Distinguish between Custodial and Non-Custodial Lending:

• Custodial lending refers to lending your crypto through a centralised entity such as Binance, Kraken, Coinbase.
• Non-custodial lending means that you have sole control of your private keys, and therefore control and custody of your own assets

Do not fall for high APR %: When you stake your crypto, you will usually be quoted an APR for your investment. Some lending platforms may offer very high APRs as a way to attract investors, but these high APRs may be unrealistic and involve additional risk. A safe USDC lending protocol typically offers yields of less than 2%.

Stick to well-known DeFi protocols: Look for protocols that have liquid markets and choose protocols that have been audited by reputable auditors for added security.

The lending yield on USDC is generated from:

Lending and Borrowing: On platforms such as AAVE, USDC token holders can contribute their USDC to liquidity pools, which can then be accessed by borrowers who provide collateral assets. These borrowers take out loans by borrowing against the collateral assets they have deposited. In exchange for the loan, borrowers pay an annual percentage rate (APR) to the token holders (i.e. lenders) who have added their USDC to the liquidity pools.

We strive to make lending as safe and transparent as possible, however, it’s important to consider factors that may influence whether a particular lending option is appropriate for you.

Smart contract risks: Defi platforms like AAVE, have inherent risks associated with smart contracts. These contracts can be exploited or hacked by a malicious actor

Counterparty risks: If you use a centralized lending platform, you may be exposed to counterparty risk. This is the risk that the other party in the transaction may not fulfill their obligations and default on the contract.

Protocol security risks: The collateral for USDC may include loans and receivables from third parties, which implies a collateral risk. There is also a risk of unknown bugs in the protocol and the USDC investment in general.

Keep in mind that this is not a comprehensive list of all potential risks associated with lending.

USDC is a FIAT-Backed Stablecoin. 

A fiat-backed stablecoin keeps a fiat currency, such as USD, in reserves. For example, each USDC is backed up by a real US dollar held as collateral. Users can then convert from fiat into a stablecoin and vice versa at the pegged rate. If the price of the token drifts from the underlying fiat, arbitrageurs will quickly bring the price back to the fixed rate.

Let’s say USDC is trading above one dollar. Arbitrageurs turn US dollars into USDC and sell it for more on the market. This increases the supply of USDC for sale and lowers the price to one dollar again. If USDC trades below one dollar, traders purchase USDC and convert it to USD. This increases demand for USDC, raising its price back to one.

For every $1 of USDC in circulation, Circle holds $1 of USD. USDC is fully-backed by cash and short-dated U.S. treasuries, and these reserves are held in the custody of leading financial institutions.

There will be times when the quoted price on exchanges may trade above or below $1, but this is usually speculation based on market volatility and does not mean that USDC is not backed by $1 of FIAT currency.

Please see Circle’s Proof of Reserves here

USDC is issued by Circle, a company in the private sector, while a CBDC would be issued by a government. While most CBDCs are only in the research phase, USDC exists today and is widely used by millions of people around the world. Circle has developed the technology to enable USDC to run on over eight public blockchains, with open-source and private market innovation driving rapid progress in dollar digital currency models.

Read more about Circle’s insights on the Federal Reserve’s CBDC discussion.