What is passive income in digital dollars? An investment that pays up to 10% annually

Source: PortaldoBitcoin Original Title: What is passive income in digital dollar? Investment that pays up to 10% per year Original Link: With interest rates still high in the United States and the dollar on the radar of those looking to protect part of their wealth, a new “gateway” to the American currency in Brazil is gaining strength: stablecoins, often called digital dollar.

In addition to allowing exposure to exchange rates with almost immediate settlement, some platforms have started offering the so-called passive income in digital dollar, which is a yield paid on the balance of these stablecoins, usually through strategies in decentralized finance protocols (DeFi).

The idea is simple: besides investing in one of the world’s strongest currencies, the investor also earns an extra yield by leaving their money on the platform. But is it really worth investing this way instead of the traditional dollar purchase?

What is “passive income” with digital dollar

In the crypto universe, the digital dollar usually refers to a stablecoin pegged to the dollar, such as the well-known USDT, issued by Tether, and USDC, from Circle. These are assets that aim to maintain parity of 1:1 with the US currency, backed by reserves that can be either deposited money in banks or Treasury bonds. Although they do not have a “government guarantee” from the US and may experience small fluctuations during stress periods, they basically always worth US$ 1.

“Passive income” appears when this digital dollar stops being idle and is allocated into yield-generating strategies (yield), usually related to lending and liquidity provision. In practice, you are being compensated for putting your USDT/USDC to work within a protocol, and this return is usually variable.

How it works in practice

Platforms can use different DeFi applications to offer returns to clients. For example, in a Brazilian exchange, the client deposits stablecoins and receives daily rewards for providing liquidity to the applications. Earnings can reach 10% per year, a higher rate than the US interest rate, which is below 4%.

It’s important to note that the return is not fixed or guaranteed. Rewards can fluctuate daily because they depend on DeFi dynamics, but generally, when evaluated over the medium and long term, they tend to stay close to the announced estimate.

The protocol where the money is invested operates with a remuneration rate as a direct consequence of supply and demand within the pool. That is, if there is a lot of available (much supply) and few borrowers, interest rates tend to fall to attract demand, but if there is high demand for loans and few funds available, interest rates tend to rise to encourage new deposits.

This mechanic, based on the “utilization level” of the pool (how much of the deposited money is being effectively lent), is one of the pillars of the variable rate model of these protocols.

Yield in practice

To make everything clearer, let’s look at different scenarios that help illustrate the advantages of digital fixed income instead of traditional investment, considering a three-month investment horizon.

In the first case, with passive income in digital dollar at 5% per year, the gain over three months is about 1.23%. This means that US$ 100 would yield about US$ 1.23, ending the period at US$ 101.23. Meanwhile, US$ 1,000 would generate approximately US$ 12.27, reaching US$ 1,012.27. On platforms where rewards are daily, the result can vary, and it’s possible to withdraw the return whenever needed.

But returns can be even higher in a second scenario. With a boosted digital dollar campaign, doubling the 5% gains offered by this type of product, now paying 10% per year in the first three months, the quarterly return rises to around 2.41%. In practice, US$ 100 would start to yield about US$ 2.41 in the period, ending at US$ 102.41, while US$ 1,000 would generate around US$ 24.11, ending at US$ 1,024.11.

To understand if it’s really worth choosing this type of investment, it’s necessary to compare it to the traditional dollar purchase route, where gains tend to follow US interest rates.

In this model, the first point is that the investor usually pays a 1.1% IOF (Tax on Financial Operations). This tax, by itself, already consumes much of the short-term return: by investing at an annual rate close to 3.62% (like the three-month Treasury), the return over three months is around 0.89%, while the investor already starts with a 1.1% loss on the principal.

In numbers: for US$ 100, the IOF costs US$ 1.10, you effectively invest US$ 98.90, earning about US$ 0.88 in three months and ending with US$ 99.78 (that is, still below the initial amount). For US$ 1,000, the IOF costs US$ 11.00, you invest US$ 989.00, earn about US$ 8.83, and end with US$ 997.83. And this is before considering another common factor: currency spread and operational fees (bank, exchange, platform), which can further reduce the net result, especially for smaller deposits.

There is also another option, currently among the most used, which is global accounts from fintechs. The problem is that this route is already more expensive, with a 3.5% IOF. To make matters worse, it’s also common to find a higher spread, which, despite some platforms offering 0% fee, can reach 2% in some cases.

In this scenario, buying US$ 100, the IOF consumes US$ 3.50, so you start with US$ 96.50. In three months, this would yield about US$ 0.86, bringing the total to US$ 97.36, excluding any spread. For US$ 1,000, the 3.5% IOF costs US$ 35.00, the effectively converted/invested amount becomes US$ 965.00, the return over three months is around US$ 8.62, and the total reaches US$ 973.62.

Summary of a US$ 1,000 investment in each option:

What about taxes?

One of the arguments used by stablecoin platforms is that, since it’s not a “traditional” foreign currency purchase, the operation is exempt from IOF when buying digital dollar. This helps explain why passive income in digital dollar is so attractive: when you remove the IOF from the equation, the interest “starts working” from day one, instead of first paying the tax bill.

On the other hand, in Brazil, passive income obtained with stablecoins is treated as taxable income abroad. Therefore, it is mandatory to report and pay 15% Income Tax according to the rules of the Federal Revenue Service.

Traditional dollar vs. Digital dollar

In the end, it’s clear why passive income in digital dollar has attracted so many investors and can prove more advantageous than the traditional route of buying dollars and trying to make them yield.

The main difference lies in friction: in the classic model, the investor often starts “in the negative” due to taxes and operational costs, with IOF at entry and, in many cases, spread and fees, which reduce or even cancel out gains in short horizons.

In contrast, the digital dollar proposal aims precisely to eliminate part of this friction, offering 100% digital access and faster settlement, in addition to allowing the stablecoin balance to enter a yield-generating dynamic.

Furthermore, the investor is not just seeking “interest”; they also want exposure to the dollar. By earning yield on USDT or USDC, they keep their wealth tied to the US currency and at the same time capture additional remuneration. Additionally, since stablecoins are pegged to the dollar, the product tends to deliver a less “volatile price shock” experience than volatile cryptocurrencies.

This does not mean treating the product as traditional fixed income. Returns can vary with protocol supply and demand, and there are risks that do not exist with traditional bank dollars. Still, the thesis makes sense: if the goal is to dollarize and at the same time seek some yield without paying the typical exchange rate toll, it is reasonable that digital dollar appears as a more efficient alternative for some investors.