By George Liu and Matthew Turk

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In part one of this quant research piece, we introduce the decentralized finance (DeFi) collateralized lending platform known as Compound Finance and discuss its use case for stablecoins, in comparison to the notion of a “risk-free” interest rate from traditional finance (TradFi). Our goal is to tie these concepts together to educate on how different types of low-risk investment work within the TradFi and crypto markets.

This introduction examines stablecoin lending yield and shares insights on yield performance, volatility, and the factors driving lending yield. Part two of this piece will examine the factors that drive lending yield in more detail.

Stablecoins are a niche part of the ever-growing crypto ecosystem, primarily used by crypto investors as a practical and cost-efficient way to transact in cryptocurrency. The invention of stablecoins in the crypto ecosystem is brilliant because of the following properties:

  • Similar to the fiat currencies used in model economies, stablecoins provide stability in price for people transacting across digital currencies or between fiat and digital currencies.
  • Stablecoins are native crypto tokens that can be transacted on-chain in a decentralized manner without involvement of any central agency.

With the growing adoption of cryptocurrencies by investors from the TradFi world, stablecoins have become a natural exchange medium between the traditional and crypto financial worlds.

Two of the shared core concepts in the traditional and crypto financial worlds are the concepts of risk and return. Expectedly,…


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