Introduction
What is the best way to protect your crypto portfolio?
While the cryptocurrency industry is known for its incredible bull runs and peaks, volatility cuts both ways and bear markets can be long and brutal. Thankfully, however, since the development of Decentralized Finance (DeFi) in the last bull market cycle users have new opportunities to protect their portfolios from prolonged bear markets.
Moving forward, one of the safest ways for investors to hedge against the turbulent market conditions while also making some humble gains is yield farming with stablecoins. Stablecoins are digital assets that are intended to maintain a “peg” to a real-world asset or currency, most commonly the US dollar, through a variety of means.
For those who don't know what to do with their fiat-pegged assets, we have gathered relatively safe stablecoin farming strategies to help you minimize risk during the relentless bear while maintaining passive income on your assets.
Stablecoins and Yield Farming
First things first: Stablecoins are not assets that are intrinsically blessed with a risk-free existence. Investors first need to know about the generic and asset-specific risks entailed by each type of stablecoin and refrain from treating these digital assets as if they are ‘real’ dollars, despite the price peg. If you want to know more about how a stablecoin can crash and protect yourself from something similar, check out our research on the collapse of UST.
Despite the variety of risks they pose, stablecoins remain attractive due to their ability to be used in yield farming strategies.
As yield farming means putting assets into use on DeFi applications for financial returns, stablecoin yield farming intuitively means generating passive income on stable crypto assets via two types of lending activities: lending on money markets and lending to decentralized exchanges as liquidity.
Farming on Decentralized Exchanges
Among numerous DEX design choices, stableswap exchanges such as Curve optimize for providing minimal assets and low trading fees for trading similar assets (e.g. swapping between two stablecoins like USDC and DAI), which requires highly liquid stablecoin pools.
These platforms deploy various incentivization mechanisms focused on stable assets, which often translates into opportunities for passive income seekers. Exchanges that fall into this category include:
Curve Finance
As the project where the stableswap exchanges technically or conceptually originate from, Curve is the most used and most liquid stablecoin swapping service on the market. The platform is seen as one of the most reliable sources for putting stable assets into use. Some even go as far to call the Curve stablecoin liquidity pools the savings account of crypto.
Supplying assets to Curve entitle depositors to a portion of the trading fees generated on the pool as well as additional $CRV token emissions. Among Curve’s stablecoin pools, the highest trading volume goes to 3pool, which comprises of DAI, USDC, and USDT (three of the four most liquid stablecoins in the market). At the time of writing, 3pool offers 0.10% variable APY in stablecoin and a 0.2% token APR in $CRV rewards, the former varying daily with the trading volume and the latter is dependent on the reward rate, prices, and the boost gained through staking.
Even if these are not some mouthwatering returns and Curve hosts other stablecoin pools with more lucrative returns, 3pool is considered largely secure and safe since both the pool and the stablecoins traded on it are strongly battle-tested. You can access Curve pools on other EVM chains and rollups, yet most of the liquidity is concentrated on Ethereum mainnet.
Ellipsis Finance
Being a Curve Finance fork, Ellipsis Finance is the same technical logic as Curve and offers similar services on the BNB chain with a different range of stablecoins in the focus (e.g. BUSD and USDD). Just like Curve, investors can deposit their stablecoins as liquidity and earn interest from the trading activities. And since Ellipsis is on the BNB chain, transaction fees for depositing, withdrawing assets, and collecting rewards are significantly lower than on Curve Finance.
Although the logic for Ellipsis and Curve are technically the same, the network effects create a discrepancy between offered productivity on capital. Compared to Curve's 3pool with more than $950 million TVL and $78 million trading volume, Ellipsis Finance's most liquid pool has $32 million TVL and pulls $215k volume. It offers 0.06% base APR compared to 0.10% base APY from Curve. The low usage of Ellipsis Finance is compensated with higher fees for trading and hefty $EPX rewards —1.47% at the time of writing.
