Earning High Yield on Stablecoins
Stablecoins like USDT, USDC, and others are a popular alternative to fiat currencies and traditional savings accounts. But stablecoin yield strategies in DeFi have a variety of risks and annual percentage yields (APYs).
In theory, this gives users the ability to match their risk preferences with a stablecoin yield strategy.
However, many of these strategies are not well understood and may carry trivialized risks. This article will highlight strategies both for investors with high and low risk appetites in the digital assets space.
Even if a DeFi protocol offers extremely high APYs, it's worthless to earn interest if the stablecoin crashes or the app suffers from an exploit. Therefore, this article will focus on sustainable DeFi yields with varying amounts of risks.
Highest Yields on Stablecoins
The highest stablecoin yields in DeFi usually involve algorithmic stablecoins, options selling, or uncollateralized lending to earn yield. However, these yield strategies hold additional risk and are generally considered mid to high risk investments. Below are some examples of different stablecoin yields.
Algorithmic Stablecoins
Algorithmic stablecoins, infamously popularized by Terra (LUNA), are stablecoins that derive value from being backed by their native crypto asset. In Terra’s case, each USTwas redeemable for $1 worth of LUNA.
Offering 20% APY on its native lending app, many crypto investors were lured in by high interest rates and the idea of earning passive income. Due to massive selling pressure and panic, a lack of demand and liquidity on LUNA led to a bank run on UST, causing a death spiral on both UST and the LUNA market cap.
The most similar alternative to UST now is USDD, which is backed by a mix of TRX, BTC and USDC, offering yields ranging from 9% to 50%. Since it is collateralized with USDC and BTC, it may be seen as safer than UST. The key risk here is that the minting of USDD and reserve management is controlled by a centralized team, similar to how UST’s treasury with BTC was controlled by the Terra team.
Options Selling
Known as the covered put option strategy, USD yields can be generated by selling put options on crypto with stablecoins as collateral. Buyers pay sellers a premium for the put option, and if the price of the underlying crypto does not go below a certain price, the seller earns the premium with no losses.
For example, if the current price of ETH is $1600, and someone sells put options with a strike price of $1375 for $5. If ETH price stays above $1375, they profit $5. However, if it goes to $1000, they suffer a total loss of $370.
Ribbon Finance’s platform offers this strategy to users, with yields ranging from -25% to 25%.
Uncollateralized Lending
Uncollateralized crypto lending platforms allow users to choose institutions they are willing to lend to, usually at a much higher rate than collateralized lenders due to the risk lenders take. Due diligence on the institutions lent to is strongly encouraged, as bankruptcies of the firms may result in losses for lenders, as seen in the Celsius and Voyager cases.
There are DeFi protocols emerging that offer uncollateralized lending, but these apps are regarded as higher-risk than collateralized lending opportunities. Given the yield is only boosted by a few percentage points, most users opt to lend money to collateralized borrowers.
Highest Low-Risk Stablecoin Yields
When thinking of the safest stablecoins, crypto natives usually point to either USDC, USDT, or DAI. The ease of redemption of USDC for USD on Coinbase and monthlyattestations that show that each USDC is backed gives assurance to holders.
DAI is a crypto-backed stablecoin with a mix of collateral backing. The majority of its backing is in stablecoins, while other cryptocurrencies can be used to mint DAI, too. DAI’s robust liquidation system and resilient smart contract security since its inception of 2017 has made it one of the most popular stablecoins.
Pairing these stablecoins with blue-chip DeFi protocols such as Aave, Compound, Curve, and Convex exposes investors to much lower risk than other options. These protocols are collateralized lending and market making platforms, with stablecoin interest rates from 0.5% to 3% if only using USDC, DAI and USDT.
What Makes Stablecoin Staking Low Risk?
Stablecoins such as USDC are generally regarded as safe because of their asset backing with U.S Treasuries or USD, as compared to algorithmic stablecoins like UST. Transparency in both stablecoin backing and yield generating protocols are key, as shown by the obfuscated handling of funds in Terra’s case.
Since DeFi protocols such as Aave and Compound are coded to have everything done onchain, with execution of governance proposals under a 1 day timelock. Any suspicious activity from these protocols will be immediately detected on-chain.
Total value locked in these protocols acts not only as a sign of trust, but acts as a “bug bounty” for any hacker. If the protocol has been operating for a significant amount of time and value locked without any hacks, it is unlikely that such hacks are possible or they would have been done already.
Protocols without lock-ups are also seen as safer, as users can pull funds if any risks change.
Highest Yielding Stablecoins with Low Risks
As we've learned, achieving higher stablecoin APYs almost always comes with additional risk. Aave, Compound, Curve and Convex are some protocols that carry low risk, as they have operated for multiple years through stressful market conditions, have full onchain transparency, large TVLs and well-defined governance processes. But the different stablecoins may be confusing to readers, hence we summarize the safest stablecoins to use below.
USDC and DAI
As mentioned before, USDC’s transparency and ease of redemption makes it one of the safest stablecoins, while DAI’s robust liquidation system for its volatile crypto assets coupled with a mix of stablecoins have made it popular.
USDC and DAI lending rates on Aave and Compound range from 4% to 9% as of writing.
USDT
USDT is the oldest and largest stablecoin by market capitalization, backed by a mix of investments, loans, bonds, cash and cash equivalents, which are verified with quarterlyreports. Though USDT may suffer from numerous rumors, it is a fact that it is the stablecoin with the longest history, going through more market tribulations than the others. Direct redemption of USDT is harder relative to the other stablecoins, as there is a minimum transaction amount of $100,000 and other restrictions.
USDT lending rate on Compound and Aave range from 5% to 8% as of writing.
OUSD
OUSD is a yield-generating stablecoin collateralized by USDC, DAI and USDT. OUSD automatically deploys them into blue-chip DeFi protocols such as Aave and strategies that have been vetted and analyzed by the engineering team. Daily interest is directly sent to OUSD holders, turning their wallet into a crypto savings account. By using the safest stablecoins and most secure DeFi protocols, OUSD is the safest yield-generating stablecoin on the market.
OUSD’s 30-day trailing average APY is currently 5.3% as of writing:
Protocols With Bonus Stablecoin Staking Rewards
APY on stablecoins can be boosted by protocols distributing their tokens as a marketing or community bootstrapping tool. Hop Protocol allows investors to provide liquidity between different chains, acting as “bridges” i.e. Swapping USDC on Arbitrum back to the Ethereum network. Investors can earn up to 8.25% on Hop with stablecoins. However, this premium in yield may be explained by skepticism on DeFi bridges, as many such protocols have been hacked before.
Is Stablecoin Staking Worth The Risk?
With vastly different risks and attributes between each strategy, it's hard to broadly say stablecoin staking is worth the risk as a crypto investment. High yielding strategies may come with risks that are not understood, as seen with UST and Celsius.
Variable APYs and market conditions also require users to continuously monitor their strategies, which they may not have the time for. For informational purposes only, if users understand the risks they are taking and match their strategies according to their risk appetite, then stablecoin staking will be worth the risk and can often provide higher returns than a traditional bank.
If users are looking for an automated low risk strategy with no lock-ups, elevated yield, and passive rewards, thenOUSD may be a good option to consider. By having compounding interest credited directly into users’ crypto wallets without transaction fees, OUSD gives users a convenient source of passive income.
OUSD can be purchased through a DEXaggregator, theapp, or crypto exchanges such as Kucoin and Gate.
