*obligatory not financial advice*
What are Liquidity Pools and why would you supply stablecoins to them?
A decentralized exchange works by offering supplied tokens to traders at a price that is set automatically based on how many tokens are in its liquidity pools. Because providing liquidity is necessary, the providers are earning trading fees as reward. Most DEXes and also other dApps are also distributing their governance tokens to liquidity providers as farming rewards.
However, people that provide liquidity are at risk of impermanent loss, which happens when one of the tokens drastically changes its value and the ratio of the supplied tokens in the pool drastically changes. In that chase you would have got or kept more profit by simply holding each token individually. Although the fees you earn could compensate the potential loss and the value of the tokens could also reach a ratio that is closer to when you added your funds again, but this is only ok if you plan on holding for a very long term and there is no guarantee that your impermanent loss wouldn’t just keep growing.
Thankfully, stablecoin pairs don't have to worry about that because here both sides are supposed to keep the same value. So you can earn trading fees and often also farming rewards, without worrying about impermanent loss. Here is a short list of some amazing liquidity pools to earn a yield with stablecoins.
#1 Kava Swap UST/USDX
Pool APY: 7.50%
Farming APY: 82% (even more if you lock rewards for 1 year)
Kava is a layer 1 blockchain that is part of the Cosmos Network. It offers multiple DeFi services like a decentralized stablecoin called USDX, a lending protocol and also its own DEX. You can trade and provide liquidity for pretty much no gas fees. The exchange supports multiple cryptocurrencies from the Cosmos Network like ATOM, OSMO and LUNA but also BNB, BUSD, BTC, XRP and more. One unique thing is that all liquidity pools include USDX, which gives it more utility and demand.
UST is also a decentralized stablecoin that keeps its peg by always being able to be traded for $1 worth of LUNA. You can provide both stablecoins to a liquidity pool to earn trading fees and also farming rewards without depending on any centralised entity. The trading fees are added directly to the pool in form of more stablecoins and the farming rewards you earn are distributed in form of the SWP token, which is the governance token of the DEX. You can choose to receive your normal farming rewards after 1 month or you can choose to receive them after 12 months and get twice as much. However, the value of the SWP token could be volatile and change drastically until it gets unlocked.
#2 Tinyman USDC/USDT
Pool APY: 2%
Farming APY: 21%
Tinyman was the first DEX on Algorand. The blockchain and its growing DeFi ecosystem are getting increasingly more popular thanks to the low gas fees and insane transaction speed. Since Tinyman was one of the first few DeFi applications on its blockchain, it has attracted many users and their funds. Recently the DEX also got the attention of the Algorand Foundation that is distributing ALGO to users of certain dApps to bootstrap the growth of DeFi on Algorand.
Tinyman has been selected for this Aeneas Liquidity Program and so far 3 of its pools can receive ALGO as additional rewards. This pools are USDT/ALGO, USDC/ALGO and USDC/USDT. By supplying liquidity to the last pool you can receive the extra ALGO while not having to worry about impermanent loss, but keep in mind that both stablecoins belong to a centralized entity. When you add your LP tokens in the farm, they get locked for 24 hours and you can unstake them anytime, but you only get rewards for days where they were completely staked for 24 hours. The rewards are distributed once per week.
#3 SpookySwap USDC/MAI
Pool APY: 32%
Farming APY: 1%
SpookySwap is the most used dApp and the go to DEX of the Fantom blockchain. The blockchain has relatively low fees and many bridges to other chains which allowed SpookySwap to become a very big exchange with countless of different liquidity pools. If you supply liquidity then you can stake your LP tokens in farms to earn the BOO governance token as reward. This BOO token can be staked further to receive a share of the trading fees on SpookySwap and to receive the tokens of partnered projects, making it highly profitable to be a liquidity provider.
MAI is a decentralized multi-chain stablecoin that can be minted with 0% interest. USDC is not decentralized, but you can pool it together with MAI to receive rewards without impermanent loss. The additional BOO rewards for this pool are actually very low with only barely more than 1%, but the trading fees alone give you an APY of more than 32% in more stablecoins. If you would prefer to get more BOO tokens instead, then you could supply funds to the USDC/TUSD pool and get 7% in BOO but less than 1% in trading fees.
Providing liquidity to a stablecoin pair can give you some seriously high yields that traditional finance could never manage and because there is no impermanent loss there is also relatively little risk. This also allows you to massively profit from the cryptocurrency market without putting your money directly into a volatile digital asset. However, keep in mind that DeFi protocols can be exploited. It happened multiple times that the liquidity of a DEX has been drained out by somebody who found a flaw in its code, so only use protocols you have trust in.
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