How to Earn on DeFi Without Fearing the Crypto-Winter: Staking Stablecoins at Wrap Protocol
Staking is arguably the most optimal way to profit from cryptocurrency. The potential profits are higher than in the case of hodling, and the risks of losses are low compared to active trading. We even found an even more conservative option: staking with stablecoins on Wrap Protocol.
Disclaimer: the text below is not investment advice or trading guidelines. Tezos Ukraine cannot be held liable for your investment decisions. Do not invest more than you can afford to lose.
In this feature, we’ll discuss the role of stablecoins for DeFi investors and calculate how to minimise losses with wrapped stablecoins in staking in case the prices go down.
Why Profits in Stablecoins Are a Good Thing
DeFi farms often pay out their rewards in the respective project’s native tokens. Wrap Protocol pays in WRAP, Plenty DeFi pays in PLENTY, etc. Those coins are highly liquid and have a steady demand, so the risk of a sudden 20% drop is minimal. The most cautious crypto-investors opt for lending stablecoins: in fact, it’s a decentralised version of traditional banking with yearly interest rates of 10 to 12% on a deposit. Still, there is a third option for conservative investment: staking with stablecoins. In the Tezos ecosystem, one can do that with Wrap Protocol.
Stablecoins in Wrap Protocol
Wrap Protocol is a service for transferring tokens between Tezos and Ethereum blockchains. Thus, a user can wrap MATIC on Ethereum and get a wrapped wMATIC on Tezos. Each transfer of tokens between blockchains involves a 0.15% fee paid by Wrap Protocol users. WRAP holders can get a share of said fees if they deposit their tokens in the Fees Farming section. Wrap Protocol also allows one to stake LP tokens of decentralised exchanges and get rewards in WRAP on a regular basis.
Aside from popular tokens like UNI, LINK, and MATIC, Wrap Protocol supports the wrapping of ERC-20 tokens:
At the time of writing, stablecoin farming has a profitability of 1% (wUSDT) to 31% (wDAI). The profitability is lower than in the case of staking with the reward in WRAP, yet at least 2 to 3 times higher than in deposits offered by lending projects. Apart from staking WRAP with the reward in stablecoins, Wrap Protocol allows for staking LP tokens from stablecoin/XTZ pairs and get rewards in WRAP. Thus, the profitability of LP-wDAI/XTZ staking is 75% APR. Theoretically, using stablecoins in staking is less risky than staking WRAP or other volatile tokens. Is it actually so?
Can Stablecoin Staking Save From Price Drops?
Alice, Bob, and Eve invested $1,000 each as follows:
- Alice deposited WRAP in staking at 100% APR with the reward in WRAP;
- Bob deposited WRAP in staking at 31% APR with the reward in stablecoins wDAI;
- Eve blocked wDAI and tez on Quipuswap and then deposited LP tokens in staking at 75% with the reward in WRAP.
In a year, they took their profits, and the prices of WRAP and tez immediately dropped by 75%. The price of wDAI remained the same, i.e. $1. Thus:
- Alice has made $1,000 in WRAP. After the price dropped, her deposit shrunk down to $500;
- Bob has made $310 in DAI. The price drop caused his deposit to reduce to $560;
- Eve has made $750 in WRAP. After the price drop, she still had $500 in wDAI, $125 in tez and $187,5 in WRAP, which makes her deposit equal to $812,5.
Say, prices have dropped by 25%:
- Alice’s deposit after the drop has grown to $1,500;
- Bob’s deposit is now $1,060;
- Eve’s deposit now comprises $1,437.50.
And here’s their profits in case of a 25% growth:
- Alice’s deposit is now $2,500;
- Bob’s deposit is now $1,560;
- Eve’s deposit is now $2,062.50.
Staking volatile tokens with the reward in volatile tokens is the most profitable, yet the investor risks losing money when prices go down. Farming stablecoins looks nice at the first glance yet it is poor protection against price drops, and it reduces the profits in case of growth.
Staking LP tokens of a stablecoin/tez pair slashes the losses from a crypto-winter. After the market fell by 75%, Eve’s deposit was reduced by 20% while Alice and Bob lost 50% of their investment. When the prices grow, however, Eve makes more than a conservative Bob.
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