DeFi Stablecoin Status and Mining Revenue Opportunities

Many crypto natives will turn to holding stablecoins instead of their home currencies when they exit risk, and the rise of DeFi has enabled users to put these idle assets to use.

Stablecoins have gained explosive adoption over the past few years, and their widespread adoption began with transactions and transfers between centralized exchanges. Since then, stablecoins have entered DeFi as the primary proto-language in the ecosystem.

Perhaps most importantly, many crypto natives will switch to holding stablecoins instead of their home currency when they exit risk. the rise of DeFi has enabled users to put these idle assets to use. Once dormant, non-productive assets leave centralized exchanges and bank accounts for economic utility in lending, market-making markets, and other types of DeFi protocols.

In this article, we will explore.

The current state of stablecoins

Revenue opportunities

The current state of stablecoins

Current stablecoins are largely dominated by a handful of projects, with USDC, USDT, and DAI dominating the circulating supply and use of Ether. USDC and USDT use centralized collateral to maintain a peg to the U.S. dollar. Each 1 token issued by these stablecoins is collateralized by $1 worth of assets.

DAI is the only one of these major stablecoin projects that manages its issuance in a decentralized manner, collateralizing on-chain assets to generate DAI.

DeFi Stablecoin Status and Mining Revenue Opportunities

All three of these stablecoins are available in Ether DeFi. Of these, DAI has over 60% of its supply locked in decentralized lending, exchanges, and other types of DeFi protocols.

Despite the high percentage of DAI locked, the latter two still dominate in Ether smart contracts due to the larger liquid supply of USDC and USDT.

DeFi Stablecoin Status and Mining Revenue Opportunities

Daily stablecoin transfers on Ether have exceeded $10 billion every business day for the past 3 months (this value includes deposits and withdrawals from smart contracts).

DeFi Stablecoin Status and Mining Revenue Opportunities

There are many demand drivers behind the growth in stable currency supply of over $75 billion and daily transfers of over $20 billion.

Shifting from volatility and risk exposure to stable assets without using national currencies.

Moving assets across centralized exchanges without taking risk.

Lending and leveraged collateral.

For decentralized lending, exchanges, derivatives, etc. The use of stablecoins eliminates the risk of volatile tokens, but usually results in lower returns due to lower risk.

payments, wages, foreign exchange, third world access to non-hyperinflationary currencies, and other niche consumer use cases.

Whereas in the stablecoin market, assets anchored to the U.S. dollar dominate, programs like EURS do a good job of anchoring other currencies like the euro. These stable assets give users the confidence to deposit their assets in a stablecoin without the need to trade into a national currency like the U.S. dollar.

DeFi Stablecoin Status and Mining Revenue Opportunities

There is already a range of stablecoins on the market and traders should be aware of the risk profile of these stablecoins, the following are some of the common ones.

Other centralized stablecoins: HUSD, GUSD, EURS, TUSD.

Other decentralized stablecoins: sUSD, FRAX, FEI, alUSD, RSV, PAX, UST, mUSD, LUSD, ESD, AMPL

Stablecoin yield opportunities in the DeFi space

Note: Yields are highly variable, and the yields listed at the time of writing this article will vary significantly from the yields the reader sees when reading.

As users move to stablecoins, it is important to understand where the yield opportunities are coming from. Unproductive assets come at a cost. While idle, stablecoins are often affected by inflation and fees. To offset these effects, investors may choose to put idle assets to use, provide services or take risks in exchange for returns.

In DeFi, these returns are currently high relative to traditional investment markers. However, this comes with a number of risks, such as

The potential for 1:1 anchoring losses.

Risk of smart contract attacks (including economic/protocol design attacks).

Yield volatility: APRs can change rapidly after assets are deposited.

Lack of liquidity: high volatility of reward tokens, inability to borrow from high-utilization pools, inability to withdraw large positions from high-utilization pools, high slippage in exiting positions.

Gas fees: high gas fees create wear and tear and limit the behaviour of liquidity providers and users.

Quantifying Returns
APR and APY are widely used as metrics to measure DeFi returns. Unfortunately, both concepts are often misunderstood by users and labeled as unclear by developers. APR represents the return of a pool and its not required to compound your returns. If APR is listed in the UI of a project, this means that your earnings are not automatically compounded. If a pool has a “claim rewards” feature, the return is the APR.

