Farming of stable coins is going to eat the food of the banks.

Stablecoins legislation is a burning issue for US lawmakers. It is a fundamental part of the crypto ecosystem, which allows you to move from one currency to another very smoothly.

 When the crypto market was in its infancy, people used the BTC pair to access altcoins. Then, the stablecoins changed the game and gave the alternative of investing through an item without BTC fluctuation. Since then, the market has never been the same again…

Given lawmakers' attitudes toward the USDC & USDT, the future remains to be determined for these stablecoins. 

This is why we have seen the rise of decentralized stablecoins such as Terra and FRAX, which, although algorithmic and decentralized, do not cover the dollar, are in high demand, and have changed yield farming income).

Yield farming of high efficiency.

With inflation soaring, people need a way to beat it. The classic method is to invest in the S&P 500 and bet the US economy will do well. Unfortunately, this investment is at least a safe bet.

S&P has an average yield of 7% per year, which is usually very good.

But with inflation at 6.8%, profits are fading. This profit pushes people to more risky solutions, expecting more significant gains.

 So we see more and more people turning to crypto, which is considered risky and "gambling" as an investment for some.

Stablecoins changed this perception, enabling high returns in a relatively safe way. It is easy to find stablecoins at odds with around 8% annual yield, but Defi allows you to increase this percentage.

Anchor Protocol

It is a storage protocol that works in the Terra ecosystem. Terra is a stablecoin algorithm, which means that there is some risk. Algorithmic stablecoins are not supported by dollar stocks, as with a typical stablecoin. Instead, it depends on an algorithm that keeps it stable, mining and burning coins depending on market conditions.

By the way, let's look at Anchor in more detail.

Anchor is referred to as a storage protocol as a service. This protocol allows you to gain a return of up to 19.68% on your stablecoin. To see exactly how it works.

The ecosystem participant, i.e., the depositor, deposits a UST amount in the Anchor market. This money is then lent to other users (borrowers) and earns an interest rate. The interest rate is distributed to all depositors. This is precisely what the bank does; the bank keeps for itself most of the interest rate it earns from borrowers.

When you deposit UST in the Anchor market, you receive aUST (Anchor Terra) in exchange for your deposit. You get the interest rate you earn as aUST, which you can exchange for UST, which is locked at $ 1.

On the other hand, Borrowers must be allowed to be listed by Anchor to participate. 

They can use other assets as collateral to lock in to create a borrower position. This is where Anchor risk management comes in. Borrowers should watch out for the LTV (Loan to value) ratio to avoid liquidation.

Where is the risk?

As Milton Freedman said, "There is no free lunch."

Of course, there is a risk. I already mentioned one more:

UST is a stablecoin algorithm. This means that its bond may be lost, and its exchange rate may collapse.

We saw this kind of collapse in May 2021, when the entire crypto market collapsed. It fell from $ 1 to $ 0.85 because people panicked and sold everything, including stablecoins.

UST price (coin gecko source)

This provided a vast opportunity for arbitrage, and those who dared to do so were taken advantage of. The price returned to $ 1 as a result. As a result, LUNA collapsed by 80% in the May 2021 dip.

Terraform Labs, the team behind Terra, took the initiative to improve the algorithm linking it to the dollar after this fall. It was retired in September, and it worked as it should.

In this case, it was the most stable stablecoin during the September fluctuations, a period during which El Salvador rebought Bitcoin.

Given the above, there are ways to mitigate this risk.

By getting decentralized insurance through Unslashed, you can be insured if the UST loses its value against the dollar and be compensated for it. This, of course, will reduce your performance by 2.5%. But it is worth it since, with proper management, the yield you will achieve will remain at an impressive 17%.

If you are even afraid of smart contract failure, which is entirely understandable, if one sees the frequent Defi hacks in the area, you can buy extra security through Nexus Mutual.

This extra will cost you an additional 2.6%. However, the result will be a return of 14.4% with complete risk control in case something goes wrong!

More and more people are moving away from traditional investments and doing the above method. Given the meager returns of banks and rising inflation, who can blame them? 

Do you now understand the embarrassment of banks and why they feel threatened?

How can they be competitive?

Defi is a predator, and in fact, it is just in its first steps !!!

Our articles are for informational purposes only and do not replace specialized consulting services with professional experts.