Stable Yield in the Brave New (Volatile) Crypto World
A first in South Africa, Mesh introduces Yield Coins
Many investors are hesitant to invest in crypto currency as it carries high risk. Anything that is new or based on technology that seems complex can feel scary and intimidating. We equate that with red flashing lights and danger right around the corner. The massive losses that we hear about in this space naturally play on our minds, however, large amounts of capital continue to flow into the blockchain ecosystem because there are good returns to be made. We need clear concepts and good research in order to make sound investment decisions.
So first things first: Blockchain. Basically a really big ledger/record keeping system. All financial institutions have some kind of accounting system to keep track of where assets lie, who owns what, and at what prices the assets should be valued. Almost like a big warehouse. Only the financial institution can access their own ledger, and we trust that what they report to us is accurate.
Public distributed blockchains are trustless. They are massive record keeping systems that can be accessed by anyone. The information on the network is anonymous, in the sense that no personal information of any individual is attached to an account.
An account on the blockchain has an address called the public key and a corresponding password called the private key. In order to authorise any transaction on your account, you need the private key. Once a transaction is committed, it can never be changed. This makes it a massive, public, permanent record.
There are lots of different blockchains, each with their own native currency. The Bitcoin network is one such example, with BTC as its native currency. Stellar is another, with XLM as its native currency.
On-chain trading, is trading directly on a blockchain. Every transaction, be it buy, sell or transfer, is committed to the blockchain. This is what we do here at Mesh.
Most cryptocurrencies are highly volatile. So Stablecoins, (coins of stable value) were created to solve the cryptocurrency volatility problem. These coins are designed and managed to trade 1:1 with their Fiat counterparts, on which their value is based. The value of Fiat will remain stable for most people for the foreseeable future.
How do Stablecoins work?
Simple: Let’s take USDC as an example. One of the issuers of USDC on Stellar is Centre.io. Centre.io holds an amount of USD in their custody account, and issues the same amount of USDC tokens on the Stellar network. If you then buy USDC, you hold the right to the underlying USD fiat currency, with the ownership record in your blockchain account.
How do we do research to see if we can trust Centre.io to do that? One way is to look at their track record, how liquid the asset is, what people are saying about them and how easy it is to trade your USDC for any other crypto currency, or redeem it for the underlying USD. You can also look at audit reports. As an example, Centre.io posts their audit reports here https://www.centre.io/usdc-transparency
There are different ledgers/blockchains available today, each is known as a network. While networks do not speak to one another, it is possible to buy, for example, Bitcoin on the Stellar network by means of Stablecoin. An issuer will hold the currency in their custody, and issue equivalent amounts of Stablecoin on a different network/blockchain. It is important to know who issued the Stablecoin, as we trust them to sell you the rights to a token in their custody, available for redemption at any time. We have a number of these currencies available on our Mesh marketplace.
Once you understand the mechanics of blockchain, you will want to know the “Why”.
Why trade USDC when you can buy the underlying asset via Forex?
Why buy any blockchain-based asset?
The answer is, ease of access. For many assets (across different asset classes), there are often significant barriers to entry. You need to go via a forex trader, or possibly other middlemen, each taking margin for the service they provide.
Many investments have a minimum investment amount stipulated, which inadvertently locks out users that have less than that available for investing.
Costs are usually high on these transactions and often margins are added which are obscure or hidden.
Having one portfolio, that combines traditional finance (TradFi) based instruments as well as decentralised finance (DeFi) or cryptocurrency assets has not been possible to date.
Blockchain makes it possible to overcome certain obstacles and makes investing a little easier. Fractional ownership means you can consistently invest only the amounts that you feel comfortable with.
Any investment is made with one goal in mind – growth. Your assets need the opportunity to grow. While there are many different ways to do this, one of the simplest is a savings account – where you earn interest for no real further work on your side.
Savings accounts sound comfortable, easy and simple. Yield coins are just like that.
What are yield coins?
Yield coins or Savings coins are coins where you earn interest for holding them in your account. As an example, if you hold yUSDC (the yield coin for USDC) you will earn daily interest into your blockchain account, just like a savings account. Your balance of coins will therefore increase every day. The interest is an annual percentage yield (APY), compounded daily.
This means that if you hold those tokens for a year, you will receive a total interest amount of x%, but that x% is broken up into daily interest payments. The yield coins can either be redeemed, or traded as if you were trading a normal asset, which in this case is USDC.
At any time you can decide to sell your yield coins, and with enough liquidity provided, you should have no trouble getting out of your position.
So where does the money come from, for the issuer to be able to pay interest to you every day?
The issuer of yUSDC is Ultrastellar. The funds generated from the sale of the yUSDC tokens are reinvested by asset managers, in both traditional finance (TradFi) as well as decentralised finance (DeFi) projects.
Ultrastellar specifically is clear on the protocol they follow and the companies they work with, in choosing where to invest. They invest only in companies that have proven track records and a certain amount (very large amounts actually) of assets under management.
What are the risks associated with yield coins?
Every type of yield coin is unique in its risks and should be considered before making an informed decision. There is always the risk that the issuer of a token defaults, resulting in the loss of your investment. This is an extreme case, but care should be taken to only trust issuers with a proven track record and sufficient liquidity.
Other risks include bugs in software and hacking attacks. While blockchain is not entirely immune to these challenges, well distributed public blockchains are extremely robust and, based on their track record, they can be considered secure. The vast majority of losses due to bugs or hacking in the crypto ecosystem are the result of failures in 3rd party software that interacts with or runs on the networks rather than the networks themselves.
As issuers are responsible for setting up this software, this further reinforces the need to take care when choosing which issuers to trust.
The reading list below can give you a starting point for researching the yield coins Mesh has on its platform: