Wombat: How Do Stablecoins Generate Yield For You?

Important: The information contained in the article represents the view and opinions of the Wombat team and does not represent the views or opinions of BNB Chain. The following content also does not constitute an endorsement or approval of any of the products or services of the project, organization, or individual.

When you hear crypto, what comes to mind? Many people get a knee-jerk reaction when hearing crypto. Yes, cryptocurrencies are notoriously known for their volatility, which is why many investors find stablecoins to be a haven from instability. Stablecoins are not exposed to fluctuations.

Stablecoins, as the name conveys, are stable. Their value is tied to a reserve asset such as the U.S dollar or gold. Backing by other assets stabilizes the price of stablecoins and makes it less prone to wild price swings. Due to this, it has become a preferred medium of exchange.

Why is stablecoin an ideal investing option?

Having stablecoins could be a great thing to have in your portfolio, and more conservative investors are drawn to it due to its steadier nature. Stablecoins play a vital role in the cryptocurrency markets with primary use for facilitating trades on crypto exchanges. Instead of trading back and forth between a cryptocurrency and a fiat currency, traders can significantly minimize the fees incurred by trading to stablecoins - which, as we discussed earlier, are tied to a reserve asset like the U.S. dollar.

Advanced stablecoin investors seize the opportunity to generate passive income from this phenomenon through methods like lending or staking. Such activities grew in popularity in the last two years due to the favorable returns compared to most banks in traditional finance. Annual interest rates are commonly at 3% to 20%, and the numbers can even go up to three-digit percent return depending on the platform. Traditional banks offer a meager interest rate on your savings. Averagely below 1%, this number does not even keep up with the average inflation rate - meaning you are losing the value of your money every year when it sits in a savings account.

How exactly do stablecoins generate yield?

There are various methods available to earn yields with your stablecoins, one of which is providing liquidity to Automated Market Maker (AMM) platforms. This method does not involve lending your assets out to borrowers but rather placing your stablecoins in a liquidity pool.

Liquidity providers earn yield through traders' fees to conduct a transaction. Thus, the higher the total trading volume, the better it is for a liquidity provider.

Common issues with providing liquidity to AMM platforms

While investing in stablecoins is relatively conservative, it is also not without risks. Most AMM platforms require liquidity providers to deposit a token pair, meaning you have to have two stablecoins to start. This is one barrier to entry for retail users, and it poses the risk of impermanent loss.

Impermanent loss happens when the dollar value of your asset is less than the dollar value when you deposited it. It is a temporary phenomenon unless you choose to withdraw at that time, making it a loss. The current model where liquidity providers must deposit two tokens or more aggravates the risk of impermanent loss. Some protocols have since advanced in this area, and a new model with a single-sided liquidity pool essentially eradicates this risk.

The innovative single-sided liquidity pool

The single-sided liquidity pool is a new system where liquidity providers are only required to deposit one stablecoin instead of a pair. On the BNB Chain, Wombat Exchange pioneered this design. With such architecture, nascent stablecoins no longer hinder the growth of their own liquidity pools due to low supply, which ultimately facilitates their adoption and leads to a healthier stablecoin ecosystem.

Wombat Exchange has also pushed forward in various aspects of an AMM platform. Minimizing slippage, maximizing capital efficiency, and laying the groundwork for being a multichain stableswap attracted many traders, enticing more liquidity providers due to the platform's trade volume.

Not only does Wombat Exchange pride itself on trade volume, but its LP mechanism allows liquidity providers to boost their returns up to three digits in percentage annual percentage yield. The base pool is where LPs deposit assets to earn yield in the form of $WOM. The boosting pool on the other hand is where LPs can push their APY to a much higher percentage by locking their $WOM. This locking process gives LPs vote-escrowed WOM (veWOM) which determines the boost on their yield.

About Wombat Exchange

Wombat Exchange is a BNB native multichain stableswap focused on re-engineering the stableswap experience with our innovative algorithm design. Wombat's vision is to fuel DeFi growth and push boundaries with greater capital efficiency, accessibility, and scalability in a multichain world.

Our success in the Binance Incubation Program was followed by the Binance BNB Chain Most Valuable Builder Season 4 Incubation Program, where we had the pleasure of being one of the monthly stars for January.

To know Wombat more, please visit: https://www.wombat.exchange/