Earn Interest on USDC and USDT APY with Lowered Risk
Providing stablecoin liquidity reduces the risks of impermanent loss in exchange for low but consistent yield.
Note: This article is not financial advice. Kamino Finance does not endorse any tokens or platforms mentioned in this article.
Overview
- Pairs two of crypto's biggest fiat-backed stablecoins
- Earn yield with reduced risk of impermanent loss
- APY with minimized exposure to the market
This vault pairs the two biggest stablecoins by market cap together in one liquidity pool. There are many reasons why users swap between USDT and USDC, and the vault featuring these two stablecoin stalwarts generates a low yield for the lowest risk profile when market making in DeFi.
Providing concentrated liquidity can be an opportunity some can compare to USDC staking. Pairing stablecoins is also one of the few ways to earn interest on USDC or USDT without taking on the risk of positions involving more volatile assets.
Why USDC - USDT?
When it comes to needing a stablecoin to transact with, USDC vs USDT has been a longstanding choice, and users frequently swap between SOL to USDC or SOL to USDT to capture gains when moving from Solana to USD. Additionally, users swap between the two stablecoins for arbitrage and other opportunities to earn yield in DeFi.
For example, if a liquidity position advertises its USDC highest APY, and it’s higher than a pool with USDT, users may chase USDC yield instead of lower USDT interest rates, and since USDT price and USDC price are usually the same, swapping between the two stablecoins for a negligible fee isn’t a huge problem compared with USDC yield.
Straight to the point: There’s really no such thing as USDC staking or USDT staking, since these stablecoins are not used to secure Proof-of-Stake (PoS) networks. They're not even a kind of utility token for a protocol, so staking USDC or staking USDT is really a CeFi pipe dream.
However, a real yield for USDT APY and USDC interest rates can be earned through lending or providing concentrated liquidity. By market making with USDC and USDT and helping users swap between these stablecoins, it is possible to generate yield from some form of real economic activity.
What is USDC?
USDC, or Circle USDC, is the stablecoin issued by Centre, which is a consortium formed between Circle and Coinbase. The USDC stablecoin is a fiat-backed token that can be theoretically redeemed for 1 USD.
When users buy USDC, Centre mints a 1 token for $1 on chain and keeps dollars, or dollar-denominated equivalent assets, in reserves. Then, USDC price is pegged on the market by the ability of users to pass KYC and swap USDC for greenbacks.
The backing for USDC is attested to on a monthly basis, and the majority of its reserves are held in “short-dated US Treasuries” that allow Centre to earn interest on USDC issuance. Circle USDC is the most liquid fiat-backed stablecoin for routing Solana to USD with over 5 billion USDC held on chain by around 1.4 million holders, according to Solscan.
What is USDT?
Launched by Tether in 2014, USDT is one of the earliest fiat-backed stablecoins in crypto. The introduction of stablecoins gave early Bitcoin supporters a way to buy USDT with BTC and move from BTC to USDT positions back and forth without selling for fiat, and the USDT Tether issues now hold the highest market cap for all stablecoins.
Tether has been less transparent than other companies that issue fiat-backed stablecoins, and it has had to settle several fines for lack of disclosure. Still, Binance USDT pairs dominate the world's largest CEX. On Solana, moving from SOL to USDT is less common than USDC, and the USDT Solana supply stands at around 1.9 billion on-chain with over 450k holders.
When to USDC - USDT?
Participating in the USDT-USDC vault is a way to earn USDC and USDT yield while sidelining capital from the market. This vault can capture a lower yield than other vaults managing liquidity for volatile assets, but the stability of USDC and USDT price means extremely low exposure to volatility or impermanent loss.
As a long-term position, providing liquidity for stablecoins only can resemble a DeFi savings rate. Short-term periods of high volume often occur during large market movements, when users are derisking into stablecoins, choosing to buy USDT or USDC to exit volatile positions.
What are USDC - USDT Risks?
There are several risks associated with fiat-backed stablecoins. Since their value relies on dollars and dollar-denominated assets held by banks, there are multiple reasons why users wouldn’t be able to redeem stablecoins for fiat:
- Lack of reserves
- Changes in banking regulations
- Changes in oversight
- Black swan events in TradFi
By backing stablecoins with real-world dollars, they provide the least friction from assets on blockchains like Solana to USD, but this also exposes USDC and USDT to real-world risk. Due to central issuance, both Circle and Tether have the capability to freeze their stablecoins with the push of a button.
Conclusions on USDC - USDT
The USDT-USDC vault manages liquidity on Solana for two of the biggest fiat-backed stablecoins in crypto. Users can earn USDC yield and USDT APY from fees paid by traders in both tokens, almost like accumulating free USDT for providing liquidity.
Since the USDC CoinGecko and USDT Coinbase charts rarely move for both tokens, there’s an extremely low risk of impermanent loss when providing liquidity for stablecoins, and market making with stables has often been compared to a DeFi savings account. However, taking positions in USDC or USDT can expose users to the possibility of frozen assets.
