How to earn yield on Stablecoins?
Here are some potential strategies to earning yield on your stablecoins, each with a different risk-reward profile for your needs.
Now that you've understood stablecoins and how they can make transacting in everyday life easier via permissionless open finance. We can now explore opportunities to earn yield on your stablecoins just like bank deposits while they remain entirely in your custody.
- Lending Pools : Lending Pools are global liquidity pools where lenders send their funds directly into a smart contract and receive interest from borrowers in the lending pool. Borrowers borrow directly from the Lending Pool smart contract by providing digital asset collateral to the smart contract as described above and pay interests on these loans. These digital asset owners are typically borrowers who have digital assets but do not which to sell them, yet require immediate liquidity for other uses and are willing to pay these higher interest rates.
- Decentralized exchanges improve efficiency by replacing the middleman (Centralized exchanges like Coinbase, Binance) with the help of automated smart contracts. One such exchange is Uniswap which utilizes an innovative mechanism (Automated Market Making) to automate trades. This also allows any user to provide liquidity into the pool and earn a share of the exchange fees. Fees are distributed to all participants of the pool and no centralized entity receives any profits.
- Stable Asset Liquidity Pools : Stable asset liquidity pools like Curve.finance combine BOTH Lending Pools and Bonding Curves similar to AMM Liquidity Pools to provide highly-efficient stable asset trading and low-risk returns for Liquidity Providers. Users are exposed to less price slippage than they would normally face on other DEXs when trading from one stable asset (USDC to USDT/DAI) to another. Unlike liquidity pools like Uniswap, some of these assets are also lent out on Lending Pools when they are not being traded which gives more interest to liquidity providers.