Status of DeFi Stablecoins and Mining Profit Opportunities

21-05-23 15:23
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Original title: "DeFi Stablecoin Status and Mining Profit Opportunities"
Original source: Babbitt



Stablecoins have seen explosive adoption over the past few years, and their widespread use began with Transactions and transfers between centralized exchanges. Since then, stablecoins have entered DeFi as the main primitive in the ecosystem.


Perhaps the most important Yes, many crypto-natives switch to holding stablecoins instead of their native currencies when exiting risk. The rise of DeFi has enabled users to put these idle assets to use. Once dormant, unproductive assets leave centralized exchanges and bank accounts to find economic utility in lending, market-making markets, and other types of DeFi protocols.


In this article, we will discuss:


1. Current status of stablecoins

2. Current status of revenue opportunities stablecoins


Current Stablecoins are dominated by a handful of projects, with USDC, USDT, and DAI dominating Ethereum’s circulating supply and usage. USDC and USDT use centralized collateral to maintain the peg to the U.S. dollar. Every 1 token issued by these stablecoins is backed by $1 worth of assets.


DAI is the only major stablecoin project that manages its issuance in a decentralized manner. Mortgage assets on the chain to generate DAI.



All three of these stablecoins can be used in Ethereum DeFi. More than 60% of DAI's supply is locked in decentralized lending, exchanges, and other types of DeFi protocols.


Despite the high lock-up percentage of DAI, due to the larger liquid supply of USDC and USDT, Therefore, the latter two still dominate in Ethereum smart contracts.



Daily stablecoin transfers on Ethereum have surpassed $10 billion per working day for the past 3 months (this value includes smart contract deposits and withdrawals).



There are many demand drivers behind stablecoin supply growth of more than $75 billion and daily transfers of more than $20 billion.


Move from volatility and exposure to stable assets without using your own currency;

Without taking risk Move assets across centralized exchanges; lending and leveraged mortgages;

Used for decentralized lending, exchanges, derivatives, etc., the use of stablecoins can eliminate the risk of volatile tokens, but due to risks Lower, often resulting in lower yields;

Payments, wages, foreign exchange, 3rd world access to non-hyperinflationary currencies, and other niche consumer use cases;

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In the stablecoin market, assets anchored to the US dollar dominate, and projects like EURS have done a good job of anchoring other currencies such as the euro. These stable assets allow users to have the confidence to store their assets in stablecoins without the need to trade into national currencies such as US dollars.



There are already a series of stable coins on the market, traders should Pay attention to the risk profile of these stablecoins, the following are some common stablecoins:


Other centralized stablecoins: HUSD, GUSD, EURS, TUSD;

Other decentralized stablecoins: sUSD, FRAX, FEI, alUSD, RSV, PAX, UST, mUSD, LUSD, ESD, AMPL


The income opportunities of stablecoins in the DeFi field


Note: The rate of return varies greatly , the rate of return listed at the time of writing this article will be very different from the rate of return readers will see when reading this article.


As users transition to stablecoins, it is important to understand where the revenue opportunities are coming from. Nonproductive assets have costs. While idle, stablecoins are often subject to inflation and fees. To offset these effects, investors can choose to put idle assets to work, provide services, or take risks in exchange for returns.


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In DeFi, these returns are currently relatively high compared to traditional investment targets. However, this also comes with some risks, such as:

  1. Potential 1:1 anchor loss;
  2. Smart contract attack risk (including economic /protocol design attack);
  3. Volatility of yield: APR will change rapidly after depositing assets;
  4. Insufficient liquidity: high volatility of reward tokens, inability to Borrowing from high-utilization pools, inability to withdraw large positions from high-utilization pools, high slippage for exiting positions;
  5. Gas fees: high gas fees create wear and tear and limit liquidity providers and user behavior;

Quantitative benefits


APR and APY are widely used to measure An indicator of DeFi returns. Unfortunately, these two concepts are often misunderstood by users and vaguely labeled by developers. APR represents the income of a pool, and it does not need to compound your income. If APR is listed in a project's UI, it means your earnings are not automatically compounded. If a pool has a "claim rewards" feature, the reward is APR.


