Why 6% stablecoin APY can lose to a $12 round trip

A DeFi user inquired if double-digit stablecoin APYs were merely temporary incentives or if additional risks are present. Another user questioned whether it was worthwhile to constantly switch yields after accounting for various costs. These are practical concerns rather than just inquiries about which protocol offers the highest yield.

An open-source tool was created to address a smaller question: How much hypothetical income is generated at the reported base rate, considering the costs mentioned? For instance, let's take $1,000. Assume a 30-day holding period, a base APY of 4%, a headline APY of 6% (including incentives), and $12 in total entry, exit, and bridge transaction costs.

Using a straightforward, non-compounded calculation, if you start with $1,000 and a 4% base APY, you would earn $3.29 over 30 days, leaving you with $8.71 after deducting the $12 fees. When using the headline APY of 6%, you would earn $4.93 over the same period, resulting in a balance of $7.07 after the same fees. With a constant base APY of 4% and those same costs, it would take approximately 110 days before the fees break even.

However, this is only a fee break-even point, not a measure of safety or net profit. The yield can still drop, rates may change, or the tokens could become depegged. One should consider whether they are comparing an outcome based on a single user-sized investment or a more general scenario. Multiple factors should be taken into account when looking at base APY, which can change daily and isn't risk-free.

Reward APY may include token incentives that might be illiquid, change suddenly, or disappear entirely. The data presented in the public feed, such as TVL, is not a measure of protocol safety. Potential risks like oracle failures, smart-contract bugs, governance issues, liquidity stress, token issuer risk, depegs, and withdrawal restrictions are not fully addressed in this simple data screen.

An open-source walletless calculator is available for comparison between base and reward APYs over a 30-day period, including TVL and fee break-even. The source code is open-source and can be viewed at the provided GitHub link.