By Ben Giove, Bankless Contributor
We’ve been spoiled over the past year. The surge in cryptocurrency prices, DeFi activity, and liquidity mining has led to a plethora of 3, 4, and even 5-figure APR/APY revenue opportunities for revenue-hungry DeFi users.
But now, with the crypto market in the doldrums, the yield landscape has changed dramatically, on-chain activity has fallen to its lowest level since the DeFi summer of 2020, and the insatiable appetite for risk has disappeared.
What was once a bumper crop now looks like a famine?
Well… That’s a bit of an exaggeration. Despite the fact that returns have shrunk significantly, there are still plenty of opportunities for high returns. This is still the case for stablecoins.
Let’s explore some productive income farming opportunities on Ether and Polygon, where you can deposit your stablecoins for gains, while also reconfiguring the returns harvested from these strategies for compounding gains.
But first… One question: Where do these returns come from?
Where do the gains from stablecoins come from?
While stablecoins may one day become an efficient medium of exchange, for now the primary value proposition of stablecoins stems from their utility in DeFi.
There are a number of DeFi protocols that allow users to earn interest/fees on deposits of stablecoin liquidity, while also providing liquidity mining returns. Stablecoins typically offer the lowest yields compared to other volatile crypto assets, but the key difference is that stablecoin holders can adopt investment strategies that leave them unexposed to price risk.
While many ‘liquidity pool’ farms have higher yields, entering these farms exposes you to greater risk of loss of the underlying assets. This could be your exposure to asset price declines, i.e., the erratic losses you face when you provide liquidity to an AMM (automated market maker); and it can be especially problematic if you use leverage for yield farming through a money lending market like Compound or Aave, because it means you risk not being able to service your debt.
But a strategy based on stablecoins won’t expose you to the same level of risk because the value of stablecoins is essentially stable. The lack of price volatility means that the risk of unpredictable losses is greatly reduced because AMMs’ liquidity providers (LPs) are essentially “shorting volatility,” and users are able to participate in other types of income opportunities without being directly exposed to an asset that could lose value.
However, it is important to note that holding stablecoins is not without risk. There is always the possibility of decoupling, and centralized stablecoins (such as USDT) obviously pose considerable counterparty risk. Be sure to vet your stablecoin like a farm!
Drivers of Yield
Before exploring any yield opportunities, it’s important to understand how yields are calculated and their drivers.
The yield of a DeFi liquidity pool that provides incentives is determined by four different supply and demand factors.
- the supply of liquidity in the pool
All else being equal, as the supply of liquidity in the pool increases, the yield will decrease because the fees and incentives generated by the liquidity pool will be spread and allocated to a larger amount of capital (and vice versa).
- Demand for pool usage
As the demand for use of the liquidity pool increases, the returns will also increase, as more demand will generate more revenue (either transaction fees or interest on borrowings) for return to the liquidity providers (LPs).
- the supply of token rewards allocated to the liquidity pool
While this is typically a fixed amount determined by the issuer (DeFi Protocol) and may be changed by the issuer, as the supply of tokens allocated to the liquidity pool increases, the return to LPs will increase as LPs will earn more tokens.
- Value of Token Rewards (Demand)
As the value of token rewards earned by LPs increases, the returns will also increase, as this means that LPs’ returns are denominated in an appreciating asset.
Let’s see how this looks in practice.
Note: These numbers below are assumed for the sake of example. This model does not take into account compounding fees or rewards. If you would like to try it for yourself, you can visit
AMM pool example.
As we can see, the liquidity pool pictured above has $1 million in liquidity, the pool generates a daily transaction fee of $10,000, and the pool also allocates 5,000 token rewards (as liquidity mining rewards) worth $2 per token, or a total of $10,000 in token rewards. This means that for every $1 of liquidity provided, the LP will earn $2 (including transaction fee rewards and token rewards), which is a 2% return (which does not take into account compounding rewards).
Now, we can see how changes in these parameters affect the return of this liquidity pool. See the following chart.
In the new case (with changed parameters) like the one shown above, while the liquidity in this liquidity pool ($1 million) remains the same, the transaction fee generated in this pool drops by 50% to $5,000. In addition, while the allocation of token rewards remains unchanged, the token price also drops by 50% to $1. As a result, the strategy that once generated 2% for LPs now generates only 1%.