One thing farmers need to keep in mind is that the yield presented on stableswaps is variable and changes with the trading volume of the day. Therefore a calmer market and lower prices for the project token can translate into lower USD-nominated returns than the offered rates.
To give a few alternatives to the mentioned platforms, several other stableswap exchanges like Platypus Finance on Avalanche, which focuses on the major stablecoins and Saber on Solana, with its most liquid pool comprising of USDC and UXD.
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Other DEXs
General-purpose spot DEXs usually do not incentivize users for pegged assets as much as stableswap exchanges do. However, it’s also possible for investors to lend their stablecoins to DEXs like Uniswap, Sushiswap, Pancakeswap, TraderJOE, Quickswap, Serum, and Osmosis.
Since these applications don’t offer single-sided liquidity provision, users need to deposit two assets to become an LP (e.g. DAI & USDC, USDT & BUSD) A third alternative to stableswaps and whole-purpose DEXs is bridges like Synapse Protocol and Hop Protocol, which also allow providing a single asset as liquidity similar to stableswaps.
You can also check Nansen’s liquidity mining dashboard to find the best opportunities on liquidity provision market.
Lending on Money Markets
The second most popular way of earning passive income on stablecoins is using decentralized money markets like Aave and Compound. Much like how stableswap exchanges often reward lenders with both stablecoins and native dapp tokens, money markets usually compensate depositors with generated revenues as well as in governance tokens.
For instance, when a user deposits their USDC to Aave’s lending pool, they are issued the corresponding aToken, which is aUSDC, a liquid synthetic asset 1:1 redeemable for USDC. As the lending position matures with time, fees gathered from borrowers are proportionally distributed to the user’s wallet, resulting in a steady increase in their aUSDC balance, which can be redeemed anytime for the underlying stablecoin. Currently, the APYs for USDC and USDT on Aave sit at 0.69% and 1.96% respectively, which are changing with the borrow rate and utilization rate.
Additionally, users may receive AAVE rewards for depositing into particular pools.
Possibilities are abundant for those willing to step into the other side of the chasm. Apart from well-known bluechips, investors can lend their stablecoins on money markets that fall on the different ends of the permission spectrum.
Rari’s permissionlessly-created Fuse pools allow users to create custom money markets with the assets they desire and with the loan parameters like collateral factors and interest rate models decided by the pool creator. This allows yield farming with both the most popular stablecoins and long-tail ones with relatively higher interest rates. Yet this also comes with endemic risks accompanied with instability.
Goldfinch sits on the opposite side of the permission spectrum with its crypto loan services based on RWA collateralization. Anybody can supply their USDC to earn interest yet only vetted parties with fitting credit lines can borrow from the lending pools. As of now, the Senior pool offers lenders 7.81% APY on USDC with additional 9.42% returns as $GFI tokens.
On top of these, there are certain money markets and DEXs built on top of less liquid niche stablecoins or work harmoniously with them. Some of the examples are USDJ and JustLend, OUSD and Origin Protocol, agEUR and Angle Protocol, and recently GHO on Aave.
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However, these niche venues-should always be approached with additional risk management since both the application and the stablecoins they are giving services on are not as battle-tested and scrutinized as their bluechip counterparts. And since the most prominent and most extreme example of these services (i.e. Anchor Protocol and UST) collapsed with massive losses for investors, caution is well-advised for those who want to convert their stable assets and use them on these platforms.
Conclusion
Yield farming is a two-folded game. How you approach it determines whether it’s a tool for active income generation or a passive one. An investor can be a mercenary, be in constant research for better yields and juggle their funds between protocols, or settle with one protocol and be happy with it. The former is riskier and requires effort but is potentially more profitable while the latter mostly optimizes for security and peace of mind. Try to find the strategy that suits best to your risk appetite. Once you decide it, tools like Nansen can be a great fit to find the best market opportunities for yields.
