If you've been in the crypto defi world for awhile, you probably have seen or even experienced the volatility of the different crypto coins. Is there a way to reduce that volatility? Below are some ways that I'm doing myself; as usual, not financial advice. Happy to hear from the rest of the community as well!
How to do it?
Having an allocation in stablecoins as part of my crypto portfolio. Below are some ways that I've explored before:
- Single-side lending stablecoins on Avalanche network, yields 20-30% APY - protocol YieldYak (auto-compounder)
- Providing stablecoins liquidity pool (LP) on Polygon network, yields 18-20% APR - protocol Balancer
- Single-side lending on Fantom network, yields 20-30% APY - protocol Beefy Finance (auto-compounder)
- Single-side lending on Terra network, yields 19%
With stablecoins, you can continue earning a modest yield (actually, it's a significant one compared to what we can get in the non-crypto world) without fearing a significant price crash. Word of caution - everything crypto comes with a risk, even though there's minimum price fluctuation, there is actually other risks involved.
How does it work?
We've seen a couple of crypto dips in the past weeks, with majority of the coins losing 10%+ in a single day. What's the impact on the price of stablecoins? Minimum. This is because stablecoins are created with a peg - either to fiat (AKA actual currency like USD) or to other crypto assets or by an algorithm. There's still some fluctuations expected around the dollar mark, but it tends to be just a few cents. In a fiat-world, this is somewhat like a fixed deposit, albeit with a supercharged interest rates.
What are the other risks involved?
The pegging system is governed by a smart contract. If the contract goes haywire, you can be sure your money goes haywire as well. Haywire could be a bug in the codes, or simply the tokenomics. How risky is this? See the Saga on Iron and Titan on how the peg was lost. Another risk is on the asset that the stablecoin is tagged to - Tether has been getting some bad rep on the breakdown of USDT's reserves.
A fundamental risk is you losing access to your crypto wallet - do be careful when you are interacting with all the protocols/websites!
Is there any trade-off?
It's good to limit your downside, but you are also limiting your upside. You wouldn't even see a 5% capital gain on your stablecoins. This stablecoin approach is meant to generate interest and not capital gains, so find out your goals and allocate accordingly.
Image credit: Google Images / CBInsights