This example illustrates why the current yield of LPs on DeFi is declining across the board: DEX trading volume has dropped by nearly 50% in the past month due to reduced activity across the DeFi space, and as a result, transaction fee revenue has dropped; furthermore, the drop in token price means that the revenue from liquidity mining has also depreciated.
Ok, with that understanding…let’s get into the opportunities!
Well, with that understanding… Let’s explore the current stablecoin revenue opportunities!
The best stablecoin gains on ethereum
Now that we understand the trade-offs of stablecoin revenue farming and how the returns are generated, we can dive into some of the different revenue opportunities on Ether and Polygon. While there are certainly some opportunities for higher returns elsewhere, these opportunities attempt to balance risk and complexity.
Opportunity #1, Aave: 3-7%
I know: even at DeFi, it’s boring to leave (deposit) money in it. However, this does not mean that good returns should be wasted, as Aave (the lending protocol) is providing liquidity incentives for its Ether L1 marketplace.
If users deposit and/or lend USDC, DAI, USDT and GUSD on Aave, they will receive stkAAVE rewards (i.e. AAVE tokens in pledged status) in addition to interest on their borrowings. The incentive program will run until mid-July, with combined yields ranging from 3-7% depending on the asset, with GUSD and USDT offering the highest yields.
Editor’s note: stkAAVE stands for Staked AAVE, which is an AAVE token in a pledged (locked) state. In the Aave platform, each Token constitutes a separate lending market, including stablecoin markets (e.g. DAI market, USDC market, USDT market, GUSD market, etc.) and non-stablecoin markets (e.g. ETH market, wBTC market, etc.). Recently Aave announced the Aave V2 release and introduced a liquidity incentive program with a daily liquidity incentive of 2200 stkAAVE according to the implemented Aave AIP-16 proposal. The daily stkAAVE incentive that can be allocated to these markets is prorated based on the borrowing activity in that market, specifically: stablecoin The stkAAVE reward for the stablecoin markets (i.e. DAI, USDC, USDT and GUSD markets) will be distributed 50/50 to lenders (i.e. liquidity providers or depositors) and borrowers (borrowers) in those markets; the stkAAVE reward for the wBTC and ETH markets is a 50/50 split between lenders (i.e. liquidity providers or depositors) and borrowers. The staAAVE reward is a 95/5 ratio between lenders and borrowers, officially explained as “a disincentive to risky borrowing activity”. Note that lenders and borrowers are rewarded with stkAAVE in a pledged (locked) state by default, not AAVE in a free state, and since users receive stkAAVE in a pledged state, these stkAAVE also generate additional pledged revenue for the user! According to the agreement, there is a 10-day waiting period before withdrawals from stkAAVE to AAVE or, of course, the option to continue pledging. For more details see.
If the APR (Annualized Percentage Rate) of the token reward for borrowing an asset on Aave offsets or exceeds the APR paid for borrowing the asset, it may even be possible to borrow the asset on Aave at the same time as borrowing at no interest or even at a profit, although this does not always happen and is not the case for all asset classes. This is not always the case, nor will it be the case for all asset classes. This is especially useful if you plan to use your ETH, stablecoin, or other collateral to capture income farming opportunities (but be sure to monitor your health factor to prevent your collateralized assets from being liquidated due to insolvency!)
Secondary income opportunities.
While I have found no other price-risk-free strategies for stkAAVE, holding staAAVE means being able to generate approximately 5% APR gains from Aave’s “Safety Module” (Safety Module).
Opportunity #2, Curve: 10-12%
At the time of writing, there are over $9.2 billion worth of locked-in positions in the Curve protocol, one of the main places to earn income with stablecoins. Some have even suggested that Curve, an AMM (automated market maker) designed to provide trading between similarly valued assets, offers a “risk-free rate” for income farmers (although with the launch of Curve V2, the platform now supports trading between volatile assets) because these trades are less likely to be “erratic” and LPs are able to earn a premium, including a premium for their trading. This is because these transactions are less likely to incur “erratic losses” and LPs are able to earn multiple revenue streams including transaction fees, CRV rewards, and interest on borrowings and even other token rewards offered by certain pools.
