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Since polygon chain has launched only a couple months ago, the governance has been incentivizing the exchanges and DEX with MATIC tokens. There are many tokens you can use to farm these incentive rewards, however, I am a conservative investor and like to have a portfolio heavy on stablecoins so in this article I'll go through 7 different strategies (from simple to complex with pros and cons) to farm stablecoins up to 54% (current) APY
Aave lending
Most of these strategies will revolve around Aave since they got quite a sizeable chunk of the MATIC incentives
As of right now, these are the deposit and borrow rates. Notice that for the 4 tokens listed, you would actually make money borrowing (after MATIC incentives) so the strategies below often are ways to efficiently borrow.
You can access Aave by going to the website: https://aave.com/ and clicking on Aave Market Polygon
Simple leverage - 14.5%
If you deposit 1000 USDC into Aave ($1000), you can borrow $750 worth of tokens (75% loan to value for USDC). If you were to borrow 750 USDC tokens and then deposit them back into USDC Aave, you can earn more rewards! The process of lending against the money you borrowed to increase yield is called leverage.
This is what the result would look like after 1 year (if the rates stayed constant), you'd owe some USDC from the loan but you'll more than make up for it with the 1750 USDC that you have deposited. You'll also make a decent amount of Matic rewards from the lending
Pros:
- Simple to understand and simple to implement
Cons:
- We can do better than this
Recursive leverage - 32.8%
Astute readers may notice that in the previous strategy, since you deposit the borrowed USDC, you can borrow more USDC. You can repeat this cycle multiple times to increase your leverage. It's not really risky because if USDC goes up or down, both your borrowed and deposited amounts move at the same percentage.
If you repeat the borrow->deposit->borrow process 10 times, you'd get 32.8% yield (much higher than the previous method), however, it is a bit of a pain to click borrow, then deposit, then click borrow again and you definitely run into declining returns later on since you can only borrow 75% of the previous amount borrowed.
Pros:
- No currency risk
Cons:
- Can be tedious to implement and unwind (deposit more USDC to unwind faster)
Optimized simple lending - 27.7%
In the Aave screenshot above, you'll notice that USDT has a much higher reward rate than the other stable coins. The reason for this is because USDT is not allowed for collateral (your USDT deposit amount doesn't count towards your ability to borrow USDT so you can't do the recursive lending strategy above with USDT). If instead of borrowing USDC in the first simple lending strategy, you borrow USDT, you would have higher yield with borrow->deposit->borrow cycle.
Pros:
- Easier to implement than the recursive strategy
- Higher yields than the simple strategy
Cons:
- Yield could be higher
- Minor currency risk since USDC and USDT can diverge in price, however, they're stablecoins so this is not likely
Aave & Curve - 49.7%
Curve also got incentive rewards from polygon. They've only implemented their infamous 3-pool (a pool that consists of USDC/USDT/DAI) currently and the rates are pretty good
If we take the USDT from previous optimized simple lending (since it can't be used as collateral on Aave) and put it into curve, we would get something like this:
For just farming stablecoins on Aave and Curve, that's a pretty crazy return to be getting almost 50%. To get the MATIC rewards, make sure you stake your curve tokens.
Previously, when you deposit + borrow from Aave, you can be sure that the difference between interest rates is 1-2% (so in terms of risk, you won't be losing too much when borrow interest rates spike up). By borrowing USDT and depositing USDC and 3-pool, you could get into a situation where USDT borrow interest is super high and interest from USDC and 3-pool is lower and so you'd be negative on the stablecoin rewards (you'd still be positive if you factor in Matic rewards).
Pros:
- Much higher yield
Cons:
- Additional platform risk (curve)
- USDT borrow risk
Curve only - 45.1%
You might think, with the curve percentages so high, why bother with Aave. As you can see below, your returns will be slightly lower without the initial Aave lending.
Pros:
- Only one platform
Cons:
- Lower returns
Aave + Curve + Stakedao - 54%
As I was looking into strategies on polygon, I found a reddit post explaining how to get over 50% yield using stakedao. I've never heard of this website before but I'll explain the strategy below.
After logging into stakedao, go to 'LP Farming' then click on 'Polygon'. If you deposit your 3-pool tokens with them (instead of staking it on curve in the Aave + curve strategy above), they'll return over 50% APY with the catch that some of the returns are in their own token (SDT) and you get curve tokens (rather than MATIC).
Another advantage of stakedao is that it is auto-compounding, so you don't need to sign in and collect rewards.
Pros:
- Highest yield
- Auto-compounds
Cons:
- Platform risk (another platform, low volume token)
- No matic rewards
Aave + Curve + Beefy - 52.1%
On the topic of compounding, you'll notice that the Aave polygon rewards are given in APR instead of APY (I think curve might have made a typo). This is because, they do not auto-compound and you need to collect MATIC rewards manually. If you collect once a year, then your return will be the same as the APR listed, however if you collect more frequently and sell the MATIC to buy more USDC (and repeat the strategy) you could get more interest.
Since MATIC looks like it might be going to the moon right now, you might want to collect the MATIC and re-deposit it back into Aave. With additional deposits in Aave, you can use that Matic to borrow more! You can borrow (up to 50%) of deposited MATIC, if you borrow Matic you could do the same recursive leverage strategy listed above and make even more. If I'm lazy, Beefy has implemented this recursive lending strategy for Matic on Aave and will give you the same returns (minus 4.5% of rewards) so you can just keep collecting MATIC from Aave and Curve and deposit into beefy.
Pros:
- Higher yields!
- You get rewards in MATIC
Cons:
- Same problems as Aave + Curve
- New platform risk (beefy) or tedious MATIC compounding (make sure you don't press deposit all since you need some left over for transaction fees)
Closing thoughts
Obviously, these incentivized rewards won't last a year but I showed everything in APY to keep the numbers consistent. Since the platforms are airdropped a constant amount of rewards, as more money moves in, the platforms will either run out of rewards sooner or have to lower the rewards given out.
For those of you who want to replicate the numbers above, these were the interest rates that I used
Happy farming!