This is the power of compounding, especially in a high interest rate environment like DeFi. Of course, a small position in Ether DeFi would not benefit from this compounding, as the daily gas fees for claiming rewards and repledging would outweigh the returns. The table below shows the possible returns assuming we invest $1 million, take returns at 50% APR, and claim the daily rewards for compounding.

DeFi Stablecoin Status and Mining Revenue Opportunities

With that in mind, here are 5 different risk and reward strategies around stablecoins. Note that the return on unilateral liquidity exposure is reduced as this return has limited potential volatility.

A risk rating is assigned here for each project that takes into account the credibility of the project, protocol risk, audit, and other factors. The risk rating is relative to the rest of DeFi, not independent, and furthermore, there is a lot of risk in the DeFi space even with an A+ rating.

Aave and Compound Lending (APY 4-16%, Risk: A)
Aave and Compound are DeFi’s largest lending agreements. Until recently, Compound has been the largest lending agreement in terms of total deposits. Aave, however, has reversed this situation with its new liquidity incentives and now dominates liquidity in lending.

DeFi Stablecoin Status and Mining Revenue Opportunities

These new Aave incentives offer an attractive opportunity to increase yields. The Aave incentive program is said to run through mid-July with increased rewards in the form of Aave governance tokens (2,200 stkAAVE per day). stkAAVE will be allocated in the pool on a pro-rata basis based on borrowing activity.

For example, Aave currently has $5 billion in outstanding loans. the DAI pool has approximately $1 billion in borrowings and $1 billion/$5 billion = 0.2 or 20%. 2200 stkAave per day would mean that the DAI pool would be allocated 440 stkAave per day, which currently means that for every $1000 deposited, the user would receive 0.0002 Aave/day (11 cents/day at current prices). This reward structure outperforms Compound’s liquidity mining rewards on some stablecoins, and performs relatively poorly on others, depending on utilization.

While Compound has historically had a more mature market in terms of size and utilization, Aave has a higher market cap due to its superior token economy, incentives, and stable interest rates and support for more tokens as collateral. Note that while Aave has surpassed Compound in terms of total collateral assets, Compound still dominates in terms of total borrowings.

DeFi Stablecoin Status and Mining Revenue Opportunities

With lower interest rates and a larger market, Compound remains a strong market for larger lenders who want stronger liquidity guarantees and lower interest rates on their borrowings. Conversely, Aave tends to offer better returns at higher risk and provides incentives on both the supply and demand side of their lending market. They also recently announced a Pro version for institutional services.

It will be interesting to see how it performs in terms of liquidity when the incentives end in July.

Market cap/TVL is commonly used as a valuation metric to measure how much liquidity a project attracts, and this metric is similar to the P/E ratio in traditional markets where the higher the P/E ratio, the higher the valuation of the token per dollar of liquidity. The Aave valuation is similar in terms of two metrics: number of users and market cap/revenue ratio.

DeFi Stablecoin Status and Mining Revenue Opportunities

The DAI lending market on Aave is currently at 11% to lenders, which means lenders can expect to earn a compound interest rate of 11%. Interest rates on this pool have been relatively volatile since the launch of the Aave liquidity incentive in late April.

The bottom line in this chart represents the rate for lenders, while the top line represents the rate for borrowers.

DeFi Stablecoin Status and Mining Revenue Opportunities

Aave’s incentives mean that an additional ~3-6% yield is derived from pledged Aave tokens. These pledged Aave tokens can be unpledged during a 10-day cooling off period or can continue to be pledged for an annualized return of 7%.

Users can take on additional risk and potential reward by pledging their borrowings, revolving them for additional leverage, or sending them to other agreements. These details are beyond the scope of the simple strategies that are the focus of this article.

Strategy payoffs: Aave lending DAI (4-15%), Aave liquidity incentive (4%), pledged Aave (7%)

Risks: potential smart contract vulnerabilities, DAI de-anchoring, Aave liquidity risk, Gas fees (for deposit, withdrawal, etc. operations) exceeding small position returns.

Curve AMM pool and Staking (APR 10-50%, Risk: B+)
As the primary venue for DeFi stablecoin DEX liquidity, it is not surprising that liquidity incentives exist for Curve. curve has the lowest slippage in stablecoin trading, and until then it has controlled the vast majority share of stablecoin trading, while recently Uniswap V3 stablecoin pairs are catching up to Curve’s trading volume, but there is still some gap.

The underlying APY providing liquidity to the largest pool of Curve protocol (USDC+USDT+DAI) is 2% (from transaction fees) and volume continues to make healthy progress towards $50 billion.

