Stablecoin Yield farming | The Ultimate Guide

đź“– The ultimate guide to Stablecoin Yield Farming

Stablecoin yield farming is one of the most straightforward yet attractive strategies of DeFi because of its low risk and ability to achieve pretty attractive interest rates.

Stablecoins are cryptocurrencies pegged to the value of an underlying asset, such as the US dollar, or another fiat currency. The value of a stablecoin is designed to remain relatively stable compared to other cryptocurrencies, which can experience large fluctuations in value. Stablecoin farming involves providing liquidity to a protocol to capture a portion of the revenues and fees gathered from the use of the platform.

TradFi users should find comfort in the relatively low level of risk and complexity of stablecoin farming. In this guide, I’ll discuss how to put your fiat money to use with cryptocurrency derivatives aka stablecoins.

# Types of stablecoins and their risks

Let’s begin by differentiating the types of stablecoins and their associated levels of risk (Using today’s most popular options):

* **Fiat-collateralized stablecoins**
* **Crypto-collateralized stablecoins**
* **Algorithmic stablecoins**

Fiat-collateralized stablecoins: These are backed by a reserve of fiat currency, such as the US dollar. (i.e USDT)


* They are backed by a reserve of a well-established and widely accepted fiat currency, which can provide a sense of security and trust for users.
* They are closely tied to the traditional financial system, making it easy for users to convert them into other currencies.


* They are subject to the same risks as the fiat currency they are backed by, such as inflation and currency devaluation.
* They are also subject to the same regulatory risks as traditional financial institutions and may be subject to seizure or freezing of assets by governments.

Crypto-collateralized stablecoins: These are backed by a reserve of cryptocurrency, such as Bitcoin. (i.e DAI)


* They are backed by a reserve of a decentralized and censorship-resistant asset, which can provide a sense of security and trust for users.
* They can provide a way to access the benefits of cryptocurrency without the volatility associated with them.


* The value of the collateralized cryptocurrency can be highly volatile, which can make the stablecoin less stable.
* They are subject to the same regulatory risks as the collateralized cryptocurrency.

Algorithmic stablecoins: These are algorithmically managed tokens that adjust their supply in response to changes in demand to maintain stability. (i.e FRAX)


* They rely on complex mathematical algorithms to maintain their stability, which can provide a sense of security and trust for users.
* They can be more efficient and cost-effective to operate than other types of stablecoins.


* They rely on complex mathematical algorithms to maintain their stability, which can be difficult to understand and trust.
* They may be subject to large fluctuations in value if the underlying algorithm fails to maintain stability.

Fiat-backed and crypto-backed stablecoins have been the most widely used stablecoin options for their relative stability with the top options being USDT, USDC, BUSD —fiat-backed— and DAI, and FRAX —crypto-backed. Some less popular options that may have worthwhile interest rates include MIM, LUSD, and MAI.

# How to yield farm with stablecoins

For the most part, there are three types of protocols where you can yield farm:

* Yield Optimizer (single-staking + pairs)
* Lending market

**Decentralized Exchange (DEX)**

At the base layer of yield farming is decentralized exchanges (DEXs). DEXs require liquidity for traders to make large trades with low slippage, so they allow users —like you— to deposit their tokens onto the platform and become liquidity providers (LP). As a liquidity provider, you receive a receipt token equivalent to your share of the liquidity pool, which you can deposit into a “farm” on the DEXs platform. DEXs capture the fees from each trade and distribute them to LPs for depositing their tokens in the farm —providing liquidity.

When searching for liquidity pools to farm, start by filtering the results by typing stablecoins and choosing a pair you’d be comfortable investing in. If you search USDC on []( you’ll find two stablecoin pairs: USDC-MAI, and USDC-TUSD.


Farm rewards are controlled by the trading activity of the liquidity pool you’re farming. Rewards are usually dispersed in a manner that auto compounds a portion into your original position and provides DEX governance tokens for the other portion. The auto-compounded rewards rate usually depends on the amount of trading volume/trading fees for the pair of interest.

It’s common practice to swap the platform governance token rewards to stablecoins weekly to avoid the volatility of the DEXs governance token, unless you believe in the project or find utility in its governance. The swapped tokens can be re-invested in your original position or used for things like DCAing into a volatile asset.

**Lending Protocol**

Lending protocols like Geist Finance allow you to provide tokens in the form of collateral and borrow tokens from the same position. The APR to borrow is usually higher than to lend unless the platform decides to inflate the governance tokens emissions. You can perform a number of investment strategies on lending protocols, but the approach with the least risk is to lend your tokens without borrowing any. The lending APR comes from the interest collected from borrowers, so you’re earning yield from those that choose to borrow the asset.

Lending markets may be difficult to understand at first, but you can view them like this:

* Everything under the deposit APR is a positive interest rate
* The borrow APR consists of two values:
* Base APR- represents a negative APR and/or the amount of debt you will accrue per year
* Platform APR- represents positive interest —in the form of the platform governance token— you will receive for borrowing

**Yield Optimizer**

Yield optimizers tap into the liquidity pools of DEXs and lending platforms and optimize the yields by either auto-compounding yields and/or boosting the yields in some way.

For example, []( stablecoin strategies make use of []( lending pools, and []( isolated pools, offering users the best rates without having to switch between pools.Liquid Driver employs a different strategy in which they farm different DEXes’ governance tokens to reinvest them for even more governance tokens. Liquid Driver directs some of the emissions from their reinvestment strategy to the LPs that they provide on their platform.


[]( is a popular yield optimizer that taps into many different strategies to provide stablecoin yields.

There are smart contract risks associated with farming on certain protocols so you should do your due diligence when investing on any platform. If you’re unsure where to start your search you should visit []( and filter protocols by each blockchain to determine which dApps to use.

source: [

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11 thoughts on “Stablecoin Yield farming | The Ultimate Guide”

  1. Great guide, stables are usually the safest play in a bear market. I like to use Beefy on Polygon as an aggregator. DYOR and stay safe out there.

  2. Amazing write up OP. Thanks for this.

    The only stablecoin yield farming I’m engaged in currently is actually [h20data’s]( H20/USDC pool. H2O is a stable asset that allows users to transact freely in Ocean’s decentralized data marketplace, easier to use in trading within the marketplace considering the volatility of Ocean pricing.

  3. You missed another source: yield from decentralized leverage trading platforms. For example, Gains Network’s DAI vault on Arbitrum is currently paying 23% APY, all coming from fees generated from the platform (APY dependent on amount of DAI staked & fees generated), not inflationary token bullshit.

    You’re welcome


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