The best stablecoin yield farming strategies for bear markets [2023]

introduction

What’s the best way to protect your crypto portfolio?

While the cryptocurrency industry is known for its incredible bull runs and spikes, volatility falls both ways and bear markets can be long and brutal. Fortunately, however, since the development of Decentralized Finance (DeFi) in the last bull market cycle, users have new ways to protect their portfolios from ongoing bear markets.

Going forward, yield farming with stablecoins is one of the surest ways for investors to hedge against turbulent market conditions while still earning modest profits. Stablecoins are digital assets designed to maintain a “peg” in various ways to a real-world asset or currency, most commonly the US dollar.

For those who don’t know what to do with their fiat-pegged assets, we’ve compiled relatively safe stablecoin farming strategies to help you minimize risk during the unrelenting bear while still earning passive income from your assets to maintain.

Stablecoins and Yield Farming

First things first: stablecoins are not assets that are inherently gifted with a risk-free existence. Investors must first understand the general and asset-specific risks inherent in any type of stablecoin, and refrain from treating these digital assets as if they were “real” dollars, despite price-fixing. If you want to learn more about how a stablecoin can crash and protect itself from something similar, check out our research on the UST collapse.

Despite the variety of risks they pose, stablecoins remain attractive because of their potential for use in yield farming strategies.

As yield farming means exploiting assets for DeFi applications for financial returns, yield farming for stablecoins intuitively means generating passive income from stable cryptoassets through two types of lending activities: lending on money markets and lending to decentralized exchanges as liquidity.

Farming on decentralized exchanges

Among numerous DEX design options, stableswap exchanges like Curve optimize the provision of 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 employ various incentive mechanisms focused on stable assets, which often translates into opportunities for passive income seekers. Exchanges that fall into this category include:

curve financing

As the project from which the stableswap exchanges technically or conceptually stem, Curve is the most used and liquid stablecoin exchange service on the market. The platform is considered to be one of the most reliable sources for using stable assets. Some even go so far as to refer to the Curve stablecoin liquidity pools as a crypto savings account.

Providing assets to Curve entitles depositors to a portion of trading fees generated in the pool as well as additional $CRV token issuance. Among Curve’s stablecoin pools, the highest trading volume goes to 3pool, which consists of DAI, USDC, and USDT (three of the four most liquid stablecoins on the market). At the time of writing, 3pool offers a variable APY of 0.10% in stablecoin and a token APR of 0.2% in $CRV rewards, with the former varying daily with trade volume and the latter varying with reward rate, prices and the resulting thrust depends on staking.

While these aren’t delicious returns, and Curve hosts other stablecoin pools with more lucrative returns, 3pool is considered largely safe and secure as both the pool and the stablecoins traded on it are heavily battle-tested. You can access curve pools on other EVM chains and rollups, but most of the liquidity is concentrated on the Ethereum mainnet.

elliptical financing

A fork of Curve Finance, Ellipsis Finance is the same technical logic as Curve and offers similar services on the BNB chain with a different range of stablecoins in focus (e.g. BUSD and USDD). Just like Curve, investors can deposit their stablecoins as liquidity and earn interest from trading activity. And since Ellipsis is part of the BNB chain, transaction fees for depositing, withdrawing assets, and earning rewards are significantly lower than Curve Finance.

Although the logic for ellipse and curve is technically the same, the network effects create a mismatch between the offered productivity on capital. Compared to Curve’s 3pool with more than $950 million TVL and $78 million in trade volume, Ellipsis Finance’s most liquid pool has $32 million TVL and $215,000 in volume. It offers 0.06% base APR compared to Curve’s 0.10% base APY. Ellipsis Finance’s low usage is offset by higher trading fees and hefty $EPX rewards – 1.47% at the time of writing.

One thing farmers need to keep in mind is that the yield on StableSwaps is variable and changes with the trading volume of the day. Therefore, a quieter market and lower project token prices may result in lower USD-nominated returns than the rates offered.

To give a few alternatives to the platforms mentioned, there are several other stableswap exchanges such as Platypus Finance on Avalanche, which focuses on the major stablecoins, and Saber on Solana, whose most liquid pool consists of USDC and UXD.

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Other DEXs

General-purpose spot DEXs typically don’t offer users as much tied-up asset incentives as stableswap exchanges. However, it is also possible for investors to lend their stablecoins to DEXs such as Uniswap, Sushiswap, Pancakeswap, TraderJOE, Quickswap, Serum and Osmosis.

Since these applications do not offer one-way liquidity provision, users must deposit two assets to become an LP (e.g. DAI & USDC, USDT & BUSD). A third alternative to stableswaps and full-purpose DEXs are bridges like Synapse Protocol and Hop Protocol, which also allows a single asset to be provided as liquidity, similar to stableswaps.

You can also check Nansen’s liquidity mining dashboard to find the best opportunities in the liquidity provision market.

lending in money markets

The second most popular way of earning passive income from stablecoins is by using decentralized money markets like Aave and Compound. Similar to how stableswap exchanges often reward lenders with both stablecoins and native dapp tokens, money markets typically reward depositors with generated revenue as well as governance tokens.

For example, when a user deposits their USDC into Aave’s loan pool, they receive the corresponding aToken, which is a USDC, a liquid synthetic asset that can be redeemed 1:1 for USDC. As the loan position matures over time, the fees charged by borrowers are distributed proportionally across the user’s wallet, resulting in a steady increase in their aUSDC balance, which can be redeemed against the underlying stablecoin at any time. Currently, the APYs for USDC and USDT on Aave are 0.69% and 1.96%, respectively, which vary with the lending rate and utilization rate.

In addition, users can earn AAVE rewards for making deposits into certain pools.

There are many opportunities for those willing to step to the other side of the abyss. Aside from well-known blue chips, investors can lend their stablecoins on money markets that are at different ends of the permission spectrum.

Rari’s permission-free fuse pools allow users to create custom money markets with the assets they want and the credit parameters set by the pool creator, such as collateral factors and interest rate models. This allows for yield farming with both the most popular stablecoins and long-tail coins with relatively higher interest rates. However, this also comes with endemic risks that come with instability.

Goldfinch is on the other end of the approval spectrum with its crypto lending services based on RWA collateralization. Anyone can lend their USDC to earn interest, but only verified parties with matching credit lines can borrow from the loan pools. As of now, the senior pool is offering lenders 7.81% APY on USDC with an additional 9.42% yield as $GFI tokens.

Additionally, there are certain money markets and DEXs that are built on top of, or work in harmony with, less liquid niche stablecoins. 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 as both the application and the stablecoins they serve on are not as battle tested and tested as their blue chip counterparts. And since the most prominent and extreme example of these services (i.e. Anchor Protocol and UST) has collapsed with massive losses for investors, caution is advised for those looking to convert and use their stable assets on these platforms.

Diploma

Yield farming is a two part game. How you approach it will determine whether it is an active or passive income generation tool. An investor can be a mercenary, constantly looking for better returns and juggling their money between protocols, or settle for one protocol and be content with it. The former is riskier and requires effort but potentially more profitable, while the latter is mostly optimized for security and peace of mind. Try to find the strategy that best suits your risk appetite. Once you’ve made up your mind, tools like Nansen can be great for finding the best market opportunities for returns.

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