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DeFi lending rates - reflective of crypto asset class volatility

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Satoshi&Co Daily Crypto Newsletter

July 17 · Issue #211 · View online
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In contrast to the near-zero interest rates (sub-zero in some cases) in the traditional finance world, the interest rates for crypto lending and borrowing are substantially higher. 
Crypto lending today is primarily driven by speculation. Brokerage margin lending is the closest real-world comparison, justifying current crypto rates of 8–10%. As more potential lenders get comfortable with the technical risks, the supply of lenders will start to outweigh the demand of borrowers and margins will eventually compress. While speculation is the primary use case for crypto lending, we are optimistic that there will be additional use cases for crypto lending as the technology and ecosystem matures (credit scoring, insurance, etc.)
The primary use cases for crypto borrowing, according to research by Genesis Capital, can be bucketed into three categories: Speculation/hedging, trading/arbitrage, and working capital. 
As cryptocurrencies are extremely volatile, lenders usually demand more than the borrowed value to be deposited as collateral (usually a minimum of 150%). The onerous collateral requirement for crypto loans precludes normal small-scale retail users from borrowing in cryptocurrencies to fund their short-term expenses (why would I have to deposit $150k in collateral to fund my $100k college fee expense?). With the current loan offerings largely unattractive to regular users, we can assume that most people who borrow crypto loans are doing so to gain leveraged exposure to the underlying collateral. We have covered the topic of how to gain leveraged exposure through borrowing in crypto in one of our previous editions.   
With speculation and trading being the biggest use cases for crypto borrowing, the right comparison for crypto borrowing rates would be the interest rates charged for margin accounts in the traditional finance world. A quick look at the interest rates charged by leading brokerage firms such as Fidelity and TD Ameritrade indicates that the market rate charged for margin accounts with up to $50k in borrowed capital ranges from 8.5% to 9.5%, which is much higher than the 3-4% interest rates for housing and vehicle loans. This perhaps explains the high borrowing rates for crypto loans in the current scenario. It is also a reflection of the market acknowledging the fact that the underlying collateral in both crypto as well as margin borrowing, while liquid, is very much a volatile financial security/asset class, unlike an inert car or a house, which might not be as liquid, but is also relatively less volatile.
The market is still in its nascent stages, which explains the huge differences in rates between various DeFi lending platforms. In the figure above, for instance, Nuo offers 20% APR for lenders as opposed to 5% on dYdX. These figures also fluctuate frequently. Also, unlike in other spot and derivative markets, it is not an easy task to ‘arbitrage’ exchange rates across markets currently.
Source: Genesis Capital
Source: Genesis Capital
Meanwhile in Crypto Wonderland....
“Another Indian Crypto Exchange Bites The Dust”
Citing a lack of support and regulatory uncertainty to continue its operations in India, another cryptocurrency Cryptokart has closed down. We’ve decided to shutdown Cryptokart, said the firm’s co-founder Gaurang Poddar said in a LinkedIn post. Since the government is not going to introduce any regulations and leave it grey for a while, planning for the long term is difficult. In April last year, the Reserve Bank of India (RBI) had asked all the regulated entities including banks not to provide services to businesses dealing in virtual currencies (cryptocurrencies) like bitcoins.
“Grayscale’s AUM Reaches An All-time High”
Digital asset management fund Grayscale Investments has recorded an all-time high volume of assets under management of $2.7 billion. Per a Digital Asset Investment Report on Q2 2019 that Grayscale shared with Cointelegraph on July 16, the firm counted over $2.7 billion in assets under management as of July 15, 2019. The figure thus marks a near tripling of assets under management by the company since the preceding quarter. Grayscale stated in the report that total investments into its single-asset and diversified investment products in Q2 2019 amounted to $84.8 million, which is nearly twice the amount the company saw in the previous quarter. The company notes that new investments were among major drivers of the recent surge of cryptocurrencies’ prices.
“Polkadot To Launch An Experimental Prototype”
An experimental version of blockchain interoperability protocol Polkadot will go live later this summer. Led by Swiss nonprofit Web3 Foundation, the Polkadot team says the “early, unaudited and unrefined release of Polkadot” will be called Kusama. The highly anticipated project was reported last month to have closed a private sale of half a million DOT tokens (5 percent of the total supply) for an implied valuation of $1.2 billion. Wood stresses that the Kusama network is meant to cater to “new, early, high-risk functionality” projects that are already building products for Polkadot. The network’s mainnet launch is tentatively slated for later this year.
“Coinbase May Start Its Own Insurance Company”
Coinbase may set up its own insurance company, according to blockchain news website CoinDesk. The popular U.S.-based cryptocurrency exchange is reportedly in talks with insurance titan Aon (NYSE: AON) to create a “captive” insurance business. The subsidiary would be wholly owned by Coinbase and provide a regulated, audited, and segregated entity in which to store funds set aside for insurance purposes. Cryptocurrency exchanges are frequent targets for cyberhacks and other forms of theft. As an example, Japanese crypto exchange Bitpoint announced that it lost $32 million in a hack just days ago.
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