How to Farm Stablecoins
Maximizing Yield, Managing Risk, and Consistently Finding the Best Opportunities
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With market sentiment in the toilet, many of us are feeling uneasy about buying into anything volatile.
In 2018 when there was a major drawdown, ETH ended up bottoming out 94% below its all-time high. With this cycle's top of 4800, that kind of drop happening again would take ETH down to 288. Oof.
Do I think that'll happen? No, but I don't feel confident that we're done dropping. Especially with the broader economy in a bit of turmoil.
So what do you do if you want to play around in crypto without buying the more volatile assets? Farm stablecoins! There are ample opportunities to put your USDC, USDT, DAI, and other dollar-pegged stablecoins to work earning anywhere from 5% to 20% or more APR, significantly higher than you would earn in a tradfi savings account.
But the problem I've seen with most stablecoin farming advice is it:
Focuses too much on specific protocols that work right now, vs helping you systematically find the best opportunities.
Doesn't account for risk, and whether the higher yield outweighs the additional risk you're taking on.
So in this piece I'm going to do just that. I'll explain how I find stablecoin farming opportunities, how I assess their risk level, and some additional factors that get glossed over when you're just comparing APRs.
By the end you will have a good framework for stablecoin farming so you can chase these yields on your own, without having to wait for someone else to tell you where to go.
To start, we have to cover the pros and cons of where the yields are coming from.
I covered this in depth in my "How are the APRs so High?" article, but there are a few common sources of stablecoin yield:
Blue Chip Lending Protocols
Niche Lending Protocols
Yield Aggregators
Incentivized Liquidity
After explaining all of those, I’ll cover:
How to find the best opportunities in each category
The question of Anchor Protocol
Leveraged stablecoin farming
My stablecoin strategy
Let's dive in.
Blue Chip Lending Protocols Pros & Cons
In tradfi we have the fed funds rate, which sets the interest rate floor for all other lending activities. In DeFi there's no central bank so we don't have that, but we do have a base interest rate usually determined by blue chip lending protocols like AAVE and Compound.
Right now on AAVE, I can get 1.91% interest on my USDC if I supply it for other people to borrow. This is what we might consider the true yield on USDC right now, since it's based on what other people are willing to pay to borrow it.
This is typically the lowest and safest stablecoins yield. It's uncomplicated, you don't have to monkey with it, but it's also going to be quite low return. The benefit is you can set it and forget it. It's not based on giving away tokens you have to periodically sell to compound your earnings. It's not going to cost you a bunch of gas to get it set up. There are no swapping fees. It's easy. So even if the yield appears lower, it might work out to be a better option.
But, it is typically pretty low. Before we get to incentivized liquidity where you typically see the highest stablecoin yields, let's quickly cover another option that might have some better returns while retaining the simplicity of an AAVE style model.
Niche Lending Protocols Pros and Cons
Most tokens aren't accepted as collateral on AAVE. So for many of the popular DeFi, Gaming, and other projects, you don't have an obvious source of liquidity for your assets without selling them.
Thankfully there are other lending protocols that have sprung up to support a broader variety of assets, while being slightly less capital efficient than AAVE and Compound.
The two big ones are Rari and Market. And if you know where to look, you can sometimes find much higher stablecoin yields on these platforms than you get on AAVE and Compound.
For example, the FeiRari pool is paying 4.42% on FEI right now, which is more than double the 1-2% most stablecoins are earning in AAVE right now:
Or on the Market Jarvis Forex Pool, you can earn 8.8% on JEUR, a Euro-pegged stablecoin:
So if you want to park your stablecoins in a lending protocol where you won't have to worry about LPing, compounding rewards, and slippage, these are pretty good options.
But if you really want to reliably pump up your stablecoin farming yield, we need to look at yield aggregators and incentivized liquidity.
Yield Aggregator Pros and Cons
A yield aggregator is a protocol where you can deposit your stablecoins and they handle the farming for you.
The biggest player in this category is Yearn, which can handle your yield farming on Ethereum, Arbitrum, and Fantom for a wide variety of assets.
You can deposit USDC, DAI, USDT, and other assets like ETH, and Yearn puts them to work farming for you. They use a variety of strategies to get the highest yield possible while adjusting for risk, which you can read about on the page for a given token's vault. Here's the USDC one:
What's nice about a service like Yearn is they'll handle moving funds between AAVE, Compound, and wherever else is necessary to get the highest yield. The downside is that they take a 20% cut of the earnings, and they might not go as risk-on as you want to.
But if you're looking for an option where you can deposit your tokens and earn yield that's as easy as the lending protocols, but with a potentially higher return, a yield aggregator like Yearn is a good place to check.
