Strategy 3: Supercharge Your Stablecoin Yields

When the markets are volatile, a popular strategy is to hold a percentage of your portfolio in stablecoins. You can then deposit those stablecoins into various available protocols, usually for 10–25% yields. However, with Alpaca Finance, you can supercharge your stablecoin yields by borrowing additional stablecoins to amplify your position sizes; and most importantly — it’s still at very low risk. Here is how you do it in 2 easy steps:

(While there are several stablecoin-stablecoin farming pools, in this example, we will show the ideal way to farm BUSD-USDT)

Step 1: On the Lend page, look at the utilization rates for BUSD and USDT. The plan is to borrow the stablecoin with a lower utilization rate because it will have a lower borrowing interest rate. For example, while writing this article, the utilization rates for BUSD and USDT are 76.58% and 41.98% respectively. Hence, within the BUSD-USDT pair, we plan to borrow USDT in the following step.

Step 2: On the Farm page, find the USDT-BUSD pool. Click Farm. Type in how much BUSD you’d like to add as your principal collateral. While you can add USDT as well, or a mix of BUSD+USDT, when using leverage, by adding 100% of your principal in the asset other than the one you’re borrowing, you often save a bit in swap fees. So in this example, we’ll add 1000 BUSD. Next, choose USDT as the asset you’d like to borrow as we decided in step 1. Then finally, choose your leverage: anywhere from 1x to 6x.

  • At 2x leverage, you’ll borrow 1000 USDT and your farming position will consist of 1000 BUSD + 1000 USDT.

  • At 6x leverage, you’ll borrow 5000 USDT, (the protocol will swap 2000 USDT for 2000 BUSD to create a 50:50 LP farming token), and your farming position will consist of 3000 BUSD + 3000 USDT.

That’s it! Two easy steps!

Now, you can sit back and enjoy your supercharged stablecoin yields!

A few caveats to keep in mind when farming stablecoins on Alpaca Finance:

  • USDT/BUSD swaps are not always 1:1 and depend on the market; The prices can float a bit from the peg. So, if your position is large, it may be a good idea to make sure the stablecoin you’re borrowing is not priced below 0.99 when you open a position.

  • If swaps are involved, which is always the case when leveraged yield farming above 2x, some of your initial equity will be slightly reduced due to swap fees(trading fees and price impact from the token pair’s DEX). That’s why when opening large positions, if you’d like to lower price impact, you can choose to split them up into smaller positions. Or, with our new Adjust Position/Partially Close Position tools, you can entirely avoid swap fees and price impact, as described in our Alpaca Academy Lesson 4.

  • The borrow rate is variable, so check this rate every now and then to track your APY. Sometimes this rate can spike, which can make your APY become very low or even slightly negative, but this is a temporary phenomenon. It doesn’t last for long since the system is designed to push borrowing interest down to a manageable level where borrowers can continue to profit.

  • Part of your APR is in ALPACA, which has to be manually claimed at the top right of the Open Positions section, and does not get added to your equity value.

  • Your APR from trading fees and yield farming is auto-compounded into your Equity Value.

  • In the short term, the floating price of the stablecoins away from the peg can move your equity value up or down due to the amplification from leverage. This is a temporary phenomenon as stablecoins return to 1:1 peg with very high certainty.