When compounding daily, An APR of 40% becomes an APY of 49%, and an APR of 400% becomes an APY of 5242%. This is the power of compound interest, especially prevalent in high interest rate environments like DeFi. Of course, small positions in Ethereum DeFi cannot benefit from this kind of compound interest, because the gas fee for claiming rewards and re-staking every day will exceed the return. The table below shows the possible returns assuming we invest $1 million, earn at 50% APR, and claim daily rewards for compounding.




With that in mind, here are 5 different risk and reward strategies around stablecoins. Note that returns on one-sided liquidity exposures are reduced because such returns have limited underlying volatility.


Each project is assigned a risk rating here, which takes into account the project's credibility, protocol risk, audit, and other factors, and the risk rating is relative to Other parts of DeFi, not independent, in addition, in the DeFi field, even an A+ rating has a lot of risks.


Aave and Compound Lending (APY 4-16%, Risk: A)


Aave and Compound are the largest lending protocols in DeFi. Until recently, Compound was the largest lending protocol in terms of total deposits. Aave has reversed that with its new liquidity incentives, and it now dominates liquidity in lending.




These new Aave incentives present an attractive opportunity to increase yield. It is reported that the Aave incentive plan will continue until mid-July, with increased rewards in the form of Aave governance tokens (2,200 stkAAVE per day). stkAAVE will be distributed in the pool proportionally according to the borrowing activity.


Aave, for example, currently has $5 billion in loans outstanding. The DAI pool has roughly $1 billion in borrowing, $1 billion/$5 billion = 0.2 or 20%. 2200 stkAave per day means that the DAI pool will be allocated 440 stkAave per day. Currently, this means that for every $1000 deposited, users can receive 0.0002 Aave/day (11 cents/day at current prices). This reward structure outperforms Compound’s liquidity mining rewards on some stablecoins and underperforms on others, depending on utilization.


Although Compound has historically had a more mature market in terms of scale and utilization, Aave, with its superior token economy, incentive mechanism, and Stable interest rates and support for more tokens as collateral, etc. have a higher market cap. Note that while Aave has surpassed Compound in terms of total collateralized assets, Compound still dominates in terms of total borrowing.




With the reduction of interest rates and the expansion of market size, for those who want to obtain stronger liquidity guarantee and lower borrowing interest Compound remains a strong market for large-scale lenders. Instead, Aave tends to offer better returns at high risk and provides incentives in terms of supply and demand in its lending market. They also recently announced a professional version for institutional services.


It will be very interesting to see how liquidity performs when the incentive ends in July.


Market value/TVL is usually used as a valuation indicator to measure how much liquidity a project attracts. This indicator is similar to the price-earnings ratio in traditional markets. In traditional markets, the price-earnings ratio The higher, the higher the token valuation per dollar of liquidity. The story is similar for Aave's valuation in terms of user numbers and market cap/revenue ratio.




The DAI lending market on Aave currently has an interest rate of 11% for lenders, which means that lenders can expect to earn 11% compound interest . Interest rates on this pool have been relatively volatile since the launch of Aave’s liquidity incentives in late April.


The bottom line on this graph represents the lender's interest rate, while the top line represents the borrower's interest rate.




Aave's incentives mean that an additional ~3-6% yield comes from staked Aave tokens. These staked Aave tokens can be unstaked within a 10-day cooldown period, or can remain staked for an annualized return of 7%.


Users can take on additional risk and potential reward by collateralizing borrowing, revolving borrowing for increased leverage, or sending borrowing to other protocols. These details are beyond the scope of the simple strategies that this article focuses on.


Strategic return: Aave lends DAI (4-15%), Aave liquidity incentive (4%), pledges Aave (7%)


Risks: Potential smart contract loopholes, DAI unanchoring, Aave liquidity risk, Gas fees (for operations such as deposits and withdrawals) exceed small position returns.


Curve AMM Pool and Staking (APR 10-50%, Risk: B+)


As the main venue for DeFi stablecoin DEX liquidity, it is not surprising that Curve has a liquidity incentive mechanism. Curve has the lowest slippage for stablecoin transactions, and until then, it has been controlling the vast majority of stablecoin transactions, and recently Uniswap V3 stablecoin pairs are catching up with Curve's transaction volume, but there are still some gaps between the two gap.


