By tying value to a reserve asset, stablecoins provide a less volatile alternative to other types of digital assets. DeFi users can receive interest in exchange for lending out stablecoins on a variety of platforms.
In this article, we review what stablecoins are, the different types of stablecoins, and the controversies surrounding stablecoins. Then, we’ll explain how to earn yield by lending stablecoins.
Stablecoins are digital assets that’s prices are pegged to a “stable” reserve asset—usually another currency, commodity, or financial instrument, making them less volatile than other digital assets. Stablecoins can be used as a store of value or put to work generating yield through lending or providing liquidity. There are three main types of stablecoins:
DeFi users should be aware of the crises and controversies that plagued stablecoins in the last quarter. These controversies surround algorithmic stablecoins, specifically TerraUSD (UST). UST was pegged 1:1 to the US dollar and backed by Terra’s native token, LUNA. Burning 1 LUNA issued 1 UST.
On May 9, 2022, UST lost its peg to the US Dollar, plummeting 100% to a fraction of a cent, where the price remains today. This was largely due to an exploitation of the unique risks inherent to algorithmic stablecoins; because of large withdrawals in a short period of time, the burn-and-mint relationship between LUNA and UST was exploited. UST holders saw the depeg and were prompted to redeem their UST for LUNA (thereby minting LUNA and burning UST), decreasing the supply of UST and increasing that of LUNA. As the supply of LUNA increased, its price fell as well, creating massive losses for holders of both UST and LUNA.
The collapse of UST calls into question the future of algorithmic stablecoins. Critics of algorithmic stablecoins highlight the risk that algorithmic stablecoins could fail in the face of massive withdrawals, due to their lack of reserve assets. Within digital assets, stablecoins have been a particular focus for regulators and governments around the world. Regulatory response to the collapse of this algorithmic stablecoin is expected; in the United States and the United Kingdom, legislation that requires stablecoins to be backed by real assets subject to regular audits of those reserves is in motion.
DeFi users can earn stablecoins by staking them, providing liquidity for stablecoin pairs, or by lending stablecoins. Earning yield on stablecoins via lending happens through a series of steps:
Providing liquidity (LPing) for stablecoins allows users to improve the ease with which tokens can be swapped to other tokens and earn yield from fees generated by trading activity. To contribute to a liquidity pool with stablecoins, users follow a series of steps:
Index Coop is a decentralized autonomous organization (DAO) that powers structured decentralized finance (DeFi) products and strategy tokens using smart contracts on the blockchain. We offer a suite of sector structured products, leverage and inverse products, and yield-generating products. We aim to create products that are simple to use, accessible to everyone and secure. Our products are built on Set Protocol, a twice-audited, self-custodial DeFi tool that allows for the creation and management of Ethereum-based (or ERC-20) tokens. Among users, partner protocols, and our composable products, Index Coop maintains one of the largest partnership networks in the DeFi ecosystem.
You can also earn or buy Index Coop products directly via your favorite decentralized exchange or on the Index Coop App.
Disclaimer: This content is for informational purposes only and is not legal, tax, investment, financial, or other advice. You should not take, or refrain from taking, any action based on any information contained herein, or any other information that we make available at any time, including blog posts, data, articles, links to third-party content, discord content, news feeds, tutorials, tweets, and videos. Before you make any financial, legal, technical, or other decisions, you should seek independent professional advice from a licensed and qualified individual in the area for which such advice would be appropriate. This information is not intended to be comprehensive or address all aspects of Index or its products. There is additional documentation on Index’s website about the functioning of Index Coop, and its ecosystem and community.
You shall not purchase or otherwise acquire any of our token products if you are: a citizen, resident (tax or otherwise), green card holder, incorporated in, owned or controlled by a person or entity in, located in, or have a registered office or principal place of business in the U.S. (a “U.S. Person”), or if you are a person in any jurisdiction in which such offer, sale, and/or purchase of any of our token products is unlawful, prohibited, or unauthorized (together with U.S. Person, a “Restricted Person”). The term “Restricted Person” includes, but is not limited to, any natural person residing in, or any firm, company, partnership, trust, corporation, entity, government, state or agency of a state, or any other incorporated or unincorporated body or association, association or partnership (whether or not having separate legal personality) that is established and/or lawfully existing under the laws of, a jurisdiction in which such offer, sale, and/or purchase of any of our token products is unlawful, prohibited, or unauthorized). You shall not resell or otherwise transfer any of our token products to any Restricted Person. The transfer or resale of any of our token products to any Restricted Person is not permitted. Click here to view the list of Tokens Restricted for Restricted Persons. You shall read the Terms of Service and use our Website in compliance with the Terms of Service.