Interest-bearing Tokens
Equities pay dividends and bonds pay interest. The money in your savings account, however, barely generates any upside. For context, the national average interest rate in the U.S. is 0.06%. When you store money in a bank account, you are taking on a counterparty risk with the bank as your bank can always fail. The bank takes in your money, then lends it out to borrowers. With fractional reserve banking adopted almost everywhere across the world, an average bank never has sufficient liquidity to satisfy the redemption requests from its clients, should they occur en masse. This creates a situation where to ensure the system is functional, the bank must prevent customers from withdrawing their money too fast (bank run). This is widely implemented via credit & debit cards limits, as well as restrictions on how much cash can be taken out OTC.
Interest-bearing tokens (ibTokens) were as such created. One such example is Aave’s aUSD. When one deposits USD to any of the dollar lending pools, an equal amount of aUSD gets sent back. As one continues to hold aUSD in their account, the balance grows over time, as the lending pool gains more interest payments. If the pool interest rate is 1%, one’s 100 aUSD will turn into 100.00276… USD. When a payment is made with aUSD, the accumulated interest follows the transaction to the recipient, meaning that no accumulated interest is lost at any point.
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