Stablecoin yields during recession

Anchor Protocol

Anchor protocol (Terra) gives a fixed ±19.5% APY for UST.

They can’t go on like this forever, otherwise they’ll be running out of business. You can read here (or everywhere else) the whole reason, long story short – their income which is based on interest from lending is much less than the interest they pay to keep this 19.5% APY.

Do Kwon, co-founder and CEO of Terraform Labs, announced saving Anchor by injecting $450m. Where is this money comes from? The LUNA holdings he’s got. Apparently he owns most of LUNA, according to him. (yes, ‘Decentralized Finance’.)

Another major risk is UST losing its peg. And there are 3rd party insurances to cover such a case.

~19.5% APY

What else?

Depends when you’re asking.

During bull runs, in most of the DeFi networks, considering only high TVL and safe platforms and stablecoins, you can find 25%-35% variable APY. Sometimes even more –

Hundred Finance, 23 Dec 2021

During mild bear market era, the yields will drop to ±5%.

I’m not considering long ‘crypto winter’, where most of DeFi might drop dead, hopefully 2018-2019 was the last one and this space has grown up since then, however long macro recession might dry up those yields and platforms.

Hundred Finance in a beginning of a mild bear market – 23 Feb 2022. The numbers on the left side refer to APR without locking HND token for long period.

So what should we do during recession?

Your traditional bank might give you 0.5%, so still DeFi gives 10 times more than that. And once you’re in DeFi you’re close with your cash to other crypto opportunities, so HODL on.

Now if US inflation rate is 7% we’re losing with 5% yields, it’s true, however inflation doesn’t continue during recession, so it’s still better than your other legitimate options.

However, during recession you’ve gotta make sure more than the usual to invest in –

  1. High TVL chains.
  2. High TVL and audited protocols.
  3. Popular stablecoins – USDT, USDC, BUSD, UST, DAI.

As to the stablecoins risk, it’s a long story. None of them is perfect –

  • USDT – centralized and cash backing is questionable.
  • USDC – centralized and subject to SEC ongoing investigation.
  • BUSD – centralized and depends on Binance.
  • DAI – decentralized, however backed by centralized stablecoin (USDC) in addition to ETH.
  • UST – decentralized, or ‘decentralized’ (see Luna note above), resistance in market crash is questionable, not enough liquidity outside Terra and BSC.

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