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Yearn

The yield liquidity pool problem

curve.fi is a breakthrough system. Stable coin swap that prefer constant market making with the assumption that the value of the underlying asset is stable.

Let’s compare $2,000,000 DAI to USDT via Uniswap (graph courtesy of 1inch.exchange);

$2,000,000 DAI to USDT via curve.fi (graph courtesy of 1inch.exchange);

The above should already be able to show you, why this is such an amazing breakthrough in world ever increasingly filled with stable coins.

But curve.fi pools are not just efficient at swapping stable values, they are also yield bearing, there are currently 3 pools;

compound.curve.fi consisting out of cDAI & cUSDC (compound.finance’s DAI & USDC)

usdt.curve.fi consisting out of cDAI, cUSDC, & USDT (non yield USDT)

y.curve.fi consisting out of yDAI, yUSDC, yUSDT, and yTUSD (iearn.finance’s DAI, USDC, USDT, & TUSD)

Now for the next part, we have to include yield;

So let’s take some fixed values from the above for our assumptions;

  • cDAI 8.95%
  • cUSDC 5.46%
  • USDT 0%
  • yDAI 11.23%
  • yTUSD 6.94%
  • yUSDC 7.36%
  • yUSDT 12.71%

So assuming 0 volume (and thus 0 LP fees), how much yield do we get from each pool, assuming equal distribution?

cDAI (8,95%) + cUSDC (5.46%) = 7.20%
cDAI (8.95%) + cUSDC (5.46%) + USDT (0%) = 4.80%
yDAI (11.23%) + yUSDC (7.36%) + yUSDT (12.71%) + yTUSD (6.94%) = 9.56%

Now from the above, we can also conclude that a pool consisting only out of yDAI + yUSDT would be the best performer (11.97%)

Next consideration, which pool would receive more trades? This is a more difficult one to measure, but we can make a few assumptions;

  1. Higher liquidity, which allows for less slippage and higher trade volume, would arguably allow for bigger trades, and more frequent smaller trades.
  2. More pairs allow for more cross pair trades*

Data courtesy of duneanalytics.com

In aggregate USDC > DAI > USDT > TUSD

In aggregate USDC > USDT > DAI

So from the above, we can assume USDC, UDST, and DAI to be the 3 best performing stable coins by volume.

As such, the following combination would be the highest yielding;

yUSDC + yDAI + yUSDT

Alternatively, for a more risk averse pool;

cUSDC + cDAI + aUSDT

Looking at the above, we can also see some interesting patterns;

compound pool liquidity started decreasing from Feb 14 (usdt pool was introduced). usdt pool liquidity started decreasing from Feb 20 (y pool was integrated into 1inch.exchange)

From the above, I believe that;

compound.curve.fi is under-performing given the 50%|50% cDAI|cUSDC pairing, cUSDC bringing CDAI interest rates down.

usdt.curve.fi is under-performing given the 33%|33%|33%(0%) cDAI|cUSDC|USDT pairing, USDT bringing yield rates down.

y.curve.fi is under-performing given the 25% TUSD inclusion, bringing down yield in aggregate, and not making it up in volume.

To achieve the right balance between risk & reward, I propose 2 pools;

low risk: cDAI|cUSDC|aUSDT
medium risk: yDAI|yUSDC|yUSDT

However, the pool with the highest liquidity will cannibalize the smaller pools for volume.

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