How to Get the Highest Yield on Your Stablecoins (Oct 2023)

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Coinmonks

8 min readOct 15, 2023

All over the news, we are hearing that money markets, U.S. treasuries, and high interest savings accounts are all offering +5% APYs. And yet, you are seeing 1–4% APYs on your stablecoins from DeFi. This article will help you navigate multiple options to up your stablecoin yield comparable to TradFi.

Strategies

Single Staking
Yield Aggregators
Yield-bearing Assets
Treasuries on Chain
Liquidity Pools
Arbitraging
Looping
Bonus: Degens

Single Staking

Let’s start with the easiest method for earning yield on your stablecoins. For beginners who haven’t even bridged to DeFi, centralized exchanges are starting to allow you to gain yield on stablecoins.

Coinbase is offering 5% on USDC
Binance is offering 1.5% on USDT (+1.5% temporary bonus)

5% from Coinbase is a really good option but if you are looking to move away from centralized exchanges to DeFi, then this option isn’t for you.

Now let’s look at a few DeFi opportunities for stables. The chart below gives a few examples of different yields you can get on different ecosystems.

(Highest) 4.69% — Stargate is a bridging application where users can stake stablecoins to receive fees from the protocol.
4.36% — Sparker is a lending protocol from Maker. Yield comes from Maker people borrowing DAI to stake into sDAI (more on this later).
3.88% — Trader Joe is similar to Aave through Trader Joe Lend. Yield comes from the interest from borrowed stablecoins.
3.36% — Aave is one of the largest lending protocols out there and is offering very promising yield on USDT on Ethereum and a few other chains. Yield comes from the interest from borrowed stablecoins.

Yield Aggregators

Anyone who has made transactions on Ethereum, know transaction fees are way too high for people like us. So if you want to compound your yield on a periodic basis, the fees will eat away your profits unless you are investing $50,000+. Luckily, yield aggregators are out there to compound for you. You just enter into one of the stablecoin pools and the yield aggregator compounds your yield for you (gas fee is shared among all the users in the pool rather than just you). This is a huge deal if you want to stay on Ethereum but for all others, this is less of a big deal. Instead, the benefit is that you can enter and forget rather than trying to compound on a daily or weekly basis to maximize your profits.

The two largest yield aggregators are Yearn and Beefy. You can see what they are offering below. Beefy’s APY depends upon what pool you enter and what chain you are on.

Yield-Bearing Assets

Similar to yield aggregators and single staking, yield-bearing assets grow without you having to do anything. Liquid staking tokens (LST), think Lido or Rocket Pool, have become popular as users look to earn yield while still being able to use the staked asset in DeFi. The way this is done is the protocol restakes your yield automatically, so your LST gains value compared to the pegged asset. The chart above shows you two examples of staked stablecoins with the most common being sDAI. The user can stake DAI to receive sDAI through Maker’s lending protocol, Sparkr. At the current rate, sDAI will gain 5% APY compared to DAI. stUSDT is handled the same way but with a 4.54% APY.

Treasuries on Chain

If you wanted to go straight to the source but still using the blockchain, then there are a few options for buying U.S. treasury bills straight on the blockchain. The only problem is average Americans are not allowed to buy these tokens due to securities laws. Bankless did a great podcast with Martin Carrica from mountain Protocol explaining how this works.

If you aren’t an American then these two options could work for you:

Mountain Protocol is offering 5% APY through their USDM token. I don’t believe they are live with there product yet but be on the watch for that.
Backed Finance is offering 5.26% APY, along with a few other treasury options. You will need to create an account through them and be KYC’d but this is better than the 5% from Mountain and sDAI.

Liquidity Pools

Liquidity pools are the backbone of decentralized finance (DeFi) ecosystems, serving as the foundation for various financial services and decentralized exchanges (DEXs). In a DeFi liquidity pool, users can provide their digital assets, typically in pairs like ETH/USDT or DAI/USDC, to be used for automated trading and lending within the ecosystem. These pools enable efficient and decentralized trading by allowing users to swap one cryptocurrency for another or borrow assets without relying on traditional intermediaries like banks or centralized exchanges. Participants in liquidity pools earn a share of the trading fees generated by the platform as a reward for providing liquidity, and this model has become integral to the DeFi space. However, it’s important to note that providing liquidity comes with its own set of risks, including potential impermanent loss and smart contract vulnerabilities, so users should conduct thorough research before participating in liquidity pools.

