Stablecoins as a Cash Alternative: The Real Costs
A stablecoin yielding 5% looks like a savings account with no bank. It is not. Here is the counterparty risk and the maths behind the yield.
What a stablecoin is
A stablecoin is a token that aims to hold a fixed value, usually one dollar. You hand over dollars, receive tokens, and can earn interest by lending them out through a crypto platform.
The yield is a risk premium, not a gift
When a stablecoin platform pays 5% and a bank pays 4%, the gap is not free money. It is compensation for the extra ways you can lose it. A bank deposit is insured; a stablecoin balance generally is not.
Where the risk lives
- The issuer: if the reserves backing the token are not what is claimed, the token can lose its peg.
- The platform: the yield comes from lending your tokens. If the borrower or the platform fails, your balance can vanish.
- The blockchain: a smart contract bug or a hack can drain funds with no recourse.
The maths, with the downside
Earn 5% for a year on 10,000 and you gain 500. Lose access to the principal once in twenty years and you lose 10,000, wiping out roughly forty years of the extra yield. A small chance of a total loss can erase a steady small gain.
A sane split
Treat stablecoins as a small, optional part of a reserve, never the whole thing. Keep your true emergency fund in an insured bank account. The yield on the part at risk is not worth the risk on the part that must be safe.
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