Coinbase has become the latest company to join in on the DeFi craze by announcing potential listing 19 new digital assets on its platform. According to the company’s press release, popular DeFi protocols such as AMPL, Balancer, Curve, and WBTC could soon be added to Coinbase if they meet the exchange’s rigorous compliance framework.
More DeFi protocols could be coming to Coinbase
The incredible growth seen in the DeFi space has made the burgeoning new sector attractive to even the most conservative companies in the crypto industry. Coinbase, one of the largest and most heavily regulated cryptocurrency exchanges in the industry, has joined in on the DeFi craze and is considering adding many new projects to its platform.
According to the company’s blog post, Coinbase is currently considering adding 19 new cryptocurrencies to its exchange platform. And while new additions are nothing new for an exchange of Coinbase’s size, the fact that most of the coins it’s considering adding the near future are DeFi tokens is news-worthy.
Projects such as Balancer, Curve, WBTC, AMPL, and tBTC could get listed on Coinbase if they manage to meet the company’s technical standards and comply with applicable laws, the company said in its blog post.
DeFi tokens might soon benefit from the Coinbase effect
All of these tokens could potentially benefit from the so-called “Coinbase Effect,” in which cryptocurrency projects that get listed on the exchange experience a significant surge in growth immediately after trading opens.
While this could have a short-term negative impact, causing major volatility for the tokens, the projects could see long-term benefits from being listed on a platform as big and as well-regulated as Coinbase.
The company noted that some of its customers might start noticing public-facing APIs and other signs that engineering work was being done on the platform. This will be a temporary nuisance as the company works on introducing support for these assets, Coinbase said in the blog post.
Nonetheless, even if the company decides to list these projects, it might not be available to all of Coinbase’s users. Due to different regulations in various regions where Coinbase operates, all of the tokens that do get listed will roll out on a jurisdiction-by-jurisdiction basis.
The rapid rise in popularity yield farming has seen in the past few months have led to many questioning its sustainability. Stani Kulechov, the founder and CEO of Aave, believes that the model could outlast the current bubble if the right kind of incentives were introduced.
He explained that applying the model seen in MakerDAO and Aave, where network participants are incentivized to secure the protocol, would result in a more stable yield farming network that would ultimately attract more users.
The growing problem of yield farming
With over $3 billion dollars currently locked in the decentralized finance ecosystem, the eyes of the crypto market are now all pointed to DeFi. One of the biggest drivers of the 200 percent growth last month has been yield farming, with its attractive returns and an easy onboarding process.
However, the bubble that’s been created around yield farming has led many to question the sustainability of such a model. With thousands of users pouring liquidity into a high-risk, extremely volatile protocols, the long-term effects on the global crypto market could be significant.
Stani Kulechov, the founder and CEO of DeFi lending protocol Aave, believes that while yield farming in itself is bad, the incentives it could bring to the table could make up for it.
In a Twitter thread earlier today, Kulechov said that yield farming essentially pays liquidity providers to risk their funds. This, he explained, is where things are going wrong in DeFi.
Currently, YFI APY returns are 331 percent for the Y-pool at Curve.finance. The interests will not remain in such ranges for a long time. The interests are primarily coming from the newly minted YFI tokens which account for 331% APY returns, the interest earned from the pool profit is only 4.77%.
However, all of this at the end of the day is indeed a giant stress-test which incentivizes people to invest hundreds of millions of dollars in smart-contracts, some of which are not even formally audited.
Incentivizing users to de-risk their funds and secure the network
The current model, which incentivizes users to accept additional risk, ultimately makes the whole DeFi system less reliable—it’s not unlikely for a liquidity fund to get completely drained after a particularly strong market movement.
Instead, yield farming protocols should be more aligned with safety.
Kulechov said that there’s an abundance of decentralized protocols that prioritize keeping the network safe over returns—both Bitcoin and Ethereum incentivize securing the underlying network, MakerDAO incentivizes passively securing the protocol, while Aave incentivizes active protocol security.
“Instead of putting all incentives into yield farming basket, let’s focus first on Safety Farming and reward people who are making other people comfortable to use our DeFi products and services.”
This, he explained, is a batter way to bring more adoption and avoid destabilizing the DeFi sector.
