Yield-bearing stablecoins represent a new tool for investors, allowing for passive income generation. This article explores their types, earning possibilities, and associated risks.
Types of Yield-Bearing Stablecoins
There are three main types of yield-bearing stablecoins:
1. **Tokenized Treasuries and Money Market Funds:** These coins are backed by safe assets, such as short-term US Treasuries, with income distributed to holders.
2. **DeFi Savings Wrappers:** Protocols that free up yield based on savings rates allow holders to earn on their tokens.
3. **Synthetic Yield Models:** These stablecoins generate yield through derivative strategies, but returns can fluctuate based on market conditions.
How to Earn with Stablecoins
Earning on stablecoins can be broken down into several steps:
1. Choose the type of stablecoin based on your risk tolerance.
2. Purchase or mint the token.
3. Hold or stake tokens in your wallet to earn yield.
4. Use tokens in DeFi for additional earnings.
5. Track and record your income for tax reporting.
Risks and Tax Implications
Using yield-bearing stablecoins comes with certain risks, including:
- Regulatory risks as laws can change. - Market risks, especially for synthetic models. - Operational risks tied to smart contract functionality. - Liquidity risks where some tokens may restrict redemptions.
Tax consequences are also critical: yield from stablecoins is usually taxed as ordinary income when received.
Yield-bearing stablecoins offer new opportunities for investors, but it is essential to consider the risks and tax implications before making a market entry decision.
