Your Stablecoins Are Killing Your Gains. Here’s Why:
Stablecoins were made and designed to be a stable cryptotoken pegged to a fiat currency like the US dollar, mimicking its value.
Given that, it is safe to assume that stablecoins are the “fiat version” of our world currency into the crypto space, and this is ideal for a stable means of transaction when buying, selling, trading, lending, or borrowing.
Stashing cash and stablecoin is good until…
It has always been advised to save money on every paycheck and stash cash as much as you can, in order for you to retire comfortably, and early if possible.
This is a healthy habit to maintain. But it is not sufficient. What is often neglected in this kind of mindset is hoping that your cash and stablecoin will have the same purchasing power 5 to 10 years down the road.
It won’t, for one reason: inflation.
Inflation is simply the rate of increase in prices over a certain period of time. It is designed to stimulate the economic activity of a country, given it is in small increments that can be controlled or predicted.
Let’s say you your portfolio contains 100 USD and it could buy 50 hamburgers today. With inflation, your 100 USD could only purchase maybe 45 hamburgers come next year because of an increase in hamburger price.
If you know that your 100 USD today will be worth less by next year, you will be spending that money now so you could maximize your purchasing power before it decreases. And does, it promotes a free flow of money in the economy.
However, without inflation, deflation happens, and it can be equally harmful.
For instance, your 100 USD could purchase one earphones today, but next year it could purchase one car. The tendency is people will be more careful spending their dollar since it increases in value, which hampers economic activity, thereby, economic growth.
How to beat inflation?
To easily solve the problem with deflation, most central bank authorities target at least 2% — 4% inflation in a year.
Generally, to beat inflation, you just need to find a deposit interest that yields higher than the inflation rate.
In DeFi, the average yield when you lend a stablecoin today is 3.10%, which is 3.02% higher than the yield in most fiat banks.
Hypothetically, if the inflation rate is 2%, and your stablecoin deposit interest is 3.10%, you are still earning 1.10% discounting the inflation.
Where can I lend my stablecoin?
There are many DeFi platforms nowadays that offer a good lending interest rate, like Aave and Yearn Finance.
However, unlike the traditional banking system, most DeFi lending yields are not fixed, so the interest rates vary depending on the supply and demand of the liquidity pool.
See how a liquidity pool works here.
With some platforms like iGain IRS, your interest rates on Aave and Yearn Finance could be fixed.
They use special tokens called LONG 🟢 token and SHORT 🔴 token to fix not only your lending yields, but also your borrowing interest rates.
Conclusion: let your cash work for you
Saving cash has always been the rule of thumb when it comes to personal finance. But, with a silent killer like the inflation that creeps out the purchasing power of your penny slowly, it is always a good thing to keep in mind to invest your money in something with a higher interest rate returns, much higher than the inflation rate.