The base APY for providing liquidity to Curve protocol's largest fund pool (USDC+USDT+DAI) is 2% (from transaction fees), and the trading volume continues to be healthy towards $50 billion.




In addition to the 2% fee reward, there are 8% additional rewards from CRV governance tokens. Users can increase this 8% yield to 20% by locking CRV for a defined period of time. The maximum reward for locking CRV for 4 years is to increase by 2.5 times. Note that this 20% is obtained from 2.5*8%, which is also the largest reward.




Strategic return: 3pool basic APR 2%, additional reward 8%-20%, locked CRV 11%.


Risks: Potential smart contract loopholes, DAI unanchored, gas fee exceeds return.


Yearn Finance DAI Vault (APY 15%, Risk: B)


yvDAI Vault is Currently the largest vault on Yearn Finance, it has more than $700 million in assets, and its current APY is 15%.


These assets will play a role in the DAI strategy created by Yearn developers. Its working principle is to put the user's DAI into various revenue agreements. The developer deems it appropriate to move the user's assets within the scope of the strategy to maximize revenue.


Example of yvDAI treasury allocation strategy:


  1. StrategyLenderYieldOptimiser: optimize DAI lending between dYdX and Cream;
  2. SingleSidedCrvDAI: deposit DAI in the pool with the highest yield in Curve;
  3. StrategyIdleDAIYield: deposit DAI in idle.finance to mine Take COMP and IDLE governance tokens. Rewards are sold for DAI and redistributed to vaults.

The Yearn vault has locked more than 4.5 billion US dollars, which is a very popular place, and its risk is relatively low compared to most defi projects.




A large part of the deposits in the Yearn yvDAI vault comes from Alchemix, and the assets deposited in the vault by the Alchemix agreement currently exceed 400 million US dollars . , Alchemix uses Yearn as the core infrastructure of its protocol. The following diagram expresses how Alchemix integrates Yearn to provide a unique use case.




Historically, single stablecoin deposit returns in the Yearn Vault have been pretty good, with APY consistently greater than 10% for the past few months.


Strategic return: yvDAI treasury (APY 15%), 2% management fee, 20% performance fee


Risks: Potential Yearn smart contract vulnerabilities, potential vulnerability risks of related revenue agreements, and DAI unanchoring risks.


KeeperDAO arbitrage (APY 10-x%, risk: B-)


KeeperDAO use Pool assets to take advantage of opportunities for arbitrage, liquidation, and other activities. A lot of people have recently noticed Miner Extractable Value (MEV) through KeeperDAO and ROOK (the DAO’s governance token).


In general, Keeper borrows assets from the pool to carry out these liquidation and arbitrage activities, and creates returns for itself and the storage users of the pool.


Here are the statistics for KeeperDAO v2. More recently, KeeperDAO V3 has been released, making these analyzes obsolete, and the liquidity of V2 is declining.




These borrowed funds are considered safe as they are borrowed, used, and returned to the same block using flash loans in the pool. This is achieved through a unique innovation based on the blockchain smart contract system, through which funds can be borrowed without collateral (it is guaranteed that the funds will be returned in the same block). If the transaction cannot guarantee this, then it fails.


The graph below shows the cumulative value of the Flash Loans that Keeper has borrowed from KeeperDAO liquidity providers.




The return of the governance token ROOK is determined by the emission plan, and the base fee expressed in the deposit currency will be more or less as Keeper executes on the DAO operation changes.


Strategy return: 15% APY (ROOK governance token), x% base fee.


Risks: Potential smart contract loopholes, DAI unanchored, dependent on Yearn earnings.


Conclusion


Reviewing recent data, the growth of stablecoins is parabolic. With the advent of DeFi, stablecoin holders can now earn attractive yields on their once-idle assets.


The current scale of stable currency has reached:


  1. Circulating supply of more than 75 billion U.S. dollars, with a daily transfer volume of more than 10 billion U.S. dollars;
  2. More than 15 billion U.S. dollars of stablecoins have been deposited in Compound and Aave, and more than 12 billion U.S. dollars of stablecoin assets have been borrowed (Utilization rate >75%)
  3. Healthy stablecoin pairs on most major DEXs;

Users will always seek stable assets when exiting risk. The question is, to what extent will DeFi drive users to put billions of dollars of unproductive assets into productive use?


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