Earn UXD Stablecoin Yield with USDC APY on Kamino

Note: This article is not financial advice. Kamino Finance does not endorse any tokens or platforms mentioned in this article.

Overview

• Earn yield with low risk using stablecoins.
• Provide liquidity with a Solana-native decentralized stable.
• Borrow UXD with USDC for market making.

This Stable Strategy vault pairs one Solana-native stablecoin, UXD, with Circle USDC. As mentioned in a previous article on UXD stablecoin liquidity, Kamino Finance can provide deep liquidity for stablecoins on Solana, and for the UXD stablecoin, Kamino has been a solid supporter of the UXD protocol.

Kamino is on a mission to participate in and help Solana DeFi succeed. Attracting liquidity to UXD paired with the fastest Solana to USD route, the fiat-redeemable USDC, helps increase the liquidity of one of Solana’s premier decentralized stablecoins, and Kamino simplifies the process.

Why UXD - USDC?

Providing liquidity with two stablecoins reduces the risk of impermanent loss, since USDC price and the UXD crypto market price are both pegged to USD. This vault provides an opportunity for users to earn low-risk USDC yield by pairing it with the UXD token, a capital-efficient and decentralized stable.

The UXD protocol can also incentivize deposits into the UXD-USDC vault with UXP, the governance token behind UXD. These additional UXP rewards are auto-compounded back into the position, creating an additional way to earn interest on USDC for those seeking higher USDC interest rates.

What is UXD?

The UXD stablecoin is minted by the UXD protocol, which has been backed by some of the biggest names in Solana DeFi. The UXD token launched as an algorithmic stablecoin backed by delta-neutral positions on Mango Markets, for example, turning 1 Solana to USD by taking a SOL perpetual short position. UXD has since branched out into alternative collateral compositions.

The UXD protocol created an Asset Liability Management Module in 2022 to generate cross-chain yield from lending and exposure to RWAs (Real World Assets). Through expanding its DeFi offerings, UXD Fi has transformed from just a capital-efficient way to mint stablecoins against other assets into a lending machine for turning UXD crypto yields into UXP value capture.

UXD Address: 7kbnvuGBxxj8AG9qp8Scn56muWGaRaFqxg1FsRp3PaFT

UXP Address: UXPhBoR3qG4UCiGNJfV7MqhHyFqKN68g45GoYvAeL2M

What is USDC?

USDC is the fiat-backed stablecoin issued first in 2018 by a consortium known as Centre, more widely known by its subsidiary as Circle USDC. On Solana, the SOL to USDC routes on decentralized exchanges usually attract the highest 24h volume of any pairing, and comparing USDC vs USDT shows the former outnumbers the latter 5:2 on chain.

Over the past several years, several CeFi protocols have advertised ways to stake USDC, but “staking USDC” has more likely served as an advertising gimmick for lenders during bull markets for those chasing USDC highest APY. Through DeFi, users can earn USDC yield themselves, sans middleman, primarily by lending USDC or providing liquidity.

When to UXD - USDC?

Stablecoins are theoretically pegged to USD and maintain a constant value. The USDC CoinGecko price may differ from the USDC CoinMarketCap price during periods of volatility, but when pressure on the market is relieved, USDC price consistently returns to $1.00 due to the fact each time users buy USDC, dollars are placed in reserve for redemption.

Similarly, UXD protocol and the UXD token are backed by an insurance fund currently over $30 million in value, and the market’s trust in backing helps keep UXD pegged to USD. So long as the market retains faith in the backing of these two tokens, a long-term position for earning USDC interest rates with UXD can be possible.

What are UXD - USDC Risks?

The major risks behind each of these tokens are that they no longer hold their backing and lose their peg. Circle USDC is a fiat-backed stablecoin that regularly audits to show it holds dollars and dollar-denominated assets; however, if TradFi institutions can no longer hold these assets, then the situation for USDC becomes more complicated.

According to the UXD protocol’s dashboard, the UXD stablecoin is also heavily exposed to USDC through its collateral composition, insurance fund, and governance accounts. On the other hand, UXD is a far cry from past algorithmic stablecoins due to this association with USDC, and the protocol does not rely on endogenous collateral to sustain UXD crypto minting.

Conclusions on UXD - USDC

Providing liquidity with a Stablecoin Strategy reduces the risks of impermanent loss while earning yield. These market-making strategies also provide lower yields than if one paired SOL to USDC. That being said, this vault can be incentivized by the UXD protocol with UXP token rewards, which can increase the overall yield.

There are always risks associated with participating in DeFi, although the UXD protocol has been working to diversify risk over the last year, and USDC is the most liquid stablecoin on Solana and across DeFi in general. Users pursuing USDC staking opportunities can participate in DeFi and earn yield by providing liquidity instead of turning to CeFi.