Curve currently offers 24 different stablecoin liquidity pools for stablecoin liquidity providers (LPs) with combined transaction fees and reward APYs ranging from approximately 2% for the 3Pool pool (the 3Pool pool consists of DAI, USDT and USDC) to 12% for the frax pool (the frax pool allows users to trade between the 3Pool pool and the FRAX coin, which is an algorithmic stablecoin).
It is important to remember that where there is a higher return, there is a corresponding risk. frax pool returns are so high probably because the LPs in the pool are taking on more risk because they have less battle-tested stablecoin exposure to FRAX in the frax pool than to the stablecoin in 3Pool.
It is also important to note that these APY estimates are from the lowest level of the range shown in the Curve interface, as they do not include an increase in CRV rewards via the “boost” gas pedal (which is described below).
Secondary Revenue Opportunities.
17% APY for Curve Finance: locking in CRV rewards in exchange for veCRV (i.e. vote-escrowed CRV), which earn Curve’s platform trading fees.
Yearn Finance’s 33% APY: Deposit CRV rewards into Yearn Finance’s yvBoost machine gun pool for yvCRV tokens (which is a tokenized version of CRV on Yearn), holding yvCRVs also earns Curve’s platform transaction fees.
Convex Finance 83% APR: Deposit CRV rewards into Convex Finance’s CRV pool for cvxCRV tokens (a tokenized version of CRV on Convex) to receive transaction fees, CRV rewards, and CVX tokens for the Curve platform. tokens. (Note: CVX is the local token for Convex Finance)
Opportunity #3, Yearn & Convex: 20-24%
Remember that Curve’s yield is based on the lowest level of the yield range mentioned above, and that Yearn and Convex Finance are two of the two platforms that provide users with access to a higher level of that yield range through access to “boosted” CRV rewards.
One of the notable aspects of liquidity mining on the Curve platform is that LPs holding veCRV are entitled to a “boosted” CRV bonus, which varies depending on the liquidity of each pool and the CRV held by the LP, multiplying the CRV bonus available to the LP. The effect is to multiply the amount of CRV rewards an LP can earn. For example, a 2x acceleration means that an LP will earn twice as much CRV reward as others who do not have an accelerated reward.
What Yearn and Convex do is that they allow Curve’s LPs to earn this acceleration bonus without having to hold veCRV. These two protocols accumulate and lock in CRV tokens to capture accelerated CRV rewards for LPs who deposit coins into their Curve pools.
These pools can significantly boost returns: for example, Convex’s crvFRAX pool also benefits from this acceleration, enabling depositors to earn 29% APY compared to a 12% APY non-accelerated return under the same strategy.
While the two protocols, Yearn and Convex, offer similar services, Yearn and Convex have different returns because each pool has a different bonus acceleration factor and each protocol uses a different fee structure. Yearn charges a 2% management fee and a 20% performance fee.
Another key difference between the two is that Yearn automatically reinvests the rewards from a particular machine gun pool in the corresponding investment strategy of that pool, while Convex pays rewards to LPs in the form of CRV and CVX tokens, which need to be collected manually by depositors.
Currently, the highest yielding pools in both protocols are on Convex, with EURS, USDN and DUSD pools on Convex at 24%, 20% and 20% APY at the time of writing, respectively, but users should keep in mind when making decisions that there is a Gas fee for manually collecting rewards on Convex.
Important: The increased revenue from Yearn and Convex comes with an increased risk of smart contracts compared to using Curve directly.
Secondary Revenue Opportunities.
52% APR for Convex Finance: pledge CVX tokens to earn cvxCRV rewards.
83% APR for Convex Finance (continuation of above gains): Pledge cvxCRV to earn CRV, 3Crv (Curve transaction fee)
Best Stablecoin Earnings on Polygon
Now let’s cross the bridge from the Ether mainchain to Polygon (Ether sidechain) and see the rich variety of opportunities on Polygon! Remember, higher returns = higher risk.
Opportunity #1, QuickSwap & SushiSwap: 10-15%
QuickSwap and SushiSwap are two of the largest decentralized exchanges (DEX) on Polygon, both with combined liquidity of over $1.5 billion and daily trading volumes of over $200-250 million.
