It is increasingly difficult to generate yields on crypto. The explosion of the Terra ecosystem – where up to $50 billion was wiped out – led to a decline in decentralized finance (DeFi) protocols offering interest.
At the other end of the table, centralized finance, or CEFI, where all processes are done through a central body, has faced a comparatively peaceful bear market, yet interest rates are trending downward.
On the first of the month, investors who have accounts with a CEFI provider such as Laden, Celsius, BlockFi or Nexo usually receive emails detailing the interest rate for the following month.
In a setback for those looking for passive income, interest paid from CEFI providers has come down since the 2021 bull market. Giving custody of crypto assets for false interest payments has encouraged some crypto enthusiasts to take control of their private keys, even comparing them to traditional banking.
In the table below, the three biggest custodians of bitcoin (BTC) and crypto assets are collapsed, taking into account both the interest rate and the amount of interest on each asset.
Cointelegraph spoke to three of the largest lenders to bitcoin and other crypto assets to understand whether the interest rates of CEFI providers will eventually end up rock bottom, aka 0.01% interest – like in banks – and whether these lenders and interest providers. Why exist?
Interest rates will remain attractive
Representatives from Layden, Nexo and BlockFi agreed that despite the low interest in crypto, it outperforms older lending. “We are still five to 10 years away from bitcoin rates, which are coming anywhere close to fiat bank accounts,” Mauricio Di Bartolomeo, co-founder of Canada-based Layden, told Cointelegraph.
“Most of the old bank savings accounts are paying only one basis point (between 0.01% and 0.05%). The interest rates for our bitcoin savings account product are still 5.25% APY for the first 0.1 BTC and 2% APY for balances above 0.1 BTC.”
In a tweet thread, Di Bartolomeo shared that “changing market conditions” have forced lenders to drop their rates, as the difficulty level of making profits on arbitrage opportunities and futures basis trading has increased.
Simply put – this means that market makers are also seeing their average returns shrink.
Which forces them to reduce their borrowing cost.
— Mauricio (@cryptonomista) 4 May 2022
Jonathan Haspel, Senior Institutional Trading Associate at BlockFi, agreed that “yields related to cryptocurrency interest-bearing accounts are affected by a number of factors, including market sentiment, funding rates, supply and demand, and balance sheet optimization. “
It is true that crypto market sentiment has plummeted since the March 2020 crash, while funding rates, especially for altcoins, have fallen to “worrying levels”. Haspel explained:
“Ultimately, narrowing rates and volatility are a sign of the asset class’s maturity. Where yields were once massive and liquidity was once sparse, there are more players in the crypto game that feed off of its competitive financing and wider reach.”
Bullish on CeFi: The future remains bright
BlockFi CEO Zack Prince Tells Cointelegraph He’s Still “Bullish On” […] The desire of customers to earn back crypto interest for a longer period of time.”
In a similar note of optimism, Nexo co-founder and executive chairman Costa Kanchev told Cointelegraph, “‘Times, they are changing,’ but crypto yields are still many times higher than traditional banks.” As for the price of bitcoin flatlining around the $30,000 mark, Kanchev said:
“While interest on some assets has become more stable, it reflects the asset itself. I think people largely ignore the higher rates on some of the new assets on the block.”
Ultimately, and in agreement with Di Bartolomeo, “no matter how volatile a cryptocurrency has been historically, the opportunity is always there.” CeFi providers will continue to offer more attractive interest rates than older financial institutions.
It is important to note that Nexo operates a different model, which explains why rates are not technically falling (as shown in the table above). Users experience higher interest rates if they lock assets or hold a proportion of the Nexo tokens. Unlike other CeFi lenders, Kanchev explained:
“The rates are not falling. It is high that the yield on older crypto on Nexo is ensured to be sustainable over the long term, but eyebrow-raising rates are often available with Nexo tokens through our loyalty program or for some of the newer coins for which we can generate such impressive yields.”
Rising adoption and innovation, anticipating regulation
This falling rate should not be a cause for concern: per di Bartolomeo, not only are centralized entities “facilitating the adoption and growth of bitcoin as an ancient collateral”, but legacy banks are also looking to “partner” with CEFI players in the future. can. he said:
“This means that centralized lenders, such as Layden, will act as a conduit for bringing legacy capital to bitcoin – bitcoiners (by lending them at increasingly better rates) and capital providers (giving them a great risk-adjusted return). by offering).
related: Can DeFi and CeFi Coexist? Three Takeaways from the Expert Panel
BlockFi’s Haspel agreed, “CeFi offers a compelling use case to support the narrative of crypto for global monetary access.” Despite the turbulent waters the crypto industry is heading into spring 2022, BlockFi sees “an increase in global demand for risk-managed crypto products – such as interest accounts – in other emerging digital assets”.
“While credit checks and lack of financial history hurt individuals seeking access to capital on a global scale, CeFi loans provide a solution. Using crypto assets confirmed on a transparent and immutable ledger, the CeFi protocol provides their Able to verify possession quickly.”
For Kanchev, innovation, customers and new products are just around the corner: “Compliant, sustainable interest products that address regulatory guidance while profitably paying customers will be among the next such products.”
“The industry has matured enough, […] That’s why I believe we will continue to find risk-free strategies that deliver attractive returns and are able to share these with the community.
In Nexo’s case, this means diversifying its product offering; As for BlockFi, it continues to get involved in institutions, while Layden has branched out into bitcoin-backed staking.
Cointelegraph contacted CEFI provider Celsius for comment, but did not receive a response as of the time of publication.