Incentivized Liquidity Pros & Cons
Incentivized liquidity is when a protocol will pay you in their native token for helping supply liquidity to their trading pools. For example, the Curve 3Pool, which contains USDC, USDT, and DAI, is currently only earning 1.55%, but sometimes ranges as high as 10%. Why is your yield so much higher there? Because you're getting paid in CRV tokens.
Your APR from sources like 3Pool isn't based on what people are willing to pay to borrow. It's based on how valuable CRV tokens are, and how many other people are supplying liquidity to 3Pool.
These token reward yield sources will almost always be higher than what you get from AAVE and Compound, so they're where we're going to primarily look. But since they introduce more complexity than simply supplying tokens to a lending protocol, we have more risks and considerations to factor in.
Swapping Fees
For example, you'll often have to do some amount of token swapping to enter the pool. Each swap usually costs 0.35% of whatever tokens you're swapping, which if you're only earning 6% APR, is almost a month of returns!
Say you want to farm the MAI/USDC pool on Polygon. It's currently paying 7%. So you:
Take 10,000 USDC
Trade 5000 to MAI and lose 17.5
Add liquidity and start farming
You'll need to earn back .175% to break even, which thankfully you'll do in about 10 days. But if you want to move your liquidity before those 10 days are up, you'll have lost money!
And you'll probably want to switch out of MAI or USDC at the end, which means you need another 10 days of farming to cover that loss.
So you really need to farm for 21+ days to make any money. Still potentially worth it if you're going to leave your funds in for a long time, but it's important to keep this lag in mind.
Gas Costs
Another factor is gas. You don't have to think about it too much if you're farming on a layer 2 or cheaper layer 1, but on the Ethereum mainnet gas can quickly destroy any gains.
Say you want to farm with $10,000. Maybe the Yearn USDC farm is paying 6%, so you put your USDC there. It costs $100 in gas to do the approval and deposit. Well you've just lost 1% of your principal, which means you'll need to farm for 2 months just to get back to break even. And again, you'll have to pay gas when you withdraw your earnings, so it's more like 3-4 months of farming just to break even.
That's why for balances under $100,000, it's rarely worth it to farm stablecoins on the Ethereum mainnet. Depending on your stack size, it will almost certainly be better to go to layer 2. Unfortunately, that adds more risks of its own.
Protocol Risk
The last factor to consider with these incentivized liquidity programs is the protocol risk you could be taking on. The highest yields are usually on the newest platforms, and the newest platforms have the shortest history for you to rely on to feel secure farming them.
Remember the swap and gas costs before. You might have to farm for 1 to 3 months just to break even, depending on the interest rate. Even if the new protocol has an APR of 20% for stablecoins, you're looking at around two weeks to break even.
How confident are you that this new protocol will be offering the same yields in a couple weeks once other people come in and dilute it? And what if there's some underlying issue that causes it to fall apart, or force you to move your stables early before you've recouped your setup cost?
That might seem extreme, but it's happened before. Last summer we had the whole Iron Finance debacle, where the stablecoin depegged and dropped 25%. If you lost 25% of your stablecoin stack, it would take about 3 years to get back to breakeven at 10% APR. Is it worth potentially wiping out the next 3 years of gains just to get a few extra percentage points of interest? What if the protocol completely fails and you lose 100% of it?
These are real risks you can't ignore just to chase the highest APR possible. It's often worth taking the lower yield so you can sleep at night.
Compounded Risk
Expanding on Protocol Risk, another risk you have to be aware of is the risk from compounding together multiple protocols.
Let's take the Iron Finance example.
There's always some baseline risk to doing anything in crypto. We don't like to think about it, but Ethereum could fail in some massive spectacular way.
Since Iron was on Polygon, you also have the risk of Polygon breaking.
And since the main stablecoins used with IRON were USDC, USDT, and DAI, you have the risk of any of those stablecoins breaking, and the risk of the Polygon <> Ethereum bridges failing and those stablecoins becoming unbacked on Polygon.
If I recall correctly, Iron was initially using SushiSwap as its DEX for creating IRON and TITAN liquidity. So you also have the risk of SushiSwap failing and that crashing all the coins relying on it for liquidity.
And then you have the Iron Finance risk. We're many layers deep now, and any of these things breaking would destroy not only your returns but possibly your entire stack of stablecoins. Is it worth adding all these layers of risk for a few extra percentage points of yield?
It might be! I'm not saying it isn't, stablecoin collapses are rare, but they definitely happen. So you have to decide how much risk you're willing to take.
