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Decentralized Finance (DeFi) has emerged as a more transparent and autonomous alternative to traditional finance. The sector continues to see increased adoption as more investors choose to keep their funds onchain.
Automated market makers (AMMs) form the bedrock of the DeFi ecosystem, allowing users to swap tokens via smart contracts without centralized oversight or a traditional order book. While traditional crypto exchanges hire private market makers to maintain liquidity on token pairs, AMMs allow anyone to participate in this process through the power of liquidity pools.
Stablecoins are the most popular digital assets used in DeFi. ERC-20 tokens such as USDT, USDC, and DAI are pegged to fiat currencies like the US dollar, unlocking vast opportunities for holders.
DeFi users can carve out fresh passive income streams by understanding how liquidity pools work. Let’s take a look at stablecoin liquidity pools, and how they earn yield for investors.
Liquidity pools play a vital role in DeFi. AMMs provide platforms for users to trade specific token pairs, such as ETH-USDT. Liquidity pools are pools of tokens that help to ensure that there are tokens available for users to swap on a trading pair at any given time. The amount of assets available for trade is called liquidity.
In traditional finance, private firms supply this liquidity. In DeFi, however, individuals pool their assets into smart contracts to achieve this goal.
For example, a user may wish to purchase 10 ETH using USDT. In this case, the user would deposit USDT to the liquidity pool to withdraw 10 ETH from the same pool. If the pool does not contain 10 ETH, the user would not be able to complete their transaction.
Thus, it’s important for token pairs to have deep liquidity pools so that pairs can handle seamless swaps at scale. Users who provide liquidity to a pool are rewarded with a share of the token pair’s trading fees paid by buyers and sellers. AMMs may also add other incentives to increase liquidity on their platforms.
Providing liquidity to stablecoin pools can be a highly effective form of yield farming.
First, you’ll typically need to deposit equal amounts of both tokens in the trading pair. This can be done directly via AMMs. Once you’ve deposited your capital, you’ll receive LP tokens representing your position. These tokens accrue rewards from the pool’s trading fees.
It’s important to note that providing liquidity carries unique risks. Users need to supply equal proportions of both tokens in a pair when creating a position. This means that your initial capital fluctuates as the pool’s balance changes.
Let’s explore an example:
If you had held both tokens instead of providing liquidity, you would have had 100 USDC ($100) and 100 UNI ($200) at current prices. Instead, you may only receive 150 USDC ($150) and 50 UNI ($100). In other words, your initial capital has lost $50 in value. This risk is known as impermanent loss (IL).
Supplying liquidity to a stablecoin liquidity pool minimizes this risk as both assets in the pair are designed to maintain a dollar peg regardless of cryptocurrency market conditions. Thus, the risk of IL on stablecoin pairs is far lower compared to volatile crypto assets such as ETH.
Users can choose between hundreds of DeFi protocols to provide crypto liquidity. However, Curve and Uniswap offer a wide range of pools with deep liquidity thanks to their market dominance.
Curve Finance launched in 2020 with a specific focus on stablecoin trading. The platform offers users deep liquidity on stablecoin trading pairs, boasting $2.5B in total value locked. Providing liquidity on Curve earns trading fee rewards, which can be boosted by staking the platform’s native token, CRV.
Curve’s USD 3pool allows users to swap between USDT, USDC, and DAI. The pool boasts a mammoth ~$47m in daily trading volume due its widespread use in DeFi.
Launched in 2018, Uniswap is DeFi’s most popular and established AMM. The leading decentralized exchange (dex) holds more than $3.9B in total value locked, illustrating its dominance.
While Uniswap hosts thousands of token pairs, a few stablecoin pairs offer substantial liquidity for traders and liquidity providers.
The OUSD-USDT pair recently placed 39th in Uniswap V3’s latest liquidity rankings, out of over 10,000 analyzed pools. Providing liquidity to such a robust pair can further lower risks of impermanent loss, while also offering steady trading fee rewards.
Providing liquidity on your own can be a highly stressful and resource-intensive undertaking. Thankfully, platforms like Origin Dollar (OUSD) allow users to earn yield from mechanics like liquidity provision automatically.
OUSD is a novel stablecoin fully backed by reserves of USDT, USDC, and DAI. Users can mint OUSD by depositing any of the platform’s supported stablecoins, or swap for OUSD on Uniswap and Curve. As an ERC-20 token, you can use OUSD just like any other stablecoin. At the same time, deposited funds are put to work via a number of innovative yield generating strategies. This means that no capital has to be locked up to earn yield, freeing up investors to do other things with their capital in the meantime.
OUSD’s reserves are deployed to robust liquidity pools to earn yield for users. The protocol also deploys funds to DeFi lending platforms like Aave and Morpho to further boost yield. These returns are automatically distributed to users’ wallets, empowering users to enjoy high APYs while taking on minimal risk.
Harnessing stablecoin liquidity pools to earn passive returns can be highly lucrative when done effectively. However, liquidity provision mechanics can still be technical and fraught with risk for many users.
Choosing a more seamless alternative like OUSD allows you to benefit from such mechanics without carrying the same risks or requiring extensive resources. As of August 2024, OUSD currently offers 8.73% 30-day trailing APYs, delivering some of the highest risk-adjusted stablecoin yields in the crypto and DeFi space.
Enjoying passive returns in DeFi should be accessible and seamless.
Click here to discover how you can stack USD faster with OUSD.
