By George Liu and Matthew Turk
Tl;dr: This blog analyzes centralized stablecoin lending yield for Compound Finance and shares our insights on performance, volatility, and factors that drive this yield on collateralized lending of stablecoins in DeFi. The analysis shows that this lending yield can outperform the risk-free yield in the TradFi market.
In part two of this quantitative research piece, we will examine stablecoin lending yield for the Compound Finance V2 decentralized finance (DeFi) protocol and share our insights on yield performance, volatility, and what factors are driving yield on collateralized lending of stablecoins through DeFi protocols. We also compare the “risk-free” yield in traditional finance (TradFi) to the concept of “low-risk” yield in DeFi, which we introduced in part one.
ACKNOWLEDGEMENT: While we are aware of the recent collapse of Terra’s algorithmic stablecoin TerraUSD (UST), our analysis here is on the area of collateralized lending yield for centralized stablecoins. We’re focused specifically on Compound for USDC and USDT (fiat-backed stablecoins), which have disparate risks and opportunities.
We conclude in this piece that using stablecoins for low-risk (within DeFi) collateralized lending could outperform the risk-free investment in the traditional financial market.
As mentioned in part one of this blog post, a Compound user who has placed their assets into a liquidity pool can calculate total lending yield using exchangeRate, which is an indication of the value of the interest that the lender can expect to receive over time, and the return from time T1 to T2 can be simply obtained as
R(T1,T2)=exchangeRate(T2)/exchangeRate(T1)-1.
Additionally, annualized yield for this type of collateralized lending (assuming continuous compounding) can be calculated as
Y(T1,T2)=log(exchangeRate(T2)) — log(exchangeRate(T1))/(T2-T1)
While the Compound liquidity pools support many stablecoin assets such USDT, USDC, DAI, FEI etc, we are only…
Click Here to Read the Full Original Article at The Coinbase Blog – Medium…
