Earning Yield on Stablecoins in 2022: Bottlenecks and Alternatives
Economics of digital assets segment have already implemented a number of financial concepts unexplored in Web2 world. At the same time, from users’ point of view, earning yield on stablecoins works not unlike bank deposits.
There’s only one difference: profits on stablecoin-powered yield programs are way higher. But what about risks?
Yield on Stablecoins: Basics
(if you’re familiar with cryptocurrencies, stablecoins and yield farming, please, skip this part)
What are stablecoins?
Stablecoins are digital currencies (assets issued on decentralized networks or blockchains) that have their price pegged to a fiat currency or precious metals (E.g: PAXG and gold). Largely, stablecoins are pegged to the U.S. Dollar and Euro.
The peg to $1 or €1 is either guaranteed by the reserves of the stablecoin’s issuer (let’s call such assets centralized stablecoins) or by technical design (E.g : over-collateralized stablecoins such as $DAI or $SUM and algorithmic stablecoins such as $UST and $USDD) that ensures the stability of liquidity behind the stablecoin in an automated way (for decentralized ones).
Centralized stablecoins are way more popular: three largest centralized stablecoins U.S. Dollar Tether (USDT), USD Coin (USDC), and Binance USD (BUSD) are responsible for $141 billion in equivalent or almost 90 percent of aggregated stablecoins’ segment supply.
How can I earn passive income on my stablecoins without spending them?
Simply put, you can provide them to some entity or protocol and allow it to use your stablecoins for financial operations (lending, providing liquidity, etc.) . This can be done by locking your stablecoins in a smart contract for a time period.
During the period of ‘staking’, you won’t be able to access your coins. The interest payouts are distributed after the end of staking periods.
In decentralized protocols, stablecoins can be locked in single-asset pools or in ‘classic’ pools when you need to inject liquidity in two assets, for instance in USDT and in USDC.
Yield on Stablecoins 1.0: Centralized Platforms, Centralized Coins
Since the 2017 wave of Bitcoin (BTC) euphoria that brought a new generation of investors to cryptocurrencies, many centralized platforms(‘digital banks’) started offering stablecoins staking services.
Technically, they are just borrowing your stablecoins (typically, USDT and USDC) to lend them to another user just like classic banks.
BlockFi and Celsius Network are the most popular platforms of this type. Also, similar services are available on the majority of large-scale centralized crypto exchanges like Binance (BNB) or Crypto.com.
BlockFi offers up to 7,5 percent in APY on major centralized stablecoins // Image by BlockFi
However, for every centralized service, ‘not your keys not your coins’ motto works perfectly: actually, the service controls your coins during the entire period of staking. This proves to be even truer in the light of recent events (Celsius stopped withdrawals citing market conditions as a reason).
Yield on Stablecoins 2.0: First-gen on-chain protocols
In 2020, a totally new group of cryptocurrency ecosystems became mainstream, i.e. decentralized finances protocols or DeFis. In general, they allow you to perform basic financial operations in a non-custodial way: your crypto wallet only interacts with smart contracts (blockchain software); no centralized entity accesses your keys, your coins or sensitive data.
Yield farming on stablecoins is available on all DeFi majors like Aave Finance, Curve DAO, PancakeSwap, and so on.
The larger the protocol the lower yield rates it offers on stablecoins. For instance, as of early Q2, 2022, CurveDAO rates for the majority of mainstream stablecoins vary between 0,5 and 5 percent APY.
Most popular stablecoin pools on CurveDAO // Image by Curve
Largest Binance-based DeFi protocol PancakeSwap (CAKE) offers 1,75% in APY on USDT/USDC pool.
The most profitable stablecoin-based yield program was offered by Terra-based Anchor Protocol, where you could stake UST for up to 19,5 percent APY. Nonetheless, this proved to be unsustainable for UST, which by design was a vulnerable stablecoin (See our article about UST).
At the same time, this design also has a number of bottlenecks. First, it still includes centralized stablecoins like USDT and USDC. They can be frozen by their issuers Tether Limited and Circle at any time.
Then, APY rates on the majority of pools are still very low; amidst skyrocketing inflation of fiat currencies, this flaw becomes critical.
Yield on Stablecoins 3.0: SUM by StableUnitDAO
USD-pegged stablecoin SUM by StableUnitDAO is set to change the narrative in earning yield on stablecoins. It was introduced in early 2022 as a part of StableUnitDAO’s multi-purpose decentralized payments ecosystem.
What is special about SUM?
First, it is 100% decentralized over-collateralized stablecoin. Its peg to USD price is controlled by a multi-layer stabilization algorithm and is guaranteed by cryptocurrency reserves. When we see stablecoins such as USDD, UST or even USDN (Neutrino) losing their pegs, we understand that this mechanism is of crucial importance for a sustainable stablecoin.
StableUnitDAO can’t somehow affect SUM distribution; no assets can be frozen voluntarily. Quite the opposite of what centralized stablecoins do and can do.
SUM holders don’t need to stake (lock) their holdings to obtain rewards. This scenario ensures seamless and straightforward yield farming experience for crypto enthusiasts with various levels of expertise in blockchain technology.
Unlike previous decentralized stablecoins FEI and DAI, SUM’s architecture is highly scalable which makes it suitable for a plethora of B2B and B2C uses.