Introducing such a model won’t be too hard, either. The majority of the people who would prioritize the safety of the protocol over outlandish returns would be more interested in using their voting power to maintain that health. “Yield chasers,” as Kulechov described them, are more likely to participate in a protocol’s governance when it comes to matters such as APYs.
One of the ways users could be incentivized to secure the network could be with non-fungible tokens (NFTs). While this is still mostly a concept, Kulechov noted that users could potentially use Aave’s crypto-collectibles platform Aavegotchi to save their returns and rewards.
Robert Leshner, the founder of Compound, has voted against the latest proposal to increase the WBTC collateral factor on the platform from 0 to 65 percent. Leshner defended his decision by saying collateral in WBTC was currently too risky due to low liquidity and a high possibility of a technical flaw that could wipe out all assets in Compound.
Borrowing against WBTC on Compound
Looking to follow in the steps of MakerDAO, which just recently started supporting wrapped Bitcoin (WBTC), Compound users proposed another change to the protocol that would allow its users to borrow against WBTC.
The earlier discussion which happened 2 months ago suggested increasing the WBTC collateral factor from its current level of zero to anywhere between 50 percent and 75 percent. Instadapp founder suggested that the optimal collateral factor should be 66 percent in order to match the collateral factor on MakerDAO.
Users that suggested the change argue that adding WBTC will create a more diversified base for collateralized assets, as ETH is currently the most significant asset used as collateral on Compound with more than $70 million worth of ETH supplied so far.
Adding WBTC would also make it easier to port the debt position between Compound and MakerDAO to find the best interest rates and create a more efficient market, it said in the discussion.
This discussion was later followed by an official proposal in the Compound Governance by Sam Bankman-Fried, the CEO of FTX and Alameda Research.
WBTC is risky business, Compound founder says
The proposal, however, most likely won’t pass—at press time, 428,361 votes have been cast for it, while only 353,195 votes were cast against it. While 75 addresses voted for setting the WBTC collateral factor to 66 percent, only 27 addresses voted against it.
Leshner said that voting no on the proposal has been the hardest decision he had to make on Compound, but added that he carefully considered all of the risks it presented. He explained that adding WBTC as collateral could lead to a collapse in the “basis” between BTC and WBTC.
For WBTC, the risk is not a collapse in Bitcoin; but rather the “basis” between $BTC and $WBTC.
There are two risks: a total collapse of WBTC, and a market disruption in WBTC.
The biggest risk for him is the potential for market disruption:
“WBTC is untested in the Compound liquidation process, and the on/off-ramp to BTC is slow, and bottlenecked through WBTC merchants.”
With over $1.5 billion supplied to the protocol, WBTC simply can’t provide the liquidity required for Compound to run. Leshner also added that there is no evidence that a 66 percent collateral factor would give the market enough time to respond in a crisis. While BTC has greater market liquidity than DAI, USDC, and ETH, wrapped Bitcoin (WBTC) has a centralized point of failure as it’s an ERC-20 token backed 1:1 with BTC.
Aside from the possibility of WBTC failing as a platform, WBTC’s daily trading volume of around $500,000 means that liquidators won’t be able to find profitable arbitrage opportunities if the market got more volatile.
This guide takes a look at the best performing and reputed platforms to earn interest in Bitcoin holdings and other cryptocurrencies.
Blockchain technology has so far been successful in disrupting industries across the board, penetrating into everything from supply chains to traditional finance. Riding on the popularity and effectiveness of blockchain technologies, cryptocurrencies have also seen a more legitimate ecosystem created around them.
Cryptocurrency lending has been one of the fastest-growing segments of the blockchain industry, with even institutional investors showing a significant interest in the service. However, individuals with fewer resources than institutions often find it hard to keep up with the increasingly maturing market and sift through the growing competition.
These companies make money by providing collateral-backed loans to users, where they take the crypto deposits and lend them out to various hedge funds and exchanges. These borrowers have to provide collateral equal to 100 percent of their loan in either crypto or cash while paying interest of 15 percent or more.
Those holding Bitcoin that want to take a portion of the profits made by the loan companies can give their coins to them for a return of anywhere between 3 and 8 percent per year.
In this article, we’ll take a look at some of the most popular and most promising cryptocurrency lending platforms to help users navigate the growing, complex market.
Cred is a global financial services platform based in the San Francisco Bay Area that services customers in 196 countries. Founded in 2018 by former PayPal executives Dan Schatt and Lu Hua, the lending platform aims to harness the power of blockchain to provide low-cost credit products to everyone.
