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Stablecoin Liquidy Pair Questions

So as I continue my research and due diligence before apeing into any liquidity pools, I have been eyeing up the safer (but lower Apr) options. If I’m not mistaken, providing liquidity for stablecoin pairs seems like one of the best bets in terms of minimizing risk. But as I learn more about the different stablecoins, it seems like each one has its own possible drawbacks. Unfortunately a lot of the info I found was in random comments or other random places, so it’s not super easy to just have all the facts laid out in one place. I was hoping some of you could lay out a simple description of possible risks involved with each stablecoin.

So far I have learned:

USDT – some members/owners of this project are said to have sketchy track records in their past business dealings. Many people question what is actually backing the reserves of tether, and if tether is being truthful about their reserves. Coffeezilla did a great video on tether witch raises many concerns regarding their transparency and reputation.

USDC – Haven’t heard much negative about this one, aside from the fact that it is based in USA, and therefore subject to US laws (possible target for USA regulators)

DAI – I don’t know the technical reasoning for this, but I have read that a sudden sharp drop in ETH price could cause this stablecoin to crash somehow? I would like to learn more about this.

miMatic – a new stablecoin on matic network, not too sure what the advantages or disadvantages of this one are yet, but I’d love to learn. I imagine it being newer than the others might be a negative? I’m guessing less adoption/people holding/using the coin isn’t a good thing?

Any others? I’d love learn about them all!

One more question, I initially thought that going into a pool like USDC+ETH was kind of stupid. As far as I know currently, that would guarantee impermanent loss as one coins price fluctuates while the other stays at $1. Recently I heard that it may be a safer bet compared to going into a pool with two fluctuating assets… But im not entirely sure why this could be the case? Is it just because it’s easier to predict impermanent loss and weigh that against the possible rewards from interest?

What do you think?

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6 Comments

  1. Ok, I’ll try my best to explain what i know:
    1. Dai is backed by crypto collateral, namely ETH. A sudden drop in ETH could lead to people losing confidence in Dai’s collateral, therefore a lot of people would be exchanging their Dai at once which could lead to Dai losing its peg and falling under 1$. I believe this risk to be minimal, since ETH is here to stay and I dont see people losing confidence in it.

    2. miMatic or Mai are the same with Matic as collateral. Matic being relatively new and not as established as ETH could drop sharply in price and it could have the same effect as in 1. I too believe this risk to be minimal i hold about 500 Mai in USDC/Mai pool and plan to increase that position. Also Mai can be minted and borrowed on app.mai.finance without interest, you might want to look into that.

    3.Providing Liquidity in Crypto/Stable pairs is safer than Crypto/Crypto because only one asset moves in price. With Crypto/Crypto you have the danger of both cryptos moving in different directions price wise and this greatly increases your risk for IL. There is a way around that by picking 2 Cryptos which are somewhat correlated like matic/ETH but in general the order from safest to riskiest is Stable/Stable>Stable/Crypto>Crypto/Crypto.

    Hope this helped you. Good Luck

  2. What exactly is your main question?

    Regarding ETH-USDC pools. Assets that are effectively pegged to the same thing should have 0 IL in theory. So there is much less IL risk. Then you can focus your worrying on other risks, such as exploits and bugs.

    Assets not pegged to the same thing, such as ETH-USDC, yes you are right, there will be some IL, perhaps a lot.

    So you’ll need a pool that yields more then the the IL. So if you guess the IL for ETH-USDC might be 15%, then maybe you should only invest if the APY is higher than 25%. That would result in a 10% net yield after 1 year.

    Keep in mind that you may not invest for exactly 1 year. So in this example, if you get 15% IL in 3 months and then withdraw, you’re not getting 25% yield on the pool, more like 6%, then you’re at a loss (6% – 15%).

  3. A few follow up questions: If your LP incurs IL in a crypto/stable pair due to crypto falling in price and for whatever reason you decide to remove liquidity, the LP will rebalance your ratio buy using the stablecoin to “buy” the token effectively increasing your crypto holding correct? Would this be an effective strategy to accumulate a token while also generating yield during a bear run?

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