Both protocols are forks of Uniswap V2, and both have pools of stablecoin trading pairs and corresponding liquidity incentives. This may come as a surprise to experienced DeFi users, as this AMM model is not used for stablecoin exchanges on Ether L1 compared to Curve or Uniswap V3, due to the large slippage in these transactions.
While the strategies for these two DEXs are the same, the returns are different for both depending on the volume and the composition of the returns.
For QuickSwap, providing liquidity to the DAI/USDT, USDC/USDT, USDC/DAI and MAI/USDC stablecoin pairs will earn the transaction fees and QUICK token rewards generated by the pool.
For SushiSwap, LPs for the DAI/USDC and USDC/USDT pairs will be rewarded with SUSHI tokens, MATIC tokens, and a transaction fee bonus. (Note: MATIC is the local token for the Polygon chain)
While the yields on these two DEXs fluctuate, the highest yielding pairs are currently on QuickSwap, where the MAI/USDC, DAI/USDC, and DAI/USDT pairs on the platform generate 15%, 10%, and 10% respectively.
Secondary income opportunities.
QuickSwap: Pledging QUICK tokens on QuickSwap will earn a 0.04% protocol transaction fee in the form of dQUICK tokens.
Aave’s 5% APY: Deposit MATIC tokens to Aave to earn borrowing rates and additional MATIC token rewards.
43% APY for Pickle Finance: Deposit LP tokens from the MAI/USDC pool on QuickSwap, known as QLP, into Pickle Finance’s token pool (known as “jars”) to compound interest gaining both PICKLE tokens and MATIC token rewards.
Opportunity #2, PoolTogether: 7-10%
Lossless Lottery PoolTogether is another popular project on Ether L1, which has launched an incentive USDT bonus pool on Polygon: participants who deposit USDT into this pool will have the chance to take home the grand prize in addition to a MATIC token bonus for all depositors, with current interest rates ranging from 7-10% between 7-10%.
This may be an opportunity overlooked by revenue farmers on Polygon, as the project’s USDT pool currently holds only $8.4 million in deposits (a figure 82 times less than the $505 million deposited in Aave’s liquidity pool on Polygon). Furthermore, this MATIC token gain from PoolTogether adds only one layer of smart contract risk compared to depositing assets directly into the Aave pool on Polygon.
Secondary Return Opportunities: :
5% APY on Aave: Deposit MATIC into Aave to earn interest on borrowing and more MATIC rewards in the MATIC marketplace on Polygon.
Opportunity #3, Qi DAO: 25-30%
Qi DAO is a Polygon native stablecoin protocol. The system functions similarly to the Liquity protocol in that users can deposit the asset MATIC, which is then used as collateral to mint the stablecoin MAI (the team just recently changed the name of their stablecoin from miMATIC to MAI), and pay no interest.
The project has grown into one of the largest DeFi applications in Polygon, with more than 11.5 million MATICs currently locked in the protocol’s funding pool and a current circulating supply of more than $59 million in its stablecoin MAI.
The protocol currently offers QI token rewards to LPs of MAI/USDC pairs on QuickSwap (Note: QI tokens are the governance tokens of the Qi DAO protocol). In addition, LPs of the pair can pledge (stake) their LP token, or QLP, into the “Rewards” feature on the Qi DAO interface, earning an APY that fluctuates between 25-30%.
It is important to note that when users pledge their LP token, a 0.5% deposit fee will be required. Therefore, it is important to remember that until your farming earnings exceed this 0.5% deposit fee, you are in a losing position.
Secondary income opportunities.
Qi DAO: Pledge your QI tokens to earn a portion of the repayment fee (coming soon)
There are still many different opportunities to earn high returns on stablecoins, although these are lower than what we have become accustomed to. Better yet, most of them offer token incentives that can be deposited into different strategies to further increase returns.
While farmers (i.e., income farmers) are in the midst of a brutal winter, it’s clear that not all crops are wilting. For those who take the time to do the research, there is still much to be gained.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/how-to-capture-the-best-defi-gains-with-stablecoin-learn-about-these-strategies/
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.