The potential of stablecoins

The potential of stablecoins

Stable currencies are not only important because they give us liquidity, speed and counterpart in the defi sector, but also because we can design strategies according to the market trend. Bear markets with cumulative strategies supported by basic and variable income products. In bull markets with distributive strategies supported by derivative products, options and capital gains with insurance companies and when we have sideways markets, we will apply delta-neutral strategies supported by flexible income products through price ranges. On the other hand, we must establish and include in the formula the risk we want to take and the time we are going to be exposed to in the market.

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We can make use of them for different actions: receive payments, purchase items, save dollars, manage a portfolio in times of market downturns safeguarding the profits made from sales made in bull markets with ATH tokens or (raising the level of understanding) can be used in decentralized finance to produce profitability passively with minimal management. Stablecoins are designed to offer stability, both on the operational side of managing a portfolio and on the operational side in returns from a DeFi producer. Therefore, diversifying capital among various stablecoins, networks and protocols is a procedural obligation to mitigate future problems arising from network failures, exploits, hacks, etc.

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But there are also other use cases for them that make them interesting and necessary, although they must be increasingly resistant to peg losses, censorship and transparency as to the origin and management of their collateralization. With stable currencies, at times when we must protect capital and stay out of the speculative market, we can produce small annular returns by using them in various products and defi protocols.

Although everything seems easy, it is now time to know and understand the generic and specific risks of each type of stablecoin, since they are not euros, dollars or Swiss francs, despite the price setting. All, without exception, can collapse or be censored, yet they are tremendously interesting to obtain financial returns passively through loans or actively by providing liquidity in pools with other stablecoins. One of the most liquid DEX markets for obtaining returns is CURVE, which, without functioning as a liquidity router for the exchange of non-stable assets, does so for stable currencies, serving for treasury management or optimizing exchange rates, among many other things.

For this whole automated financial network to work, a series of properly aligned incentives must be deployed both on the protocol side and on the profitability seeker side, since pools with stable currencies do not exactly offer very attractive returns. The incentives sometimes do not have to come from the economic side. Security and liquidity can be more than enough reasons to decide to work a pool in a protocol that has this reputation. 

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In the case of CURVE, apart from the commissions it distributes for each exchange made within its pools, the depositor receives a part of these in CRV tokens (by way of clarification, the commissions come from the part of the volume of operations, so it is variable and the incentive with the CRV token depends on the reward rate, the prices and the staking).

Not everything moves in the Ethereum blockchain, since in the BSC, MATIC, SOLANA or Avalanche for example, we also have protocols with these features (being stable coin banks), but it is true that most of the liquidity is concentrated in the Ethereum mainnet, therefore they share business logic, the network effect and productivity between blockchains and others create notable differences. A detail to take into account is the operating costs. Sometimes we are seduced by returns that are irreversibly eaten by management costs, therefore focusing on earning little, safely and at low cost is the best way to work passively in defi with state currencies. Anything over 5% APR per annum with stablecoin makes you the business instead of the money.

The possibilities are abundant for those who want to take them without trying to generate high returns, there are plenty of protocols, pools and networks for this. I will not mention them, since I disapprove of their use, but they exist and many people use them. I am talking about pools created without permission, forks of forks, centralization or illiquid money markets that add all the guidelines to be intervened by hackers or network failures.

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To finish this article I want you to reflect and change little by little your perception of DeFi. You are in front of a new and open capital market with its pros and cons. You are in an incipient moment of all this movement that is drawing the new financial era, therefore, there is no hurry, since opportunities are given every day. Do not base your thesis on temporary opportunities, on dangerous games or on trying your luck, a profitability producer must optimize time and capital by automating his processes and only putting his money where it is really productive, the rest is chaff and noise. Do not leverage yourself and do not get into debt irresponsibly, it is not necessary, because when you do things right, the money comes to you.

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