Maybe you feel differently though, in which case go crazy. Come back and laugh at me in a few years if I'm wrong. I'll take the 10% APR I understand over the 20% I don't.
How to Find The Best Stablecoin Yields
Now that you understand the main ways you get yield on your stables, what are the best ways to find those yields?
Here's a rough overview of the process I go through.
Checking the Lending Protocols
If you want to do simpler stablecoin farming in a lending protocol, then you want to do a quick check through:
AAVE
Compound
Rari
Market
And make sure you check them on other chains, too. AAVE on Avalanche is a little better than AAVE on Ethereum and Polygon for example, since it gives out additional free AVAX tokens as rewards.
Digging into the Market.xyz pools on Fantom and Polygon often have good yields as well. For example, this pool on Fantom is paying 15% on MAI right now:
Specifically to Avalanche, Trader Joe often has fairly high APRs as well:
Checking the Yield Aggregators
You can also compare those returns to what you're seeing on yield aggregators.
The best ones to check are:
Yearn
Tesseract
Tokemak
There are other yield "aggregators" that would be better described as autocompounders you can check, but we'll cover those in the next section.
Since Yearn and Tesseract are using a blend of strategies to maximize your yield, and since Tokemak is giving you extra yield in the form of TOKE, you can often earn a higher return on these platforms than you can with normal lending.
For example, the Tokemak rate on most stablecoins is 5-6%:
That’s quite a bit higher than you get on the lending protocols right now, and you don’t have to deal with setting up liquidity positions!
Checking the Incentivized Liquidity Pools
Now we get to the incentivized liquidity pools. These can often have the highest yield, but they’re also the most numerous. New ones are launching every day, some are scams, and it’s almost impossible to stay on top of them.
Thankfully you don’t have to. We can rely on other tools to point us in the right direction.
An autocompounder is a protocol that can take your position in some defi protocol, usually an incentivized liquidity pool, and handle reinvesting the rewards for you. They claim the rewards, sell them, create more liquidity, and add that liquidity to your deposited position. If you don’t want to manage farming incentivized liquidity yourself, autocompounders are a great option!
The problem is the fees. Pickle Finance, for example, charges 20% of all rewards generated. So if you would earn 10% on your own, with Pickle you would only earn 8%. But, especially for Ethereum pools, that might be worth it since they cover all the gas fees of compounding your earnings.
On Polygon, Avalanche, and other L2s or low-cost L1s, that value proposition gets tougher. It might not be worth giving up 20% when gas fees are negligible for doing the compounding yourself.
Some autocompounders also charge a deposit or withdrawal fee. Beefy Finance only charges 2.5% on rewards, but they sometimes charge as much as 0.5% to deposit your LP tokens. If you’re depositing into a pool with a 10% APR, it will take 18 days to earn that 0.5% back. Plus any swapping fees you need to cover as well!
So while it might not make sense to use the autocompounders for low yield pools, they are very helpful for finding these pools and saving you some research time.
First, go to any autocompounder that pulls in a lot of pools. I like:
Beefy (all L2s)
Yield Yak (avalanche specific)
Tulip (Solana)
Convex (Ethereum, not an autocompounder but still helpful)
Then just go shopping for yield! For example I can go to Beefy and filter by USDC on Polygon, Avalanche, and Arbitrum, and compare the yields. MAI-USDC on Polygon looks quite good:
So does UST-USDC on Avalanche:
And the MIM/2Pool on Arbitrum:
For Solana I can check Tulip, and it looks like apUSDC/USDC is quite high:
And if I do want to farm stables on Ethereum, I’ll usually check Convex for the best rates. It looks like the UST-Wormhole and MIM/UST pools are particularly good right now:
The one thing to be careful of with this strategy is to do some due diligence on the protocols supplying the yield before you toss all your stablecoins in. Just because a pool is listed on an autocompounder doesn’t mean it’s safe, and sometimes it’s better to take a lower yield on a more established platform so you can sleep at night.
Special Mention: Anchor Protocol
Alright, it's impossible to talk about stablecoin farming without some Lunatics showing up and yelling at me for not mentioning Anchor Protocol.
Here's the deal: Anchor is a stablecoin borrowing protocol on Terra, which pays a fixed APR of 19.45% for UST.
A fixed APR of almost 20% on a US pegged stablecoin is insane. It's phenomenal. It's the best thing on the market hands down. And it just feels a little too good to be true.
