It is becoming increasingly difficult to generate a return on crypto. The Terra ecosystem collapse — in which up to $50 billion was lost — caused a decrease in interest rates for decentralized finance (DeFi).
CeFi, which is centralized finance and all processes are rooted in a central body, has seen a relatively peaceful bear market. However, interest rates are on the decline.
Investors who have an account at a CeFi provider like Ledn, Celsius or BlockFi will receive emails on the first day of each month detailing the interest rate for that month.
CeFi providers have been paying lower interest rates since the bull market of 2021, which is a blow to passive income seekers. Some crypto enthusiasts have compared legacy banking to crypto, by giving up custody of crypto assets in exchange for a meager interest payment.
The table below shows the decline of three of the biggest custodians for Bitcoin (BTC), and other crypto assets. It takes into account both the interest rate as well as the amount of interest each asset has paid.
The CeFi interest rate has trended down in the last year. Source: Data taken from the individual provider’s website.
Cointelegraph spoke with three of the biggest lenders of Bitcoin and crypto assets in order to find out if interest rates from CeFi providers will eventually reach rock bottom (aka 0.01% interest) and why these lenders are important.
The attractive interest rates will not change.
Representatives of BlockFi, Nexo, and Ledn all agreed that although crypto interest is lower than legacy lending, it outcompetes it. Co-founder of Ledn Canada, Mauricio di Bartolomeo told Cointelegraph that Bitcoin rates are five to ten years away from being comparable to fiat bank accounts.
“Most legacy savings accounts pay out just basis points (between 0.0.01% and 0.0.05%). As of today, interest rates for our Bitcoin Savings Account product still have a 5.25% APY on the first 0.1 BTC and an additional 2% for any balances greater than 0.1 BTC.
Di Bartolomeo tweeted that the “changing market conditions” have forced lenders to lower their rates as it has become more difficult to turn a profit on arbitrage and futures basis trades.
This means that market makers are also experiencing a decrease in their average returns. This forces them to reduce their borrowing costs.
— Mauricio (@cryptonomista) May 4, 2022
Jonathan Haspel, BlockFi’s senior institutional trading associate, said that the yield of crypto interest-bearing accounts can be affected by many factors, including market sentiment and funding rates, supply, demand and balance sheet optimization.
Haspel explained that it is true that crypto market sentiment has dropped since the March 2020 crash. However, funding rates for altcoins have fallen to “worrying” levels.
“Ultimately, volatility and compressed rates are signs of an asset class’s maturity. The crypto market is booming, with more players providing competitive financing and access to liquidity where yield was once low and liquidity scarce.
CeFi Bullish: The future is bright
BlockFi CEO Zac Prince told Cointelegraph he is still “bullish on […] clients desire to earn cryptocurrency interest back for long-term.”
Cointelegraph was told by Kosta Kantchev, Nexo’s co-founder and executive chair, that “the times are changing, but crypto yields still multiple times greater than traditional banks.” This is in reference to Bitcoin’s flatlining price at $30,000:
“While interest rates on certain assets have become more stable, this is in line with the assets themselves. People tend to overlook the high rates of some of the more recent assets.
According to Di Bartolomeo’s words, “regardless how historically volatile crypto was, the opportunity is always available.” CeFi providers will continue offering more attractive interest rates that legacy financial institutions.
Note that Nexo has a different model than the one shown above. This would explain why rates have not dropped technically. If users lock up an asset or have a portion of the Nexo token, they will experience higher rates. Kantchev explained that CeFi lenders are not the only ones who can offer higher rates of interest.
Rates are not falling. The fact that older cryptos on Nexo have high yields is a plus. However, the rates for the more recent coins are available with Nexo Tokens or through our loyalty program.
Innovation and adoption are growing, while regulation is being anticipated
This drop in rates shouldn’t be cause for alarm: According to Di Bartolomeo central entities are “instrumental to Bitcoin’s adoption and evolution as pristine collateral.” However, legacy banks might also look to “partner” with CeFi-operating banks in the future. He stated:
“This means that Ledn and other centralized lenders will be able to channel legacy capital to Bitcoin. This will benefit both Bitcoiners (by allowing them to borrow at ever-lower rates) as well as capital providers (by providing them with a high risk-adjusted return).
Related: Can CeFi and DeFi coexist? Expert panel: Three lessons learned
BlockFi’s Haspel said that “CeFi presents a compelling use case supporting crypto’s narrative for global monetary access.”
CeFi lending is a way to get capital at a global scale. Credit checks and lack of financial history can be detrimental. CeFi protocols can quickly verify the possession of crypto assets by using them.
Kantchev believes innovation, customers, and new products are just around the corner. “Compliant, sustainable interests products that address regulatory guidance while profitablely paying customers will be one the next such products,” he said.
“The industry has advanced tremendously […] and I am convinced that we will continue to find risk free strategies that yield attractive returns, and be able share these with our community.”
Nexo is trying to diversify its product offerings. BlockFi continues to add institutions while BlockFi has expanded into Bitcoin-backed mortgages.
Cointelegraph reached out CeFi provider Celsius to request comment, but was not able to get a reply as of publication time.
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