The company also offers tailored services to fit large borrowers and lenders such as institutions or whales, but anyone with an Uphold account can utilize the company’s services.
The unusually large return comes at a small cost. In order to access the 8 percent APY interest rate, users have to stake 10,000 LBA, or around $110 worth of the platform’s native token, the Lend Borrow Asset (LBA). It’s also important to note that while the platform is available in 196 countries worldwide, only 30 U.S. states can access it.
By far the most popular is the basic Cred Earn package, which offers a standard annual percentage yield (APY) of 4 percent. However, those that want to pledge or lend Bitcoin are able to get a preferential rate of 8 percent if they agree to lock-up their coins for a minimum of 6 months.
Created with a goal to compete with the big names in banking, Celsius has set its sight on improving legacy financial infrastructure. Its founders, Alex Mashinsky and Daniel Leon funded the company through a 2017 ICO that raised $50 million.
Just like Cred, Celsius also has a token native to its platform, called the CEL token. However, unlike Cred, Celsius doesn’t require users to stake their token, but uses it as an incentive—those holding CEL are entitled to receive interest bonuses depending on their loyalty levels if they choose to earn interest in CEL tokens.
Currently, the option to earn interest in CEL tokens is not available in the US.
The platform’s standard interest rate on Bitcoin lending is 4.03 percent, while a preferential rate of 6.2 percent is available to users that are willing to accept their payouts in CEL. There is no minimum lockup time, plus the platform offers bonus interest payouts of up to 35 percent to users willing to keep up to 15 percent of their holdings in CEL.
In addition to that, users who have more than 15 percent of their holdings on Celsius in CEL as platinum members can unlock an effective annual interest rate as high as 8.37 (6.2 + 35 percent) percent on Bitcoin lending.
Celsius is available in all U.S. states, excluding Washington and New York, but the preferential rates paid out in CEL aren’t available anywhere in the U.S.
Founded in 2017 with a mission to become the most trusted financial services provider in crypto, BlockFi is the lending platform that raised the most capital in its ICO. It is also the institution with the largest number of large institutional backers, which some potential users might find reassuring and trustworthy.
The company’s ICO raised an estimated $108 million in 2017, thanks to investments from ConsenSys, Winklevoss Capital, Arrington XRP Capital, Castle Island Ventures, Three Arrows Capital, Susquehanna, SoFi, and Valar.
The fact that it has lower rates than its two previously mentioned competitors is balanced out by its availability—BlockFi is the only cryptocurrency lending service available in all U.S. states. However, only crypto pairs are available in many states.
BlockFi’s annual percentage yield (APY) on Bitcoin is 3.2 percent. The platform’s preferential rate of 6 percent is available for the first five BTC a user holds on the service. There is no minimum required lockup time for lending.
BlockFi also offers an 8.6 percent interest rate on USDC and Gemini dollars.
One of the oldest platforms that enables crypto lending, Crypto.com has been around since 2016, when Bobby Bao, Gary Or, Kris Marszalek, and Rafael Melo founded the company that enables users to earn, trade, borrow, and pay in crypto.
The all-encompassing range of financial services the company wanted to provide attracted investments from various accredited and non-accredited investors, enabling it to raise $26.7 million in its 2017 ICO. The Hong Kong-based company quickly began making strides in the crypto industry by offering a prepaid crypto Visa card.
Crypto.com users can access fairly good interest rates through the platform’s mobile app—the company’s Earn program offers a 4.58 percent APY on Bitcoin. Those that hold the platform’s native cryptocurrency, the MCO token, are eligible for a preferential rate of 6.66 percent.
Aside from the regular Earn program, the company also offers Crypto.com Private, where high-net investors can earn an additional 2 percent bonus interest, which effectively means they can access an annual interest rate of 8.77 percent on Bitcoin.
The higher interest rates, however, do require a three-month lockup, while lower interest rates are available without any lockup terms.
There is also the issue of limited access, as users that want to earn the higher interest rates have to buy and stake 500 MCO, worth around $2,700 at press time. But, staking also unlocks the ability to have a crypto debit card with a 3 percent cashback on all purchases. The larger the user’s MCO stake is, the larger the more cash it can get back on the debit card.
Crypto.com also offers an attractive interest rate of 12 percent for stable coins like TrueUSD or Paxos Standard to users staking 500 MCO.
