Introduction The Decentralized Finance (DeFi) Revolution is taking over traditional finance (TradFi) and centralized exchanges (CEX), with billions in...
Welcome to Part 4 of Stably’s series on using stablecoins in DeFi. In this article, we’ll talk about how to use stablecoins to supply liquidity to liquidity pools and use the LP tokens earned from supplying liquidity to compound returns through yield farming.
Yield farming refers to methods whereby people leverage their tokens in multiple ways to maximize earnings. If you’re looking to optimize returns, these strategies offer some of the highest rewards – as well as the highest risks – available in DeFi.
In the final article of this series, we’ll talk about supplying liquidity to liquidity pools in exchange for Liquidity Provider (LP) tokens that can be staked to generate further returns.
Liquidity pools enable users to supply money used to provide liquidity for trading pairs on automated market makers (AMMs). By providing liquidity to AMMs, LPs earn a share of the trading fees users pay when exchanging one token for another.
AMMs are a type of decentralized exchange that enables users to exchange tokens using liquidity pools rather than trading them peer-to-peer.
Like decentralized lending platforms, different liquidity pools and automated market makers are hosted on different networks, meaning you need to transfer your tokens to a wallet with access to the appropriate network in order to use these dApps.
Yield Farming with Vexchange
For this walkthrough, we’ll demonstrate how to provide liquidity to the VET/VeUSD trading pair on Vexchange. Vexchange is an automated market maker hosted on the VeChain blockchain that distributes 0.3% of its trading volume to liquidity providers.
To provide liquidity on Vexchange, you’ll need both VeUSD and VET. VeUSD can be obtained through Stably Prime and quickly exchanged for VET using Vexchange.
When supplying liquidity for the VET/VeUSD trading pair, you’ll receive a portion of the fees traders pay to swap those tokens on Vexchange. The amount of fees received is calculated as a proportion of the total liquidity pool.
Providing liquidity on Vexchange
To get started, head to https://vexchange.io/pool. Click “Join a pool,” scroll to the bottom of the listed options, and click “Join” to select the VET/VeUSD trading pair.
To add liquidity, connect your wallet and type in the amount of VET and VeUSD you want to deposit. Vexchange doesn’t require users to deposit tokens in equal value but it’s generally a good idea to do so.
If tokens are deposited in values that don’t match the proportion of the pool they represent, either the pool will rebalance or someone will arbitrage the difference. Either way, it results in a decreased share in the pool.
After entering the number of tokens to deposit, Vexchange will display the percentage of trading fees the LP tokens will receive relative to the current size of the pool.
When supplying liquidity, it’s important to be aware of the risk associated with impermanent loss.
For a refresher on what impermanent loss is and how to minimize the risk using stablecoins, please check out the section on impermanent loss in Part 1 of this series.
Staking LP tokens
In addition to earning a portion of the trading fees, LP tokens can also be used to supply liquidity to trading pairs.
After obtaining VeUSD-VET LP tokens, return to the Vexchange home page and click the “Farm” tab to access liquidity pools for LP tokens.
Scroll down to the VeUSD-VET pair and click “Connect Wallet” to connect your wallet.
Once your wallet is connected, repeat the same process as before: enter the number of tokens you want to deposit, making sure to deposit an equivalent value of tokens.
At 14.86% APR in addition to the trading fees earned by holding LP tokens, yield farming can not only beat high-yield savings accounts but can beat the 10.50% yearly average the S&P 500 has returned from 1957 to 2001. That being said, there are risks associated with it and returns vary by time. Investors should exercise careful caution prior to investing and be fully aware of all risks associated.
Ready to get started?
Check out Stably Prime to easily purchase stablecoins with some of the lowest fees in the industry.
Head to https://prime.stably.io/ to sign up for an account and obtain the stablecoins you need to start earning money with DeFi.
Need a refresher? Check out Part 1 to learn about stablecoins and earning opportunities, Part 2 for a walkthrough on obtaining and transferring stablecoins with Stably Prime, and Part 3 for our guide to decentralized lending.
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