DeFi Stablecoin Status and Mining Revenue Opportunities

And in addition to the 2% fee bonus, there is an additional 8% bonus from CRV governance tokens. Users can increase this 8% to 20% by locking in CRV for a defined period of time. The maximum reward for locking in CRV for 4 years is a 2.5x boost. Note that the 20% is derived from 2.5*8%, which is the maximum reward reward.

DeFi Stablecoin Status and Mining Revenue Opportunities

Strategy reward: 3pool base APR 2%, additional bonus 8%-20%, locked-in CRV 11%.

Risks: potential smart contract vulnerabilities, DAI off-anchor, gas fees exceed returns.

Yearn Finance DAI Vault (APY 15%, Risk: B)
The yvDAI vault is currently the largest vault on Yearn Finance with over $700 million in assets and it currently has an APY of 15%.

These assets will play a role in the DAI strategy created by Yearn developers, which works by placing a user’s DAI into various revenue protocols, moving the user’s assets within the scope of the strategy as the developer sees fit to maximize returns.

Example of a strategy assigned with a yvDAI vault.

StrategyLenderYieldOptimiser: optimizes DAI lending between dYdX and Cream.

SingleSidedCrvDAI: deposit DAI into the highest yielding pool in Curve.

StrategyIdleDAIYield: Deposit DAI into to mine COMP and IDLE governance tokens. Rewards are sold as DAI , and reallocated to the vault.

The Yearn vault has over $4.5 billion locked up, it is a popular place to be and its risk is low compared to most defi projects.

DeFi Stablecoin Status and Mining Revenue Opportunities

A significant portion of deposits in the Yearn yvDAI vault are from Alchemix, and the Alchemix protocol currently has over $400 million in assets deposited in the vault. Alchemix uses Yearn as the core infrastructure of its protocol, and the following diagram expresses how Alchemix integrates Yearn to provide a unique use case.

DeFi Stablecoin Status and Mining Revenue Opportunities

Historically, Yearn Vault’s single stablecoin deposit returns have been quite good, with an APY consistently greater than 10% for the past few months.

Strategy return: yvDAI Vault (15% APY), 2% management fee, 20% performance fee

Risks: potential Yearn smart contract vulnerability, and potential vulnerability risk in the associated revenue protocol, DAI de-anchoring risk.

KeeperDAO Arbitrage (APY 10-x% , Risk: B-)
KeeperDAO uses pool assets to take advantage of arbitrage, liquidation and other activity opportunities. Many people have recently followed the Miner Extractable Value (MEV) through KeeperDAO and ROK (DAO’s governance token).

In general, Keeper borrows assets from the pool to perform these clearing and arbitrage activities and to generate returns for itself and the pool’s storage users.

Here are the statistics for KeeperDAO v2 And more recently, KeeperDAO V3 has been released, which has caused these analytics to become outdated and the liquidity of V2 to be in decline.

DeFi Stablecoin Status and Mining Revenue Opportunities

These borrowed funds are considered safe because they are borrowed, used, and returned to the pool of funds in the same block using lightning credits. This is achieved through a unique innovation based on a blockchain smart contract system through which funds can be borrowed without collateral (with the guarantee that the funds will be returned in the same block). If a transaction cannot guarantee this, then it will fail.

The chart below shows the cumulative value of lightning loans borrowed by Keeper from the KeeperDAO liquidity provider.

DeFi Stablecoin Status and Mining Revenue Opportunities

The return on the governance token ROK is determined by the emission plan and the base fee, expressed in deposit currency, will change as Keeper performs more or less operations on the DAO.

Strategy payoff: 15% APY (ROK governance token), x% of base fee.

Risks: potential smart contract vulnerabilities, DAI de-anchoring, dependence on Yearn returns.


Reviewing recent data, the growth of stablecoins has been parabolic and with the advent of DeFi, stablecoin holders can now earn attractive returns on their once idle assets.

The current size of stablecoins has reached.

Over $75 billion in circulating supply, with over $10 billion in daily transfers.

15+ billion of stablecoins deposited with Compound and Aave, with over $12 billion of stablecoin assets being borrowed (>75% utilization)

Healthy stablecoin pairs in most major DEXs.

Users will always seek stable assets when exiting risk. The question is, to what extent will DeFi drive users to put billions of dollars of unproductive assets into productive use?

Posted by:CoinYuppie,Reprinted with attribution to:
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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