If you are looking at yield for LPs, Curve and Balancer are one of the biggest on the market. Neither are offering very promising yield so you would need to go to different protocols, such as Trade Joe, to find higher yield. This is still not better than single staking and includes higher overall risk so this should be avoided.

Arbitraging

If you have been in crypto long enough, you have noticed that stablecoins tend to not always be stable. There are ways to take advantage of the price fluctuations to make a profit. This shouldn’t be your primary strategy because these opportunities do not come about all that often.

Crisis Events: During the Silicon Valley Bank collapse last spring, we found out that Circle, the owners of USDC, had a good chunk of their USD sitting in that bank. Therefore, if the bank collapsed and the money was no longer available, USDC was definitely no longer backed 1:1. The price dropped to $.88 for each token of USDC. After 24 hours, people realized that SVB was going to be bailed out by the U.S. Government and USDC would gao back to $1.00. If you made that trade, you could have made up to 12% on arbitrage in a few days.
Decentralized Stables: These are stables on the blockchain that require other collateral to back the asset. Aave’s GHO is one example. GHO is backed by collateral held in Aave (for more info on GHO see this article). GHO is currently trading at $.97 even though it is fully backed by collateral 1:1. You could buy GHO at that price with the expectation that it goes back to $1.00. The question would be how long that may take and if people trust GHO enough to get back to parity.
Algo Stables: A slight difference from decentralized stables, algo stables use technology to keep the price at $1.00 or allows users to arbitrage on the open market. The most common was UST on Terra but we won’t go there for now… A current example is $Note from Canto. The price stability is maintained through interest rate manipulation. Here is some more details from Canto’s Docs:

If $NOTE is trading under $1, the interest rate is raised to strengthen the incentive for buying $NOTE on secondary markets and lending it to the CLM. If $NOTE is trading over a dollar, the interest rate is lowered to make borrowing $NOTE from the CLM and selling it on secondary markets more attractive.

Looping

A “looping” strategy in lending and borrowing protocols typically involves a cyclical process of borrowing and repaying assets to optimize yield generation. Users borrows from the protocol at a low-interest rate and then deposit back into the protocol, effectively earning interest on the borrowed funds. The earned interest can be used to offset the borrowing costs, and if the yield generated exceeds the borrowing interest rate, it can result in a net profit. The process may be repeated multiple times, with the user continuously borrowing and reinvesting the borrowed funds to maximize returns. However, it’s important to note that looping strategies carry risks, including potential liquidation if the collateral value falls below a certain threshold, and interest rate fluctuations, so users should carefully assess the associated risks and monitor their positions closely.

Now you know what looping is, lets look at an example of how we could optimize this for stablecoin yields. Using Aave on Ethereum, you are able to stake sDAI (which gives you 5% APY) and borrow another stablecoin. Right now Aave is allowing users to borrow GHO which was discussed earlier for around 2% interest depending on how much Aave you have staked. The chart below gives an idea of expected APY based upon a starting value of $10,000. By looping 7 times, you could potentially get 15% APY on $10,000. This is probably unlikely because sDAI’s APY will probably decrease over the next year and Aave will increase the borrow rate for GHO.

Be careful with this strategy because of the possibility of liquidation. Also make sure to take slippage and gas fees into account when doing this strategy.

Best strategy

Based on everything above, the best option is to stake DAI into Sparkr to receive 5% APY. This is a enter and forget strategy rather than worrying about looping multiple times in a lending protocol. Additionally, sDAI is a liquid staking token (LST) which allows you to quickly sell into any other asset to take advantage of any arbitrage opportunities or portfolio rebalancing. Looping takes times to undo and the fees eat away at your profits.

None of this has been financial advise and make sure you do your own research.

-Just Another Crypto Analyst

Doing this for fun but if you want to leave a tip: 0xa33aE4207466cD866D13fA587067B1F824C06d4A

Bonus: Degens

For all you degens out there looking for the best possible yield. DefiLlama is a great website to check the best yields on stablecoins. Make sure you check what is backing the stablecoins and how long the protocol has been around before apeing into a protocol.