DeFi is not really for the faint of heart, the number of projects that are best described as "untested" are rife in the cryptocurrency world. Meanwhile, the most trusted protocols exist on the Ethereum blockchain, which is long overdue for an upgrade. This results in gas fees that are untenable for small retail investor, especially if you want to shop around for the best APY or just want to add capital in small amounts. You often hear news of billions of crypto being moved for about 10 euros in gas fees, but what is often left unsaid is the fact that moving 50 euros also costs the same! At the moment, DeFi is not a liberating experience for anyone other than whales.
However, the current "real-world" alternative is quite horrific as well. Out in the traditional economy, we are seeing large amounts of quantitative easing and dilution of fiat currencies as countries attempt to cope with the economic effects of Coronavirus lockdowns and downturns; meanwhile, interest rates on savings are near zero and investments into stocks and assets appear to be inflated due to the printing of fiat currencies.
What is a regular person supposed to do? You are just watching your fiat savings being diluted in an economy where real-world assets appear to be dangerously overpriced.
Harvest Finance is one of the newer breed of DeFi aggregators that pool together the funds from it's users to follow optimisation strategies. Individually, the users are minnows in the world of DeFi and would be crippled by the gas fees required to swiftly switch protocols to chase the best APY for their assets. In addition, it requires users to be constantly on top of the fast moving developments in the cryptocurrency world, a feat that is a full-time job in itself!
By pooling user funds (currently over 500 million USD across various pools), Harvest Finance allows users to take advantage of highest APY yields across multiple DeFi protocols on Ethereum. Combined, the users act like a single whale-like entity, able to take advantage of the lower gas fees in relations to the amount of capital being moved around.
The users are also liberated from the requirement of staying atop of breaking DeFi and cryptocurrency news. The various strategies developed by Harvest Finance are catered for users of different risk and investment preferences, and for different types of asset deposits.
DeFi is an ecosystem of protocols that are full of high risk, but also high APY returns. However, not everyone has the stomach for yield-farming relatively low cap tokens, or to contribute to swap-pools where the paired assets are highly volatile and could likely result in disastrous impermanent losses. Stablecoin vaults and strategies offer a space of relative safety in all of this volatility. The APY returns are not going to be as high as other more risky strategies, with stablecoin returns being measured in the range of 10-60% APY as opposed to the 200% plus returns of the riskier strategies.
Still, the idea of earning up to 60% APR returns far outstrips the zero or near zero percent returns (or in some countries, negative interest rates) on fiat savings products currently offered by the traditional banking sector.
A number of pools that are listed under the stablecoin section of Harvest Finance are paired liquidity provider pools, and it is more than likely that a risk averse investor who just wants to maximise fiat returns is going to still be reluctant to enter these pools due to the possibility of impermanent loss that is an inherent risk in these paired pools.
So, a cautious risk averse investor is going to be more attracted to the single asset vaults that are denominated in the various stablecoin tokens that exist on the Ethereum blockchain. The first three pools(USDC, USDT and TUSD) are highly trusted stablecoins, tokens backed directly by fiat USD or their equivalents. The fourth token (DAI), is a stablecoin that is backed by a basket of cryptocurrencies, with the DAI token representing a claim of one USD worth of the basket currencies. So, all of these tokens should be redeemable for a fiat USD for the forseeable future, which makes them a more understandable and less risky asset for those who are newer to cryptocurrencies or will need to have easy access to a known non-volatile asset for "real-world" use.
The locked values of these stablecoin tokens are significantly less compared to the amounts locked up by the riskier strategies or pairings. This is less a reflection on their trustworthiness and more of an insight into the current character of the majority of DeFi users, who have a greater appetite for profit and risk. The 7-35 percent APY yields on these strategies are pitiful compared to the riskier ones that offer often in excess of 100% APR, but there is less risk of impermanent loss and denomination of the assets is clearly in USD. For the risk averse, this smaller APR number is an acceptable trade-off for the minimisation of risk/loss of the initial capital.
Compared to the rates that are possible in the savings products of the banking world, even the lower range of 7 percent APR from TUSD is light-years ahead! Meanwhile, the 25-35 percent range of the USDC/USDT/DAI seem like they belong from a different reality!
The stablecoin strategies, especially those that are tied to a single asset, are the perfect investment/savings vehicles for those who have no appetite for the high risk/reward liquidity provision of highly volatile assets. Despite the lower APR in comparison to the riskier strategies, the stablecoin pools offer a much higher APR than can be found in the traditional banking system, and allows the user to easily view and track the holdings in a stable USD valuation, without the second by second volatility of the non-stablecoin assets.
That said, no DeFi protocol is completely risk free. There are several risks in using these stablecoin strategies that justify the higher interest rates in comparison to the "safe" bank interest bearing accounts. These risk can be summarised as:
- Protocol failure. Failure of smart contracts or team fraud at either the aggregator (Harvest Finance) or the underlying lending protocols (at the time of writing, this is Compound and Idle). This is mitigated by security audits, insurance and reputation.
- Stablecoin provider failure. If it proves that the stablecoin tokens are NOT actually backed 1:1 by USD or equivalents then the tokens are rendered worthless. USDC/USDT/TUSD provide independent accounting audits of bank accounts and assets to prove the backing of the tokens, whilst the DAI token holdings can be transparently verified in real time by reviewing the MKR vaults on the Ethereum blockchain.
- Fiat currency fluctuations. Most of the widely used stablecoins are pegged to the US dollar. If your native fiat currency is a different (such as EUR) then you are subject to the usual foreign exchange fluctations between the native fiat and USD.
- Ecosystem failure. If the Ethereum blockchain fails completely, protocols can halt and migrate. It is a tiny risk given that the Ethereum blockchain has managed to run reliably for several years, but there can be unforeseen consequences of updates. This is mitigated by test-nets, open-source audits and the nuclear option of forking the network.
At the moment, these risks appear to be minimal and an acceptable level of risk for the higher APR of stablecoin lending protocols in comparison to regular fiat savings accounts. That said, some of these failures WILL result in complete capital loss, so it would be unwise to consider these products to be a complete replacement for fiat holdings. However, some exposure to these products would be a good way to put your fiat to work whilst being insulated from the riskier excesses of the DeFi world!