Calmer Waters: The Stable Side of Cryptocurrency

Hey there! Welcome back to the IGIN newsletter. Thanks to the 36 new IGIN readers that have joined us this past week. That puts us at 219 people who can now impress their friends at a dinner party with their knowledge of web3, the creator economy, and the internet. Congrats. You get it now.

I will be the first to admit it — crypto can be risky. 

That's one of the main reasons that the adoption rate has been slow up until now. For every time you hear about a random coin jumping 1000% in a day, there is also another coin that lost every cent of its value in the blink of an eye. That's a scary reality for someone to jump into.

However, the reason these are the stories constantly hitting the headlines is because they are the only ones that are newsworthy for an audience with very little knowledge about the web3 space. 

But luckily, you're here. You get it now. Or at least you are starting to. If you've been reading this newsletter up till now, you have started to see there is a lot more to this space than meets the eye. There are countless projects being built and experiments being done that will have huge implications on how people organize online and how people interact with money in the future.

Yet, you still probably haven't taken the dive...

You probably have some fear, uncertainty, & doubt. Also known as FUD in the crypto space. It's normal for people to feel this. If I had to guess, it's probably part of the reason many people still haven't begun their web3 journey. 

So, I decided to write today's letter about the area of crypto that might seem a bit more reasonable as a jumping off point — stablecoins. 

Yes. Stable, meaning the price doesn't change. Don't worry. You can still make money with it...

Let's talk about it:

• What's the point? Why does crypto need stablecoins?

• Types of Stablecoins. Four versions. One goal.

• Earning with your stables. Lending, pooling, and compounding.

• Takeaways. You've got options.

What's the point.

At the base level, stablecoins provide a connection of sorts between fiat currency and cryptocurrencies. The largest stablecoin projects to date all attempt to hold their value to that of one US dollar ($1 USD). These coins have access to all the mobility and utility that blockchain technology provides, yet they directly correlate to a value in fiat currency.

So if you buy 1 stablecoin such as $USDT (USD-Tether), it holds the same value as $1. The concept is similar to an ATM. You put dollars in, and get "digital dollars" in return. 

These stables are very important for the ecosystem. At the time of writing, five of the top 25 largest crypto projects were stable coins — their combined value sits at $157 billion. 

The reason they're so important is right in the name. They're stable. As I'm sure you're very aware, most crypto assets can be super volatile. Stablecoins provide you with a way to move your money out of volatile assets when taking profits, attempting to avoid market downturns, or sitting out on the market. All of this without leaving the blockchain. 

Additionally, there are ways for you to earn money with your stablecoins at much better rates than you can with traditional fiat money. We'll get to that later...😉

Types of Stablecoins.

To further understand stablecoins, you need to know how they work. Don't worry. It's not too complicated. There are four main types of stables:

• Fiat-backed: Each stablecoin is backed with traditional currency at a 1:1 ratio.

• Crypto-backed: Each stablecoin is backed with locked crypto-collateral, typically at a higher collateralization ratio. (ex. $2 worth of Bitcoin backing each $1 stablecoin)

• Commodity-backed: Each stablecoin is backed with a physical commodity, such as gold.

• Algorithmic: Rather than being backed, these stablecoins use algorithms to adjust market supply in order to hold the value at the desired amount.

Four different types but one central goal — keep the peg. 

In general, most stablecoins that you will interact with will be pegged to the US dollar, meaning they ideally hold their value at $1.

A stablecoins ability to maintain their peg is crucial to their success. The entire market for stables is based on...you guessed it...stability. So a volatile coin is not going to get much traction.

Check out the top 5 stablecoins above. Which coins are which?

Tether ($USDT) is fiat-backed stablecoin backed with US dollar reserves and other forms of fiat-backing such as commercial paper, treasury bills, etc. A lot of hardcore crypto enthusiasts strongly dislike Tether with it being both centralized and because the backing isn't held in exclusively cash reserves (*very simplified explanation*). Just be aware of this sentiment. It is the largest stablecoin by a huge margin though. 

USD Coin ($USDC) is also fiat-backed with a 1:1 ratio, with reserves held in cash and US treasury bonds. Created in partnership with Coinbase (a name you probably are familiar with). Also centralized, but less negative energy surrounding it than Tether.

Binance USD ($BUSD) is another fiat backed with a 1:1 ratio. It is issued by Binance, one of the largest cryptocurrency exchanges in the world. Once again, centralized.

Terra USD ($UST) is an algorithmic stablecoin. It is both scalable and decentralized. In this context, this means a centralized company doesn't control the creation or burning of new tokens. We'll talk about this one a bit more later.

Dai ($DAI) is a crypto-backed stablecoin. This coin was created by a group called MakerDAO, a decentralized autonomous organization. (For a quick refresh on what a DAO is, you can read my ConstitutionDAO post). Every token is backed by various crypto assets. 

Those are currently the largest stablecoins on the market. Are some stable coins better than others? It depends on who you ask. As I've mentioned, hardcore decentralists strongly dislike centralized stablecoins, especially Tether. However, if you're new to the crypto world, they all look pretty much the same. Use whichever works best for your strategy— and by that I mean your ~earning more money strategy~.

Earning with your Stables.

