Donut University is an open space for you to learn about investing, crypto & decentralized finance. Today we take a close look at our App's latest feature: Donut Savings.
There's one piece of advice we've all heard since we were old enough to own a wallet: keep your savings in the bank. But in 2020, this sage wisdom is up for debate.
Thanks to crypto, there are more options for saving smarter than ever before. Donut Savings, our App's newest feature, is one of them.
WTF is Donut Savings? 🤔
Donut Savings is a way to make your money work harder by earning a higher interest rate (between 2-10% APY) on your dollar.
It's simple to use:
1️⃣ Add funds
2️⃣ Earn interest in real time
3️⃣ Cash out when you want
So, how does this all work? 👀
Donut Savings can do things your bank can't because it's powered by special cryptocurrencies called stablecoins (1 stablecoin ≈ $1 USD).
When using Donut Savings, we automatically convert your dollars to stablecoins and supply them to our partners at Compound.
In exchange for supplying your stablecoins to Compound's platform, you receive a real time interest rate on your assets. The interest rate varies constantly, but has roughly been in the 2-10% range in recent months.
What are stablecoins? 💵
Stablecoins are like real dollars, but are based on blockchain technology. They don't fluctuate in value and are 1:1 with the US dollar. They're accessible by anyone, anywhere in the world and can be transferred globally in seconds not days.
The real benefit, similar to other cryptocurrencies, is that they enable a whole host of new finance applications with no borders and no banks needed. While there are many stablecoins out there, we use DAI for Donut Savings.
How does Compound work? 📈
Compound is a global, decentralized network of borrowers and lenders. By using their platform, you can earn interest on money like never before.
On Compound, your stablecoins become part of a global lending pool. Borrowers take out loans from this pool and pay an interest rate, which goes directly to your pocket in real time.
You can literally watch your Donut Savings tick up second-by-second as this unique system is collecting interest 24/7. You can dive deeper and learn more about Compound with this great FAQ.
How is this different from a bank? 🏦
Banks generate profit as a middleman, whereas lenders earn interest directly with the crypto approach. Here's a closer look:
You go to a bank and save $2,000 and a bank offers you an interest rate of 0.50% (if you're lucky!). On the backend, the bank lends your cash out, perhaps to a small business owner or college student, and charges 5% interest on the loan to profit 4.5% on your dollars.
The Crypto Approach:
There is no middleman. You can go direct with the borrower globally, and pocket higher interest yourself (instead of sharing it with a bank).
How is my interest rate calculated? 🤓
Compound calculates its interest rate algorithmically, based on supply and demand. As borrowing demand increases rates rise. Conversely as lending supply increases rates fall. Supply and demand factors look different in the crypto sector, hence the uniquely high interest rates.
How often is my interest paid? 📆
The whole system works in real time and there are no "1 year" terms (as there are with traditional bank lending).
This dynamic system allows you to be paid interest every 15 seconds, or every block. You will be able to visibly see your savings grow day-to-day, rather than every year.
Is my interest rate variable? 😬
Interest rates on Donut Savings are variable as lending and borrowing fluctuates on Compound. Rates can change up to 4 times a minute, often with very small changes.
At the time of writing, the interest rate on Compound has varied from 2-10% APY over the past months. You should expect constant change.
What are the risks? 🕵️
Like any financial product, there are always risks and we want to make you fully aware of them before you take advantage of Donut Savings.
1) Platform Risk
Donut Savings leverages Compound, a third party technology platform for providing interest on your money. As with any decentralized application, there is the chance that the smart contracts governing the network have a bug, which could create an issue for all users.
However, we trust Compound's regular audits and procedures safeguard against such technical issues. Indeed, you can read about Compound's security features that their developers documented here.
2) Stablecoin Risk
Donut Savings uses the DAI stablecoin. DAI is a decentralized cryptocurrency that's based on the Ethereum blockchain.
It's price is regulated by MakerDAO though a system of smart contracts such that 1 DAI = $1. There is a possibility that this peg breaks, although the system is designed in a way to avoid that happening.
You can learn more by visiting MakerDAO's FAQ page.
3) Interest Rate Changes
Interest rates change based on supply and demand of the underlying stablecoins. Today you may have a higher or lower interest rate than when you started.
Although not a full risk as your assets should always increase, it's worth noting that the rate of increase can fluctuate.
Can I withdraw anytime? 👋
You can cash out whenever you want. With the swipe of a button, funds will instantly return to your cash balance in-app. You can then withdraw funds back to your bank account via ACH (this part can take 1-3 days!).
Are you FDIC insured? 🏦
Yes and no. At Donut, we partner with Evolve Bank & Trust, which is an FDIC insured bank. Any holdings in your cash wallet within the App are insured. However, Donut Savings is itself not an FDIC insured product.
The Federal Deposit Insurance Corporation insures deposits of up to $250,000 in U.S. banks to protect against bank failures. Donut Savings puts your stablecoins on Compound, which has its own risks (per above).
Compound mitigate these risks with extensive security practices and auditing. We are looking into ways to insure process even further.
Are you a bank? 🏦
Donut is not a bank and we do not offer fiduciary services. We are a software company providing an easy way to invest and save using cryptocurrency.
Real talk 🚨
Any saving and investment strategy puts your capital at risk.
The above information is intended for informational purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.
We're constantly updating our coverage and you can check within the App if the service is available in your state. For certain states we may provide a reward equivalent to the Compound interest rate as an alternate.