By “stablecoins,” we usually mean tokens, whose price is stable against traditional currencies. In this article, we review dollar stablecoins, whose prices experience minimum volatility in relation to the U.S. dollar, and try to answer the question, ‘How to earn on stablecoins with Minter?’
At the time of writing, there are three stablecoins on Minter:
- USDTE (Tether USD), Ethereum network’s USDT’s mirrored token
- USDCE (USD Coin), Ethereum network’s USDC’s mirrored token
- MUSD (Minter USD), Minter network’s internal stablecoin
How to Earn on Stablecoins
1. Arbitrage
In trading, “arbitrage” refers to buying an asset at one place and selling it for a better price somewhere else. The goal is to accumulate the asset — in our case, stablecoins. Before we move on, it’s important to understand the difference between arbitrage and trading. The former is not about buying low, waiting, and selling high. It’s about making a profit by closing two deals at the same time (buy&sell).
Apart from bringing benefits for traders, arbitrage also represents a vital mechanism for the stabilization of the rates. If a given asset trades lower in pool A than in pool B, an arbitrage situation occurs. By benefiting from that situation, the trader balances the asset’s rate in both pools. That way, the asset’s price will always be at the market across all pairs for the rest of the traders. In plain English, those engaged in arbitrage make money out of balancing out the rates.
Arbitrage Opportunities with Minter
To fully grasp just how advantageous Minter environment is in terms of trading and arbitrage, let’s define key features that allow one to trade even in insignificant amounts:
- Confirmation time of up to 5 seconds allows one not only to save their precious time but also to quickly react to trading situations
- Block finality: no need to wait until several blocks are mined
- Low fees, namely $0.03 + 0.2% per swap, let one take part in profitable transactions even if their balance is insignificant. Soon, Minter will roll out an opportunity to apply a so-called swap fee multiplier aiming to help traders prioritize the processing of their transactions by the blockchain. The bigger the multiplier, the higher the chance that the transaction will be processed first in the block and the trader will achieve the result they’ve expected
- Fees payable in any liquid token: no need to hold a specific token just to pay the fee. If there’s only USDTE on your balance, for example, the fee will be paid in USDTE as well
- Pool routes: build any swap route using liquidity pools within a single transaction *
* If the user needs to swap two tokens that don’t have a common pool for direct exchange, the conversion can take place through a chain of pools (up to 5 tokens).
This means that when token A is swapped for token E and there is a chain allowing them to “connect,” the route will look like this:
A ⇢ B ⇢ C ⇢ D ⇢ E
The most important characteristic for arbitrage is the token’s ability to be exchanged for itself after taking any route available, e.g.:
A ⇢ B ⇢ C ⇢ D ⇢ A
After finding an efficient route for self-exchange (USDTE -> USDTE), profit may be generated even within a single transaction (i.e., getting more USDTE coins than have been spent).
Mono-Currency Stablecoin Arbitrage
By “mono,” we mean that the same stablecoin acts as both input and output currency. Let’s take USDTE and the most popular tokens:
USDTE ⇢ BTC ⇢ ETH ⇢ BIP ⇢ USDTE
In this case:
- USDTE is sold in the BTC/USDTE pool for BTC
- BTC is sold in the ETH/BTC pool for ETH
- ETH is sold in the BIP/ETH pool for BIP
- BIP is sold in the BIP/USDTE pool for USDTE
Here, the route consists of four operations in four pools within a single transaction.
Real-world cases of mono-currency stablecoin arbitrage:
Multi-Currency Stablecoin Arbitrage
At the time of writing, there are three dollar stablecoins on Minter — USDTE, USDCE, and MUSD. Given that worth of any stablecoin always approaches the 1-to-1 ratio with the U.S. dollar, we can derive a simple equation:
1 USDTE = 1 USDCE = 1 MUSD = 1 dollar
For simplicity, let’s label an arbitrage deal that has different input and output stablecoins as “multi-currency.”
By slightly changing an example above, we get:
USDTE ⇢ BTC ⇢ ETH ⇢ BIP ⇢ MUSD
Selling USDTE and taking a swap route, an arbitrage trader can get a bigger-than-initial quantity of MUSD, which is equal to USDTE in dollar terms. Hence, the number of arbitrage situations increases threefold.
Real-world cases of multi-currency stablecoin arbitrage:
Searching for a Route
Finding profitable routes is one of the primary tasks of an arbitrage trader. There are two main approaches — manual and automated, but before applying either of them, one needs to analyze the market carefully and locate existing or potential arbitrage situations.
In manual approach, the trader analyzes the current situation in the market and executes a chain of operations via liquidity pools on their own.
In an automated approach, the trader assesses potential arbitrage situations that have a sufficient probability of occurring. After that, they task programmers with writing bots (automated programs) that will be initiating transactions with necessary chains of liquidity pools and amounts to be traded. For these purposes, Minter offers a great API toolset that programmers can address at the stage of designing.
Three Rules of Successful Stablecoin Arbitrage
It’s safe to assume that an arbitrage trader may expect a guaranteed profit if they stick to the following checklist:
- Find an arbitrage situation. This task includes search for an efficient route involving three stablecoins (USDTE, USDCE, and MUSD), at the same time taking into account all associated fees. With three stablecoins, the number of arbitrage situations rises three times because at the end of the day, the stablecoin’s price always returns to $1 even if it fluctuates a bit from time to time
- Set proper slippage (Min/Max amount)
- Pay a fee sufficient for a transaction to have a higher priority than that of rival arbitrage deals
2. How to Earn on Stablecoins: Liquidity Mining
Liquidity mining means that you put your stablecoins into a liquidity pool and start receiving a share of fee charged for every trade (0.2%).
As of now, there are several pools with stablecoins on Minter, you can find them here.
3. How to Earn on Stablecoins: Farming
Farming means that you put your stablecoins into a liquidity pool and in addition to a share of fee charged for every trade (0.2%), you start getting an additional reward for the very fact of locking your assets.
To find out more about ongoing farming programs, visit this page.
Key Takeaways
- Since blockchain is an open system, anyone can locate an arbitrage opportunity
- If the user has set up everything properly, everything will execute just as it is meant to
- If the user has specified a sufficient fee, their trade will be first to execute
- With three different stablecoins on the network, figuring how to earn on stablecoins gets easier as the user gets three times as many arbitrage situations. Minter will soon add support for other popular stablecoins, too
- Stablecoin always stays a stable coin, meaning it’s as close to being risk-free as possible
- With a proper setup, the user is guaranteed to extract profit; otherwise, the trade won’t get through
