Before last year, the common complaint levelled at Bitcoin as an investment product was that it produced no yield.
Investors could hold cryptocurrencies and — much like gold, or zero-yield stocks like Amazon — hope that the asset’s value increased over time, before selling it on for a higher price later.
That all changed in March 2019 when BlockFi became the first platform to offer a Bitcoin interest account.
Backed by the Winklevoss twins’ Gemini exchange, it offered a 6.2% annual yield. As its popularity grew, customers demanded lower barriers to entry. In response BlockFi dropped the minimum required balance from 1 BTC to 0.5 BTC. The New Jersey firm also expanded its accounts to India, responding to “huge demand” from customers in the South Asian country.
The company wrote in a blog post: “We’re able to provide the interest account product because we’ve created a marketplace for institutional borrowers. Our portfolio management system, built by our Chief Risk Officer Rene van Kesteren, monitors and manages all of these deals 24/7. Previously, Rene managed structured lending for Bank of America for 15 years prior to joining BlockFi.”
Today, you would be hard pressed to find any retail-focused Bitcoin interest accounts that require a minimum balance. Most are happy to capitalise on the wave and attract new customers through the door.
French Romantic novelist Victor Hugo famously wrote in The Future of Man: “You can resist an invading army. What you cannot resist is an idea whose time has come.”
DeFi appears to be just that.
Global macroeconomic shocks caused by the pandemic still ravaging the world are pushing investors to seek yield in ever greater numbers.
Add that wave of new customers to the millions of current holders, previously hoping that the price of their crypto would simply appreciate over time. What do you get? The birth of an entirely new industry.
International and domestic banks would normally control most of the market for lending. However, with central bank quantitative easing propping up stock markets worldwide, interest rates for fiat currency have been slashed to historic near-zero levels.
Take for example the Bank of England. Nervous policymakers have printed hundreds of billions of pounds to inject into the UK economy while cutting interest rates to their lowest point in 300 years — just 0.1%.
Showing the scale of the economic panic, this action happened just seven days after bank leaders took historic action to drop the rate to 0.25%.
With rates this low, banks are making ever-reduced margins on the money they loan out to customers.
As Finance Magnates describes, DeFi is a ‘gateway’ for new investors to hold Bitcoin.
You don’t have to be a card-carrying fanatic or libertarian hellbent on the idea that cryptocurrencies will eventually remove the need for central banks or replace government-backed currencies entirely.
This market is aimed at your average family investor, who has perhaps a couple of thousand pounds to her name and is looking for a place to stash it to gain a market-beating return over a number of years.
So we come to the newly-popular trend of yield farming.
This is where investors move their crypto around various platforms in order to secure the best yield.
It’s the kind of system that apes current account switching in the traditional fiat world. As per usual, it is happening much more quickly in crypto as holders tend to be more financially and technologically savvy.
Today BlockFi offers a headline annual yield of 8.6%, with deposits possible in BTC and ETH, or the stablecoins USDC, GUSD and PAX.
Its main competition comes from the likes of Celsius Network, which offers up to 12% per year, with interest payments deposited directly into your wallet every Monday. Celsius also offers yield on a much larger basket of 25 cryptocurrencies and stablecoins compared to BlockFi.
Crypto.com is another competitor with deep reach. Its interest-bearing accounts offer up to 8% per annum or up to 12% per annum on stablecoins.
Crypto.com includes lesser known stablecoins like TrustToken’s TrueCAD, which is 1:1 pegged and redeemable against the Canadian dollar. TrustToken has since launched stablecoins pegged against the Hong Kong Dollar (THKD), Australian Dollar (TAUD) and British pound (TGBP).
Capital is flowing rapidly into DeFi in ever greater amounts.
In the last 12 months the total value locked (TVL) in DeFi products has skyrocketed tenfold, from a little over $500m to more than $6bn. According to industry tracker DeFiPulse.com, the pace of change is increasing, too. From 1 July to 17 August 2020, the TVL more than tripled from $2.01bn to $6.31bn.
The leaderboard of top-30 most popular projects on DeFiPulse contains well-known names like Maker, Curve and Compound, but is increasingly populated by newer protocols.
mStable, for example, only went live on 29 May 2020 and has already seen the value aggregated by its system shoot up from $30,000 to over $41m.
Synthetix is perhaps the fastest-growing. Live since the early part of 2019, the platform offers on-chain exposure not just to cryptocurrencies, but to fiat currencies, commodities like gold and silver, equities and indices like the S&P 500 and NASDAQ. The TVL in Synthetix has skyrocketed from $141m in June 2020 to approach almost $1bn in August 2020.
It certainly appears that there is a great deal of interest in platforms that can combine investor exposure to cryptocurrencies with more traditional financial products like gold, forex and stocks and shares.
Sophistication, too, is growing as the market size increases: mirroring the depth and scale of traditional financial products. And as is usually the case with cryptoassets, this kind of fintech innovation is happening at a searing pace. Excitement lies ahead.
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