Today we talked with @CryptoIdealist about farming stablecoins. We discuss the different types of stablecoins, how farming stablecoins fits into your portfolio and the best platforms for maximizing returns on your stablecoin farm.
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 two 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.
- Algorithmic Stablecoins – Algorithmic stablecoins are backed by volatile collateral (like LUNE or ETH) with market mechanics designed to help peg the coin in place. Examples of algorithmic stablecoins include DAI and UST.
Investing In Stablecoins
Back in March 2021, we published our Stable Coin Lock-In Theory on Twitter. Growth and demand for stablecoins is inevitable, but how can you benefit from the growth since stablecoin prices don’t appreciate!?
CeFi projects like BlockFi, Nexo and Crypto.com will pay you anywhere from 5-12% APY for allowing them to loan out your stablecoins or put them to work in DeFi on your behalf. But the real money is in farming stablecoins yourself in DeFi Land.
We like to recommend having at least 20% of your crypto portfolio dedicated to farming stablecoins. Think of this portion of your portfolio like your bond or income bucket. Having a stable income helps offset the volatility of the other 80% of your portfolio.
Stablecoin Farming Projects
Let’s breakdown a few of our favorite dApps for farming stablecoins:
⚠️ In May 2022, the Terra blockchain suffered an attack knocking UST off peg and causing the price of LUNA to collapse below a penny. This page is no longer maintained but is kept for historical reference only. More information on what happened can be found here.
The tricky part about Anchor is that you can only deposit their native stablecoin UST. There is a workaround for depositing Ethereum stablecoins directly using Orion, but the yield isn’t as good. Typically you’ll buy Ethereum wrapped UST (aka wUST) on a DEX like Uniswap or an exchange like Coinbase Pro and bridge it to your Terra wallet. You can also buy native UST using Kucoin.
Once you’ve got your UST in your Terra wallet, it’s a 1 click deposit into Anchor. We use Anchor as our default DeFi savings account due to it’s high yield and ease of use.
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. You can see the fee by hovering over the fault’s version number in the fee column.
Don’t be fooled by Curve’s retro design, Curve is the largest decentralized exchange by market cap, clocking in at $11.4B Total Value Locked today. 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 2.73%-6.82% in CRV for depositing stablecoins into the 3pool as a LP. To collect these rewards directly, you would click “Deposit & stake in guage”.
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 6.82%, 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 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 11.1% 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 6.82+0.29=7.11%. 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 click “Deposit” NOT “Deposit & stake in guage”!)
- 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 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 on Sunday evenings when gas fees are low and re-stake them. Then quarterly, we dump the rewards for stablecoins and calculate our APY.