So yes, you can park your UST there and get 20%. And no it hasn't failed. And yes I'm bullish on Terra in general and hold some $LUNA. But I'm not putting my stablecoins here because it just doesn't make sense. No one is paying over 20% to borrow UST. It is supposedly mostly coming from the yield earned on Luna staked as collateral, with some support from its creators / investors, but something just feels off. Too much money appears to be getting minted out of thin air.
If that’s fine and you want those sweet juicy yields though then go crazy, this is probably the highest yield with lowest effort.
Leveraged Stablecoin Farming
Using the resources above you can usually find good stablecoin farming opportunities in the 10-20% APR range.
But what if you want to go higher? You typically need to employ some amount of leverage if you want to truly max out your stablecoin yield. By using certain protocols to borrow against your stablecoin stack, you can effectively increase your APR by increasing the amount of stablecoins you’re farming with. Albeit, with the additional risk of liquidation.
Abracabra
One way to do this is with Abracadabra, which I wrote about here. Abracadabra lets you mint the stablecoin MIM by borrowing against your collateral. But they also have a neat feature where you can compound your borrowed MIM back into the collateral you initially deposited, while earning interest on that collateral.
Let’s look at their UST pool as an example.
By depositing UST, you’ll earn 16.56% APY. And you’ll be able to borrow MIM against it, with a maximum collateral ratio of 90%.
So if you deposit 10,000 UST, you’ll be earning 16.56% APY on that 10,000 and you can borrow 9,000 MIM against it to go do whatever you want.
If you then convert those 9,000 MIM into UST and deposit them, you’ll have 19,000 UST earning 16.56% APY, which essentially means your original 10,000 is now earning 31.45%. If you repeat that process 8 times, you’re now earning an insane 138% APY:
The huge risk here is if there’s almost any fluctuation in the value of MIM or UST relative to each other, you could get liquidated. So you have to be careful with using aggressive leverage like this!
Alchemix
Another option for leveraged stablecoin farming is Alchemix, which I wrote about here. Alchemix lets you borrow up to 50% of the value of your stablecoin deposits, and then automatically pays off the borrowed amount for you with the yield generated from your deposit.
Since you can take your 50% and go, this essentially gives you 2x leverage on your stablecoins. If the Alchemix yield is showing 7%, and you have 10,000 DAI to deposit, you’re really earning 14% on 5,000 DAI. Or you can borrow 5,000 put it back into Alchemix, repeat that a couple times, and now you’re earning 7% on 20,000 with 10,000 borrowed, so essentially 14% on your initial 10,000.
The nice thing with the Alchemix strategy is there are no liquidations, so you can sleep much easier.
Generic Leveraged Stablecoin Farming
Aside from those stablecoin specific strategies, you can also leverage any tokens you have lying around that you don’t want to sell in order to earn some bonus yield.
For example, say you have a chunk of stETH sitting in your wallet earning 4.5% APR. You can deposit that stETH in AAVE, where it will still keep earning you that 4.5%, and you can borrow up to 70% of the value in USDC or another stablecoin.
Let’s say you have $100,000 of stETH. You put it into AAVE, and then to be on the more conservative side, you only borrow 30% against it. You now have 30,000 DAI which you’re paying approximately 1.6% APR on.
You then take your 30,000 DAI and put it into the UST-Wormhole pool on Convex, where it’s earning 10%. So your net interest rate is 8.4% on 30,000, on top of the 4.5% you’re already earning on the $100,000 of stETH you started with.
Now your total interest earnings are:
$4,500 on stETH
$2,520 on DAI
$7,020 total, taking your APR from 4.5% to 7%
And this is with being more conservative. You could argue that since you can always close out these stablecoins to cover your debt if ETH starts dropping, you could get more aggressive than 30% LTV. Especially if you use a tool like DeFi Saver which can help prevent you from getting liquidated.
But as always, that depends on how well you like to sleep at night.
My Stablecoin Farming Strategy
The biggest question for me with stablecoin farming is how can I get the best yield, while adjusting for risk, and without being too stupid about the whole thing.
I also care a lot about being able to sleep at night, and being able to leave my stuff farming for weeks at a time without having to constantly check on them or move things around.
So I’ve landed on what I think is a pretty good set of strategies for doing that, which paying subscribers can read about here.
Using The Process
You now have a good system for tracking down the highest yields across chains, putting your stablecoins to work, and assessing the risks inherent in the various strategies.
There will certainly be some new opportunities that pop up that you might miss, but again, if your goal is to maximize returns while managing risk and being able to sleep at night, this will get you there.
Have fun, and enjoy the bear market!
As always, I hope you enjoyed this post. It would mean a lot if you shared it on Twitter if you did. And if you ever want help on your project, feel free to send me a DM!