crypto investment

In the world of DeFi, participants consider stablecoin farming a near-zero risk approach to gain yields. This is due to the stablecoin’s metrics of being pegged to the US Dollar. Unfortunately, holding stablecoins is not a zero-risk investment. This is because the US government doesn’t back them up. Instead, different mechanisms support them.

Essentially, there are two kinds of stablecoins for DeFi users: centralized and decentralized stablecoins. They both have associated risks. Centralized stablecoins are usually fiat collateralized off-chain. They achieve stability through a 1:1 backing of token liabilities with the matched asset. This takes place directly or through a third-party organization such as a bank. As a result, it creates a bridge between the crypto world and traditional finance.

Decentralized stablecoins fall into two categories: crypto-collateralized and algorithmic stablecoins. Crypto-collateralized stablecoins are backed by cryptocurrencies. A central body does not issue these coins. Instead, they take place on-chain and make use of smart contracts. Instead of cryptocurrencies, algorithmic stablecoins employ specialized algorithms and smart contracts to regulate the supply of tokens in circulation and maintain price stability.

How Safe Are Stablecoins?

Although stablecoins have many advantages, there are a few drawbacks to be aware of. For example, unauthorized figures can access accounts. Sometimes users can also suffer embezzlement or hacking when it comes to centralized stablecoins. Furthermore, there are chances that third parties could alter an algorithm.

Recently, the Ethereum-based stablecoin “$BEAN” from the Beanstalk Farms DeFi protocol suffered an attack. An attacker used code in a flash loan contract to steal approximately $182 million in value. This includes about 24,830 ETH. In addition, the protocol itself suffered some damage.

The attack happened on April 17, 2022, and the value of the $BEAN token dropped by more than 80%. Furthermore, the assault took place regardless of the stablecoin’s claim that Omniscia, a blockchain security firm, had audited it.

So, this attack, coupled with a series of foul plays, triggered Twitter user, Aylo (who writes about actionable alpha in investments) to share some of his risk-adjusted stablecoin yield strategies. According to Aylo, “I think you should be looking to spread risk amongst four or five protocols. One of these protocols can be a slightly riskier/degen play, but this should be no more than 10% of your portfolio.”

No one wants to lose their portfolio following the failure of any protocol. So, the best option is to seek farms with lower-risk options.

Stablecoins Low-Risk Strategy

According to Aylo, when investing in stablecoins, it’d be best for your portfolio to be largely in the stablecoin with the lowest risk associated with it, which is $USDC. He wrote, “Despite it being centralized, I still perceive $USDC to be the safest and lowest risk stablecoin in the space currently.”

A factor to consider to achieve the lowest risk when farming is to farm only stablecoin farms that are either single-sided (involving one asset) or double-sided (involving two assets). Some double-sided farms may be stablecoins paired with any random cryptocurrency (example: USDC-ETH). But these farms are always prone to impermanent loss.

Sharing his special formula, Aylo wrote that he has 75% of his stablecoins in USDC and 25% in UST. Below are good stablecoin farms that participate in

1.$USDC on Vector Finance: Deposit $USDC to earn $PTP and $VTX rewards.

2.$USDC on Echidna Finance. Deposit $USDC to earn $PTP and $ECD rewards.

3 $UST on Anchor. Deposit $UST to earn $UST.

4.. $USDC on Stargate Finance. Deposit $USDC to earn $STG rewards.

Finally, there are several good stablecoin farms out there. But, making decisions based on risks could be smart. However, before making any investment in these farms, do your own research. The DeFi requires deep research before financial commitments.

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