Nansen: The Best Strategy for Stablecoin Yield Farming in a Bear Market

This article comes from Nansen, compiled by Odaily translator Katie Koo.

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Crypto bear markets can be long and brutal. Fortunately, after the development of the last round of bull market, DeFi has provided investors with richer product choices. One of the safest ways for investors to hedge against market turbulence while still making some small gains is through Yield Farming with stablecoins.

To this end, Nansen has compiled a stable currency Yield Farming strategy with higher security to help you minimize risk during the ruthless bear market while maintaining passive income.

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First, stablecoins are not inherently risk-free assets. Investors first need to understand the general and asset-specific risks involved with each type of stablecoin, and avoid treating these digital assets as "real" dollars. Despite the various risks that stablecoins pose, they remain attractive due to their ability to be used in Yield Farming strategies.

Since Yield Farming means putting assets into DeFi applications to collect returns, Stablecoin Yield Farming intuitively means generating passive income on stable crypto assets through two types of lending activities: money market lending and decentralization as liquidity exchange lending.

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Among the many DEX designs, stablecoin exchanges (such as Curve) provide the minimum asset requirements and low transaction fees for trading similar assets (such as trading between two stablecoins, such as USDC and DAI), which requires Highly liquid stablecoin pool.

Curve Finance

These platforms deploy a variety of stablecoin-focused incentives that often translate into opportunities for passive income seekers. Such exchanges include:

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Providing assets to Curve allows depositors to earn a portion of the transaction fees generated in the pool, as well as additional emissions of CRV tokens. Among Curve’s stablecoin pools, the most traded is 3pool, which consists of DAI, USDC, and USDT (three of the four most liquid stablecoins on the market). At the time of writing, 3pool offers 0.10% APY for stablecoins and 0.2% APR (CRV rewards) for tokens, the former varies daily with transaction volume, and the latter depends on reward rate, price and earnings earned through staking.

Ellipsis Finance

While the aforementioned yields are low, Curve has other stablecoin pools with more lucrative returns, and 3pool is widely considered to be safer because both the pool and the stablecoins traded on it have undergone strong “stress tests.” Curve pools on other EVM chains and Rollup are accessible, but most liquidity is concentrated on the Ethereum mainnet.

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As a fork of Curve, Ellipsis Finance has the same technical logic as Curve and provides similar services on the BNB Chain, but focuses on different stablecoins (such as BUSD and USDD). Like Curve, investors can deposit stablecoins as liquidity and earn interest on trading activity. Since Ellipsis is on Binance Chain, transaction fees for depositing and withdrawing assets and collecting rewards are significantly lower than Curve Finance.

Farmers need to keep in mind that the benefits of stablecoin trading are variable and vary with the trading volume of the day. Therefore, calmer markets and lower project token prices can translate into lower USD specified returns.

Alternatives to the aforementioned platforms include several other stablecoin exchanges such as Platypus Finance on Avalanche, which focuses on major stablecoins, and Saber on Solana, whose most liquid pools include USDC and UXD.

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Other DEXs

A third alternative to stablecoins and multipurpose DEXs are cross-chain bridges like Synapse Protocol and Hop Protocol, which also allow providing a single asset as liquidity for stablecoin-like transactions.

Check out Nansen's liquidity mining dashboard to find the best opportunities in the liquidity supply market.

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crypto lending

The second most popular way to earn passive income on stablecoins is by using decentralized money marketplaces like Aave and Compound. Just as stablecoin exchanges often reward lenders with stablecoins and native Dapp tokens, money markets often compensate depositors with generated revenue and governance tokens.

For example, when users deposit their USDC into Aave's lending pool, they receive the corresponding token, aUSDC, a 1:1 liquid synthetic asset redeemable for USDC. As loan positions mature over time, fees collected from borrowers are distributed proportionally to users' wallets, resulting in a steady build-up of aUSDC balances that can be redeemed at any time for the underlying stablecoin. Currently, the APY of USDC and USDT on Aave is 0.69% and 1.96%, respectively, and changes with the borrowing rate and utilization rate. Additionally, users can earn AAVE rewards by depositing into specific pools.

In addition to these two blue-chip lending projects, investors can also lend their stablecoins to money markets that fall under different licenses.

Rari's permissionless created Fuse pool allows users to create custom money markets with the assets they want and lending parameters such as collateralization factors and interest rate models determined by the pool creator. This has allowed both the most popular stablecoins and long-tail coins with relatively high interest rates to gain. However, this also comes with endemic risks of instability.

However, these niche platforms should insist on enhanced risk management, as neither the apps nor the stablecoins they serve have been “stress-tested” and scrutinized like their blue-chip counterparts. Since the collapse of the most extreme examples of these platforms (such as Anchor Protocol and UST) has caused huge losses to investors, for users who want to convert their stable assets and use these assets on these platforms, we recommend Proceed with caution.

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