[Strategy Paper] Overview of Stablecoin Investments

This strategy paper summarizes the strategies of investing stablecoins, based on our previous Strategy Papers since Nov 2020, and it provides a support to our weekly updates. Our first general strategy overview was in Nov 2020, and subsequently briefly updated in Mar 2021; as our followers might notice, a lot has since changed in this industry. We will continue to monitor this industry and keep it updated. All information is published periodically on our Medium and Twitter.

Investment in Curve and Yearn

Curve now is the biggest platform for stablecoins trading and investments. Yearn provides two services: auto-compound and share of boost. Investing in Curve is as simple as providing liquidity into the different pools; then one can either stake with Curve for CRV or stake with Yearn. In our weekly, we assume that staking with Curve has a boost of 1.5x; this will require locking some CRV for evCRV. Yearn, on the other hand, has a reasonable boost and no lock-up, but charges a fee of 2%+20% like a fund (v2).

We summarize the yield of largest pools in Curve/Yearn, as a reference rate. An average is taken (other than the 3pool) itself.

For details on Curve and Yearn, you can start with our article in the Medium: Curve and Its Investment Value, and the sequent updates.

Investment in Other Stablecoin Platforms

One of the trends over the last six months is that the incentised platforms flourished. Not all of them are dedicated to stablecoins, but quite a number of them provide rewards for depositing stablecoins. Investment in these platforms are basically deposit stablecoins into them. A typical example is Vesper Finance.

Different platforms have different functionalities, e.g. KeeperDAO is to raise funds for liquidators; different yield distribution rules, e.g. mStable requires locking 80% of rewards; different risks, e.g. Frax’s FRAX-USDC pair has exposure to its own stablecoin FRAX. And these are changing all the time, so do refer to our coverage articles for details.

Investment in Other Platforms (Non-USD Products)

Similar to Other Stablecoin Platforms, this category has platforms that accept depositing coins not representing USD, but also stable in nature. For instance, you can deposit EUR stablecoins with Curve or Yearn, for a higher yield than deposit USD stablecoins.

We now accept very few products in this category. Currently there are: gold or silver derivatives from Mirror Protocol and their UST pair; hedged insurance product from Cover Protocol; fixed rate lending product from Ruler Protocol.

Investmnet in Uniswap Pairs

This is our very first strategy, which was tested during De-Fi summer of 2020. This strategy is not purely on-chain. It requires investment into a Uniswap pair, and hedging the non-stablecoin pair of it. For instance, one can invest in ETH-USDC pair, and hedge the same amount of ETH in Binance. This is not 100% market neutral, as there’s always impermanent loss. The calculation of return is also depending on how much fund is deposited into Binance as futures collaterals. For more details on this strategy, please refer to our early articles: Hedged Liquidity Providing in Swaps (1~4). The same strategy can be applied to any other AMM, e.g. Balancer, Sushiswap, or 1Inch.

Do note that due to the impermanent loss, the yield from this category is not comparable to other strategies.

A variation of this strategy is that one can use Alpha Homora to borrow ETH and leverage this strategy. For details please refer to this article on Alpha Homora. The yield is higher, but there’s also a risk of your vault being liquidated.

Investment in Compound and Leveraged Mining

Another traditional strategy is to borrow and lend stable coins at the same time in Compound (or AAVE in Polygon, Klend on Binance Smart Chain). This is a relatively low risk strategy but the yield are usually low as well. We do not have an article on Compound (as it has never been executed by us in fact, due to the lower return), but you can refer to our article on Cream’s ETH2 staking product for details on the principle of this strategy.

This strategy works when rewards are directly delivered based on lending and borrowing, and no staking is required. For instance, other platforms like WePiggy and Fulcrum do give incentives for lending but staking is required — and staking will remove one’s liquidity out of the leverage, thus defeating this strategy.

Investment in Binance’s Coin Futures for Funding Rates

Last but not least, one can invest in other purely off-chain: buying coin ABC, deposit into the Coin-margined Futures of an exchange like Binance, and short the exact amount. Details please refer to our article: Hedged Futures in CEX. By doing so, there’s no market price exposure (100% hedged), nor there’s liquidation risk (100% pledged). The yield is funding rates, every 8 hours. Theoretically, funding rates can be negative but most of the time it’s around 0.01% per 8-hr, and can go very high sometimes.

We use Binance as the reference exchange for this strategy. Also note that the yield for USDT-margined futures are usually higher but the strategy of arbitraging funding rates are much more complex and risky.

Other Notes and References

We publish the market returns of each strategy on Monday. All yields are APY, i.e. on the assumption that the yield is compounded in not less than weekly basis.

Yields derived from mining reward tokens are based on the prices of tokens on the date of publishing. For instance, Curve’s mining returns are based on the price of CRV on that Monday the update is released. Some yields are cumulative, e.g. Uniswap and Compound’s basic earnings and Binance funding rates, and are actual yields over the last week, compounded weekly to derive the APY.

Some platforms have rewards lock-ups, withdrawal fees, deposit fees, etc. and are not listed in the weekly updates but usually they are mentioned in our articles or strategy papers.

(Serenity Team, 10 May 2021, Twitter: https://twitter.com/SerenityFund)