Generating a yield on crypto is increasingly tricky. The Terra ecosystem implosion — 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 rooted through a central body, has endured a comparatively peaceful bear market, yet interest rates are trending down.
On the first of the month, investors who have an account with a CeFi provider such as Ledn, Celsius, BlockFi or Nexo generally receive emails detailing the interest rate for the following month.
A blow for those looking for passive income, the interest paid from CeFi providers has ground down since the 2021 bull market. Giving up custody of a crypto asset for a miserly interest payment has encouraged some crypto enthusiasts to take control of their private keys, even drawing comparisons to legacy banking.
In the table below, three of the largest custodians of Bitcoin (BTC) and crypto assets have fallen, taking into account both the interest rate and the amount of interest paid on each asset.
Cointelegraph spoke to three of the largest lenders of Bitcoin and other crypto assets to understand whether interest rates from CeFi providers may eventually hit rock bottom, aka 0.01% interest — like at banks — and why these lenders and interest providers exist.
Interest rates will continue to be attractive
Representatives from Ledn, Nexo and BlockFi agreed that while interest in crypto is lower, it outcompetes legacy lending. Mauricio Di Bartolomeo, co-founder of Canada-based Ledn, told Cointelegraph, ”We are still five to 10 years away from Bitcoin rates coming anywhere close to those of fiat bank accounts.”
“Most legacy bank savings accounts are paying out mere basis points (between 0.01% and 0.05%). 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 as of today.”
In a tweet thread, Di Bartolomeo shared that “changing market conditions” have obliged lenders to drop their rates, as the difficulty level of turning a profit on arbitrage opportunities and the futures basis trade has risen.
In simple terms – this means that market makers are also seeing their average returns get compressed.
Which forces them to have to lower their borrowing costs.
— Mauricio (@cryptonomista) May 4, 2022
Jonathan Haspel, senior institutional trading associate at BlockFi, agreed, stating that “yield related to crypto interest-bearing accounts is impacted by a number of factors, including market sentiment, funding rates, supply and demand, and balance sheet optimization.”
It’s true that crypto market sentiment has plummeted since the March 2020 crash, while funding rates, particularly for altcoins, have dropped to “worrying levels.” Haspel explained:
“Ultimately, compressed rates and volatility are a sign of the asset class’s maturation. Where yield was once rampant and liquidity once sparse, there are more players in the crypto game feeding its competitive financing and widespread access.”
Bullish on CeFi: The future remains bright
Zac Prince, CEO of BlockFi, told Cointelegraph that he’s still “bulllish on […] clients’ desire to earn crypto interest back for the long term.”
In a similar note of optimism, Nexo co-founder and executive chairman Kosta Kantchev told Cointelegraph, “‘The times, they are a-changing,’ but crypto yields are still multiple times higher than those of traditional banks.” In a nod to the price of Bitcoin flatlining at around the $30,000 mark, Kantchev said:
“While interest on some assets has become more stable, this mirrors the assets themselves. I think people largely overlook the sky-high rates on some of the newer assets on the block.”
Ultimately, and in agreement with Di Bartolomeo, “regardless of how historically volatile crypto has been, the opportunity is always there.” CeFi providers will continue to offer more attractive interest rates than legacy financial institutions.
It’s important to note that Nexo operates a different model, which would explain why rates are not technically dropping (as shown in the above table). Users experience higher rates of interest if they lock up the asset or hold a proportion of the Nexo token. Contrary to the other CeFi lenders, Kantchev explained:
“Rates are not dropping. It’s more that yields on older cryptos on Nexo are ensured to be sustainable in the long run, but the eyebrow-raising rates are often available either with Nexo Tokens through our loyalty program or for some of the newer coins for which we can generate such impressive yield.”
Growing adoption and innovation, anticipating regulation
That dropping rates should not be cause for concern: Per Di Bartolomeo, not only are centralized entities “instrumental to the adoption and evolution of Bitcoin as pristine collateral,” but legacy banks may even look to “partner” with CeFi players in the future. He said:
“This means that centralized lenders, like Ledn, will act as a conduit to bring legacy capital to Bitcoin — benefiting both Bitcoiners (by letting them borrow at increasingly better rates) and capital providers (by offering them a great risk-adjusted return).”
Related: Can DeFi and CeFi coexist? Three takeaways from experts panel
BlockFi’s Haspel agreed, “CeFi offers a compelling use case supporting crypto’s narrative for global monetary access.” Despite the turbulent waters the crypto industry treads in 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 a lack of financial history harm individuals seeking access to capital on a global scale, CeFi lending offers a solution. By utilizing crypto assets confirmed on a transparent and immutable ledger, CeFi protocols are able to quickly verify their possession.”
For Kantchev, innovation, customers and new products are right around the corner: “Compliant, sustainable interest products that address regulatory guidance while profitably paying customers will be one of the next such products.”
“The industry has matured tremendously, […] so I’m convinced we will continue to find risk-free strategies that yield attractive returns and be able to share these with the community.”
In Nexo’s case, that means diversifying its product offering; for BlockFi, it continues to onboard institutions, while Ledn has branched out into Bitcoin-backed mortgages.
Cointelegraph reached out to CeFi provider Celsius for comment but did not receive a response as of publishing time.