

Ready to get started?

Purchase  USDC on VALR Today!

Risk Disclosure

Trading or investing in crypto assets is risky and may result in the loss of capital as the value may fluctuate.

VALR (Pty) Ltd is a licensed financial services provider (FSP #53308).

Disclaimer: Views expressed in this article are the personal views of the author and should not form the basis for making investment decisions, nor be construed as a recommendation or advice to engage in investment transactions.