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Here’s this week’s rapidly trending topic with insights and analysis

Disclaimer: This content is for informational and educational purposes only and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. Please do further research before you invest in any crypto asset.

Topic #1

Stablecoin Yield Farming

The global search interest for stablecoin yield farming has increased by 6800% within the last 2 years with the top region being the United States.

With stagflation risks on the rise, investors must earn more than 8.5% APY on their investments to outpace inflation. One of the best strategies to provide downside protection and potentially outpace inflation would be to yield farm stablecoins.

Yield farming is a major profit-making strategy in decentralized finance (DeFi). It is the practice of providing liquidity to yield farming protocols by lending or staking crypto assets in order to generate higher returns and crypto rewards. However, when it comes to yield farming, the yield is earned in the form of protocol tokens which is subject to volatile price swings. In addition, there are risks of impermanent loss.

Stablecoin yield farming significantly reduces these risks by providing a low-risk, high reward investment strategy with yields ranging from 5% to 100%. Investors can earn high yields in a relatively safe way and hedge against the downward trends in this volatile crypto market. 

Stablecoins are cryptocurrencies that attempt to peg their market value to some external reference. Stablecoins may be pegged to a currency like the U.S. dollar. Includes fiat-backed, commodity-backed, crypto-backed, and algorithmic stablecoins. 

Key Market Drivers

The volatility of the crypto market is by far one of the most significant drivers of this trend. During times of increased volatility, stablecoins are seen as a safe haven. In addition, the high returns compared to .6% in a traditional bank savings account give stablecoin yield farming an edge. 

Key Challenges

While stablecoin yield farming provides high returns with low risks, there are of course some risks involved. Fiat-backed stablecoins like USDC generally perform well during market crashes however, algorithmic stablecoins are another story. During a market crash, it’s possible for algorithmic stablecoins to lose their peg which could lead to bank runs. For example, the algorithmic stablecoin Neutrino dollar (USDN) built on the Waves blockchain lost its U.S dollar peg and fell more than 15%.

Government regulation of stablecoins is a potential challenge to the growth of stablecoin yield farming. United States regulators are concerned about the systemic failure of top stablecoins. 

According to Nellie Liang the Under Secretary of the Treasury for Domestic Finance,

“If stablecoins are backed by high-quality assets, their risk is quite low and they can form a building block, a cornerstone of a payments system,” Liang said. “If there’s questions about the quality of the assets and the reserve pool backing them, then they create risk.”

In addition, not all stablecoin issuers disclose what they use as reserves or whether they have enough to cover the value of each token.

Platform security and hacking are some more challenges with this trend. It’s best to ensure the yield farming platform has been audited, however, this doesn’t eliminate the risk completely. Dig into the details of different platforms to understand the entire process.

Adoption

The Total Value Locked (TVL) in the top stablecoin yield platforms has increased significantly since the start of 2022 which suggests an increased demand for stablecoin yield. TVL is the total value held by a DeFi protocol and can be used to measure the yield farming market or DeFi as a whole. 

Total stablecoin supply currently exceeds $180 billion. Supply was under $31 billion at the beginning of January 2021.

We hope you enjoyed this week's topic. See you next week.