Anchor

The quintessential place to earn money with your stablecoins right now is Anchor Protocol. It essentially acts like a better version of a savings account. Deposit your money as a stable coin. Earn interest in a stable coin.

How much do you earn?  A lot.

It currently provides a stable annual yield of 19.5%.

I've done my fair share of roasting traditional savings accounts on IGIN so far, but I mean... c'mon. How can I not while I'm aware of a savings account offering 19.5% returns every year. That's even double the average return on the stock market.

How does it work you may be asking?

It seems too good to be true, but spoiler alert. It's not.

Anchor is built on top of the Terra blockchain. The token used by Anchor is $UST, the algorithmic stablecoin we mentioned earlier. There's a lot to unpack with the Terra ecosystem, but we'll stick to just Anchor for today.

Like a bank, the protocol works with lenders and borrowers. Essentially, borrowers can deposit certain cryptocurrencies, such as Luna and Ethereum, into the protocol and borrow $UST against it. The protocol is then able to stake these deposited tokens elsewhere to earn yield. Because borrowers have to deposit a higher value of collateral compared to the borrowed amount, the protocol can produce a much higher return on each dollar borrowed. Additionally, borrowers are paying a borrowing rate for their loan.

So Anchor earns money with a borrower's collateral and with the interest they pay.

All of this leaves the protocol with enough yield to give its depositors annual returns of 19.5%. Your rewards are compounding multiple times per minute. So, if you're really bored you can just watch as your account value goes up every minute. 

This rate has been sustainable up until now. Will it remain stable forever? I don't know. However, the protocol seems to have a good system set up so far. On the risk scale for crypto projects, this falls on the low side. As always, do your own research before getting involved in any crypto/web3 project. (Additionally, you can get insurance for your deposit in exchange for a percentages of your interest earned.)

Lending

The lending principle here works the same as traditional banks. You lend stable coins. Other people pay to borrow them. You get paid an interest rate. Simple.

Let's take a quick look at the current lending rates for stablecoins on the DeFi protocol Trader Joe.

Don't worry about the "e" next to each token name. These stablecoins are the same as the ones we discussed earlier. They've just been bridged to the Avalanche blockchain. You don't need to understand bridging to understand this article.

The moral of the story — lend any of these stablecoins and earn better rates than traditional finance. There are tons of protocols that allow you lend stablecoins. Check out DeFiLlama to find other protocols that offer lending.

Pooling

Another way to earn with your stablecoins is to provide liquidity to a protocol. This allows you to earn fees when people swap between the two tokens. 

Some of these liquidity pools might be further incentivized by the given protocols. This would allow you to farm for extra rewards. If you need a refresher on lending, liquidity providing, and farming, you can check out my post explaining DeFi tools on Trader Joe.  

Yield Optimizers

Last but not least...we have yield optimizers. Also known as auto-compounders. As the name suggests, these protocols optimize the amount of yield you earn on your stable coins by automatically compounding your rewards. 

Perhaps one of the most well-known protocols in this space is called Beefy Finance. They offer auto-compounding services on many of the top blockchain networks such as Avalanche, Fantom, Binance Smart Chain, Polygon, and more.

Here are some of the current returns offered on stablecoins on the Fantom Network.

How does this work?

On the user end, we simply buy the chosen stablecoin elsewhere and deposit it in the auto-compounder. The protocol will capture the rewards and compound them for you. Earning stables with your stables — effectively, "earning you dollars with your dollars".

In the background, the protocol deploys your assets in other protocols and earns rewards. They then sell these rewards and converts them back to your deposited token. This continuously compounds every day and grows your deposited value. 

Risks: As with all cryptocurrencies, there are some inherent risks. Every time you interact with a web3 protocol, you are exposed to smart contract risks. Choose projects that have been audited (preferably multiple times) to minimize this risk. Anchor, Trader Joe, and Beefy have all been audited, but as always, its good practice to do research yourself. 

With stablecoins, your other primary risk is associated with whether or not the stablecoin can maintain its peg to the US dollar (or any other asset it might be pegged to). That is a slightly more complicated issue to dissect. However, you can get an idea of the markets confidence in a coin by the size of its market cap. The market isn't always right though. Just be aware. There are DeFi insurance options to protect you against smart contract risks and de-pegging scenarios if you want the extra protection. 

Takeaways.

I know it can seem like a huge step to jump down the crypto rabbit hole, but I promise — it's not as scary as it seems. As with the entire web3 space currently, these are the early days. However the best opportunities in this space are for those who are early. If you're looking for an easier entry point, stablecoins are a great place to start.

You have a lot of options for how you can earn with your stablecoins, so you have some flexibility in choosing how to earn yield. One of the beauties of crypto is that you are always free to take your assets and move it around whenever you wish. So if you choose one option to start, you can always move your assets around to chase higher yield earning opportunities.

That freedom is one of the main drivers in this space. If protocols want to attract users, they must provide the best outcome for you. If not, you'll simply leave to go elsewhere. All of those incentives results in a better outcome for you. 

I think the future is bright for the web3 space. I'd recommend keeping an eye on it as it grows. The community is strong here... and so are the yields.

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-Levi

I do my best to explain how it all works in these letters, but I won't be able to outline all of the risks. So if you read this and want to get involved, make sure you do your due diligence. For full transparency, I am involved in some of the tokens mentioned in the writing. This letter is not financial advise.