What is digital dollar passive income? An investment method with an annual return rate of up to 10%

Source: PortaldoBitcoin Original Title: What is passive income in digital dollar? Investment that pays up to 10% annually Original Link: As US interest rates remain relatively high, the US dollar has become a key asset for Brazilian investors to protect their assets. A new “entry point” is gradually gaining attention: stablecoins (commonly referred to as digital dollars).

Stablecoins not only allow exposure to USD with near-instant settlement, but some platforms are also beginning to offer so-called digital dollar passive income, which is a yield paid on stablecoin balances, typically achieved through strategies in decentralized finance(DeFi) protocols.

The idea is simple: besides investing in one of the world’s strongest currencies, investors can also earn additional returns just by keeping funds on the platform. But is this investment approach really more worthwhile than traditional USD purchases?

What is “Digital Dollar Passive Income”

In the crypto world, digital dollars usually refer to USD-pegged stablecoins, such as the most well-known USDT (issued by Tether) and USDC (issued by Circle). These assets aim to maintain a 1:1 parity with the dollar, backed by reserves that can be bank deposits or US Treasuries. Although not officially guaranteed by the US government, they generally hold their value at around 1 USD, with minor fluctuations under stress periods.

“Passive income” appears when these digital dollars are no longer idle but are allocated into yield-generating strategies(yield), often involving lending and liquidity provision. Essentially, you earn rewards by deploying USDT/USDC within protocols, with returns that are usually variable.

How it works in practice

Platforms can use different DeFi applications to offer returns to users. For example, a leading exchange platform might allow users to deposit stablecoins and earn daily rewards for providing liquidity. In their case, returns can reach up to 10% per year, which is higher than US interest rates (below 4%).

It’s important to note that these returns are not fixed and cannot be guaranteed. Rewards fluctuate daily depending on DeFi dynamics, but generally, over the medium to long term, they tend to be close to the published estimates.

In this platform, the protocol used is Aave, where the interest rate is a direct result of supply and demand within the pool. That is, if there is a large supply of available funds (supply is ample) and few borrowers, interest rates tend to decrease to attract demand; but if borrowing demand is high and available funds are scarce, rates tend to rise to encourage new deposits.

This “utilization rate” mechanism (the proportion of deposited funds that are actually lent out) is one of the pillars of these protocols’ variable interest rate models.

Actual returns

To clarify further, let’s look at different scenarios over a three-month investment period.

In the first case, the annual digital dollar passive income is 5%, so the three-month yield is about 1.23%. This means $100 will generate about $1.23, ending at $101.23. Similarly, $1,000 will generate about $12.27, ending at $1,012.27. On some platforms, rewards are paid daily, so results may vary, and you can withdraw your earnings at any time.

In the second case, returns could be higher. A platform launched a “Turbo Digital Dollar” promotion, doubling the offered 5% yield, now paying 10% annually over the first three months. Under this promotion, quarterly returns increase to about 2.41%. In practice, $100 during this period will generate about $2.41, ending at $102.41, and $1,000 will generate about $24.11, ending at $1,024.11.

To determine whether this investment approach is truly worthwhile, compare it with traditional USD purchasing methods, which typically track US interest rates.

In this mode, the first point is that investors usually pay a 1.1% IOF (Tax on Financial Operations) on transactions. This tax alone consumes most of the short-term returns: applying at an annual rate of about 3.62% (like a 3-month T-bill), the three-month yield is roughly 0.89%, and the investor effectively starts losing 1.1% of principal.

Numerically: for $100, the IOF cost is $1.10, so you effectively deploy $98.90, with a yield of about $0.88 over three months, ending at $99.78 (which is below the initial amount). For $1,000, the IOF cost is $11, deploying $989, with a yield close to $8.83, ending at $997.83. This is before considering another common burden: exchange rate differences and operational fees (bank, broker, platform), which could further reduce net results, especially for smaller deposits.

Another option, currently one of the most used, is the global account of fintech companies. The issue is that this route is more expensive from the start, with a 3.5% IOF. Worse, larger spreads are common; some platforms offer zero fees, but in some cases, they can reach 2%.

In this case, buying $100, with a 3.5% IOF, starts with $96.50. Over three months, this yields about $0.86, totaling $97.36, excluding any spread. For $1,000, a 3.5% IOF costs $35, so the actual converted/deployed amount is $965, with a yield of about $8.62, ending at $973.62.

Summary of $1,000 investments in different options:

What about taxes?

One of the arguments used by stablecoin platforms is that, since this is not a “traditional” foreign currency purchase, there is no IOF when buying digital dollars. This helps explain why “digital dollar passive income” is so attractive: with IOF paid upfront, interest starts working from day one, rather than after paying taxes.

On the other hand, in the country, passive income earned through stablecoins is considered taxable income earned abroad. Therefore, it must be reported and taxed at 15% according to tax regulations.

“Traditional” USD vs. Digital USD

Ultimately, it’s clear why digital dollar passive income has attracted so many investors and may be more advantageous than the traditional approach of buying dollars and trying to generate returns.

The main difference lies in friction: in the classic model, investors often start at a disadvantage due to taxes and operational costs—initial IOF, and in many cases, spreads and fees, which can reduce or offset gains in the short term.

In digital dollars, the proposal often aims to eliminate some of this friction, providing 100% digital access and faster settlement, while allowing stablecoin balances to enter yield dynamics.

Moreover, investors are not only seeking “interest” but also want USD exposure. By earning yields on USDT or USDC, they maintain assets pegged to the dollar while earning extra income. Additionally, since stablecoins are dollar-pegged, this product tends to offer a less volatile experience compared to crypto assets with higher volatility.

This does not mean viewing the product as a classic fixed income instrument. Returns can fluctuate with protocol supply and demand, and there are risks not present in traditional bank USD holdings. Nonetheless, the argument makes sense: if the goal is dollarization while seeking some yield without paying typical exchange fees, digital dollars as a more efficient alternative for some investors is reasonable.