The service is available in select European countries, Singapore, and all U.S. states, excluding New York.
Created in 2017 as a subsidiary of Credissimo, an online lending pioneer that has been serving millions of users in Europe, Nexo was the first company to power instant crypto-backed loans. The company’s 2018 ICO raised $52 million, allowing it to introduce various new services and features such as the Nexo MasterCard debit card.
Nexo is certainly geared more towards borrowers than lenders—the company enables users to use 24 different crypto assets as collateral and get loans both in fiat and in cryptocurrencies. The platform’s interest rate starts from 5.9 percent per year, but requires no minimum prepayment. The minimal amount for a loan is set at $500.
Those that want to earn interest on their holdings can deposit fiat currencies such as the USD, EUR, or GBP, or stablecoins such as USDT, TUSD, USDC, PAX, and DAI. The company provides an 8 percent annual return of 8 percent on both fiat and stablecoins.
Like Crypto.com, Nexo also offers its users the ability to access a prepaid MasterCard debit card. The card can be used with more than 40 million merchants across the globe and comes without transaction fees or currency exchange fees.
Decentralized finance (DeFi) has been one of the most used buzz-words in the crypto industry last year. The rise of applications built on the Ethereum network was followed by an equally high rise of the expectations people had from the newly created industry—a decentralized answer to the problems with the current financial system.
One of the projects that have led the DeFi evolution was MKR, a project that used Ethereum’s native cryptocurrency ether (ETH) to back a stablecoin that could facilitate fast money transfers and various other financial applications.
However, one analyst believes that MKR and its DAI stablecoin shouldn’t be the DeFi darling that it is, as it poses a huge threat to the entire DeFi ecosystem. Adam Cochran, a professor of information science at Conestoga College and partner at Metacartel Ventures, said that DAI has gone astray in the past year and laid out several reasons for this.
Firstly, he said that almost all DeFi protocols rely, at least somewhat, on all of the tokens in their system not breaking, which means that they have to transfer properly, be actually worth their value, and come from a trusted origin. This applies to Compound, Fulcrum, SET, Aave, Uniswap, and all other similar protocols that rely on collateralization or liquidity pooling.
However, the interconnectedness of DeFi applications has caused them to act more like a house of cards instead of a layer of structurally sound blocks, Cochran explained.
“This connectivity is our biggest benefit and our greatest risk,” he said.
As there’s no card that appears in more DeFi products than DAI, it becomes clear that it sits at the base of most of the ecosystem.
This wasn’t that big of a problem for most, Cochran said until DAI began showing very serious vulnerabilities. The first problem he highlights is the fact that DAI isn’t actually governed by all MKR holders, but rather a small group of powerful entities—the MakerDAO team, MKR, and venture capital firm A16z led by Andreessen Horowitz. Cochran pointed out that the top 50 wallet addresses have more than 50% of all voting authority in the protocol.
Therefore, with the majority of the vote belonging to several major entities, its users can’t rely on them doing what’s best for the system. Cochran said that the MakerDAO team had a history of withholding valuable information from the public, as well as forcing out many of its executives due to “directional differences.”
Apart from that, the company secretly tried to trademark the term “DeFi,” which Cochran believes was the final nail in the coffin for MKR governance.
“DAI is not decentralized, because MKR is not decentralized. MakerDAO makes the decisions, and it’s clear they have a history of making bad ones,” he explained.
All of this leads to Cochran’s final point, which is MakerDAO’s plan to switch from a single-collateral DAI to a multi-collateral DAI. This means that instead of just ETH backing the coin, DAI will be backed with a basket of different ERC-20 tokens. This major decision was made by only 54 people, as they had the majority of the voting power on the network—those 56 people only represented 7.56% of the total MKR circulating supply.
It’s interesting to note that 100% of votes were in favor of the decision.
For now, this basket only includes the Basic Attention Token (BAT) and USDC, but the list could be expanded to include more assets with ease.
“These assets were added without big wallets voting, but what happens when a16z decides that one of the projects they’ve invested in should become part of the MCD? They vote for it, they put pressure on MKR to vote for, and other investors follow suit,” Cochran wrote.
Therefore, DAI has the potential to become an incredibly risky basket of assets, which could take the entire DeFi ecosystem down with it if it experiences even the slightest volatility.