What Are Stablecoins?
In a future where the entire financial industry is built on blockchains, fiat dollars will probably still exist. So we're going to need a way to move fiat money around in the cryptoverse.
A stablecoin is simply a coin designed to represent a fiat dollar on the blockchain. Since stablecoins are so new, there's lots of different stablecoins and experimentation happening.
Types Of Stablecoins
For now, the biggest stablecoins are all US Dollar stablecoins, but stablecoins can exist for any fiat currency. For the most part, all stablecoins fit into three buckets:
- Custodial Stablecoins - A custodial stablecoin is a token representing a dollar (or cash equivalent) hedl in a bank somewhere. Examples of custodial stablecoins include USDC issued by Circle and Coinbase and USDT issued by Tether.
- Collateral Backed Stablecoins - Dollars aren’t the only asset used to back stablecoins, just like how gold use to back the US Dollar, crypto can be used to back a stablecoin. With a volatile asset backing a stable one, you’ll want to see a high collateral ratio - meaning more crypto backing the stablecoins than stablecoins in circulation. A popular collateralized stablecoin is DAI issued by Maker DAO.
- Algorithmic Stablecoins - Fallen out of fashion since the collapse of Terra’s UST, Algorithmic stablecoins maintain their peg by minting and burning another asset to maintain balance.
Stablecoin Investment Opportunities
Back in March 2021, we published our Stable Coin Lock-In Theory on Twitter. Today, the opportunity is often referred to as RWA or “real world assets”, referring to the growth of fiat dollars being brought on chain. Growth and demand for stablecoins is inevitable, but how can you benefit from the growth since stablecoin prices don't appreciate!?
Companies like Circle & Tether issue custodial stablecoins but they’re private companies. Circle attempted to go public in 2022 via a SPAC but its since fell through as the crypto market cycle took a turn.
Collateral backed stablecoin projects like Maker DAO and Frax continue to offer an interesting opportunity, though both have become mostly backed by USDC in recent years to help maintain their peg.
Algorithmic stable coins appeared to be an epic investment opportunity until we saw what happened with Terra.
In 2023 Chainlink is looking like it could be well positioned to benefit from the influx of CBDCs coming online and their collaboration with SWIFT.
For much of the 2020-2022 bull market, CeFi projects like BlockFi, Nexo and Crypto.com were paying 5-12% APY if you deposit your stablecoins with them. They would turn around and lend them out to investors - the same business model as traditional banks. However, investors learned the hard way the risks of holding large sums of stablecoins with centralized custodians in the wake of the FTX collapse.
Before the collapse of Terra, it was common practice to keep a portion of your portfolio in stablecoins generating a healthy yield. This was the “income” portion of your portfolio. Unfortunately the risk/reward didn’t turn out well for most.
But if you still want to take a stab at stablecoin farming, your best bet is still in DeFi.
How To Farm Stablecoins
Let's dig into a few of our favorite dApps for farming stablecoins and look at some examples.
Yearn
Yearn is an Ethereum dApp which can be thought of as a decentralized hedge fund or yield aggregator. Tokens and LP tokens are organized into "vaults" which implement different strategies under the hood to optimize your return.
Depositing tokens like USDC into a Yearn Vault is dead simple, but Yearn also simplifies yield farming for Liquidity providers by harvesting reward tokens automatically. For all this added benefit, Yearn takes a 2% management fee and a 20% performance fee on most vaults.
Notice the MASSIVE difference in the Total Value Locked (TVL) in the Yearn USDC Vault from 2021 vs 2023. This is how much stablecoin farming has fallen out of fashion with crypto investors.
Curve
Don't be fooled by Curve's retro design, Curve is one of the largest decentralized exchange by market cap, clocking in at $3.259B TVL. Curve's 3pool (not to be confused with their tripool) is a popular way to swap stablecoins between DAI, USDC and USDT.
At its current rate, Curve will pay you a base fee of 0.29% in 3CRV + rewards of 0.69%-1.75% in CRV for providing liquidity to the 3pool as a LP. To collect these rewards directly, you would use the "Deposit & Stake" tab.
Curve has a unique incentive system which pays you higher rewards the longer you lock up their native CRV token. So if you want that maximum vAPY, you need to also buy and lock up CRV in their system. Because of this lock up system, you might not want to stake your LP tokens in Curve directly, instead you use Convex.
Convex
Convex is a dApp built on top of Curve which matches people who want to lock up CRV with people who want to earn the maximum rewards for providing liquidity on Curve.
Think of Convex like a Curve rewards mining pool. You would never mine bitcoin directly since your chances of discovering a block on your own are very low, instead you join a pool.
Currently, you can earn 2.1% by depositing your Curve 3Pool LP tokens into Convex and that's without locking up any CRV! Even if you locked the max CRV on Curve (4 years) you'd still only earn 0.29+1.75=2.04%. That's because on top of helping boost your reward Convex pays it's own CVX reward token as well.
Using Convex sounds complicated, but it's pretty simple once you get the hang of it. To farm stablecoins with Convex:
- Deposit coins into the Curve pool of your choice (Only "Deposit" NOT "Deposit & Stake"!)
- This will result in that Curve pool's LP tokens in your wallet
- Go to Convex, find the Curve pool in the list and deposit your Curve LP tokens (first you'll have to "Approve" the LP token which costs gas fees unfortunately)
- Then daily, weekly, monthly, or whenever you feel like it, visit Convex's Claim page to harvest your reward tokens which are typically in the form of CRV, 3CRV & CVX depending on which pool you LP'd into.
- You can sell your reward tokens for more stablecoins and repeat the process or you can stake your rewards tokens for additional snowballing effects!
Managing Your Stablecoin Farm
Farming stablecoins is a pretty new concept so there aren't great tools for tracking and managing your returns. Your best bet is to keep a spreadsheet and crunch the numbers yourself.
You can earn monster yields by re-staking your rewards tokens in Convex, however this flies in the face of your stablecoin farming strategy in that hodling reward tokens adds volatility back into the mix. We like to claim rewards weekly or monthly on Sunday evenings when gas fees are low and re-stake them. Then quarterly, we dump the rewards for stablecoins and calculate our APY.
Written by: @gerbz Gerbz is the founder of BitLift and has been journeying down the crypto rabbit hole since 2013.