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.

hUSDC is a wrapped form of USDC, which is produced by Circle, a privately-owned company, in contrast to a CBDC, which would be generated by a governmental entity. While numerous CBDCs are still being explored and researched, USDC is already in existence and has gained extensive popularity, being utilized by millions of individuals globally. Circle has pioneered the technology necessary for USDC to operate across multiple public blockchains, leveraging both open-source contributions and advancements in private markets to accelerate the development of digital dollar currencies.

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

hUSDC is a wrapped version of USDC –  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.

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.