Today, Coinbase announced that some U.S. holders of USD Coin will earn 1.25% APR per coin on their platform. Earning interest isn’t new in the crypto space. Plenty of other websites offer more interest for holding the same USDC, but it is a debut feature for Coinbase.
Why am I able to earn interest on USDC?
Circle, who created the UDSC product claims on their website that U.S. dollars backing USDC are held in reserve by regulated financial institutions. This, along with there being no records of Coinbase being in the business of lending implies that the financial institutions holding the backing for USDC are paying Coinbase higher than 1.25% interest.
According to Coindesk, a Coinbase representative said that 1.25% interest is higher than most will receive from a savings account.
“Speaking to the inspiration behind the USDC Rewards program, Branzburg noted that a 1.25 percent interest rate on holdings of U.S. dollars is “15 times more than the national average or what people might get through a [traditional] savings account.”
So unless those regulated financial institutions are giving Coinbase a generous savings account, the money backing USDC is likely in a CD account. According to smartasset.com, there is only one online bank offering 6 month CD rates over 1.25%. There are zero big banks offering 6 month CD rates over 1.25%.
What this means is that the money backing up USDC is likely going to be tied up for more than six months to make paying interest profitable.
What is the benefit of using Coinbase rather than higher paying sites?
Most decentralized exchanges will pay more than double what Coinbase will pay you, but moving the money around takes longer. There are no decentralized exchanges where you can convert directly to USD like you can on coinbase.
A decentralized exchange is intended to be a forum to facilitate transactions between wallets.This can potentially make your transactions a bit slower and more time consuming.
The only way to get USDC onto DYDX, a popular lending and borrowing platform is to use the MetaMask wallet. MetaMask app doesn’t let you deposit USDC by default, so you have to find USDC and enable it.
From there, you deposit it into DYDX, but you will need to have some Ethereum in MetaMask to pay the gas fee. Once you would like to take the USDC out of DYDX, you need some more Eth for the gas fee. It will then be sent back to your MetaMask address, then you will pay another gas fee to transfer it to Coinbase. From there you can exchange it for fiat USD.
On Coinbase, you will only have to purchase USDC with cash and then they will pay you interest.
There are many people who won’t go to the trouble of learning how a decentralized exchange or even a crypto wallet works. For those people, they are still going to earn more interest holding USDC on Coinbase than they would keeping USD in their savings account.
As long as you can trust that the USDC product is in good hands, there doesn’t seem to be much to worry about. If something happened to where Coinbase needed to take out USDC backing and it was locked in a CD account, they would either have to dip into their personal bags or take out loans.