Stablecoins are one of the smartest inventions in the cryptocurrency market. As the name suggests, the price of stablecoins remains the same as the asset they are pegged (linked) to. When bears conquer the market, these stablecoins become very popular as they protect you from losses. In a bearish market, people who own stablecoins may need to invest them in yield farming protocols as liquidity providers (LPs). This article explains the basic characteristics of stablecoin liquidity pools and their advantages and disadvantages.
What is a stable coin?
There are various definitions of stablecoins, but for the sake of simplicity, in this article we will use the term defined as a digital asset used for payments and investments that maintain equivalence with a fiat currency (e.g. 1 unit stablecoin = $1). ), for example via underlying assets.
When a user transfers fiat currency to a stablecoin operator, the company issues the user an equal amount of stablecoin on the public blockchain. This allows investors to convert their fiat currency into a form that can circulate in the cryptocurrency market. USDT and USDC, which are representative examples, have increased their issuance amounts to approximately US$67 billion and US$44 billion, respectively (as of January 2023).
Stablecoins come in different variations, e.g. B. in relation to the type of issuer, the distribution network and the price stability mechanism. In addition, the expected benefits and risks differ depending on the variant.
Such stablecoins allow investors to close cryptocurrency positions during large price swings and stabilize prices without exchanging them for fiat currency. This makes it possible to complete crypto asset management within the crypto asset market on the blockchain. Additionally, Decentralized Finance (DeFi) has evolved as the number of stablecoins circulating in the cryptocurrency market has increased.
Advantages of Stablecoin Yield Farming
Most of the benefits of yield farming with stablecoins stem from the inherent property of stablecoins, namely the stability of their price. These characteristics include lower turnover and less risk of temporary losses. Let’s look at how these risks are mitigated by stablecoin liquidity pools.
Less turnover
The cryptocurrency market is very volatile and prices can fluctuate significantly in a matter of minutes if not seconds. Because of this, some people may not want to engage in such high volatility and still want to take advantage of the opportunities this market offers them. If so, they can place their stablecoins in liquidity pools that allow them to do so.
In this way, the investor can be very sure that his assets will not be subject to these fluctuations and earn passive income with greater certainty. For the same reason, stablecoins were created in the first place; to jump into a safe house when you feel you have to take casualties.
No temporary loss
In addition to the above benefits, stablecoin liquidity pools also significantly minimize the risk of temporary losses. A temporary loss occurs when you provide liquidity to a liquidity pool and the price of your deposited assets decreases compared to when you deposited them. As a result, you have earned interest but are in the red. This can happen during times of high market volatility. The greater the change, the greater the risk of temporary losses.
Read more: What is a temporary loss?
However, participating in liquidity pools with your stablecoins reduces the risk of temporary loss because the stablecoin’s price is supposed to stay the same as the asset it’s tied to, right? While this is true in most cases, a few rare instances in cryptocurrency market history prove otherwise. In May 2022, algorithmic stablecoin Terra USD (UST) failed its balancing system and its price plummeted to near zero.
The conclusion
Yield farming is a great way to earn passive income from the assets you want to hold and is one of the good decisions to make during bear markets. Due to the high volatility in the cryptocurrency market, investing in stablecoin liquidity pools is far less risky than investing in other crypto assets. Suppose you want to be a liquidity provider (LP) in a DeFi protocol but want to avoid being exposed to the risks of volatility in the crypto market. In this case, you can opt for stablecoin opportunities.
However, this does not mean that holding a stablecoin is COMPLETELY risk-free, as cases like UST can still occur, albeit very rarely. The bottom line is that stablecoin liquidity pools are much safer than other crypto options. Every successful investor advises you to diversify your portfolio and strategies to minimize risk. So always control your risk and don’t put everything on one card.
Best yield farming strategy in 2023
Bitcoin and the cryptocurrency market are going through a very difficult time. The bear market that began in 2022 is one of the longest periods of its kind, stretching into 2023. Under such circumstances, some investors prefer to hold stablecoins until they see signs of recovery. Therefore, finding lucrative farming opportunities with stablecoin yields is a must for some investors.
For those looking to earn passive income in 2023, CrowdSwap offers numerous profitable opportunities. These options exist on two different blockchain networks: Polygon and BNB Smart Chain. You can see these options here.
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