Decrypting DeFi is Decrypt’s DeFi email newsletter. (Art: Grant Kempster)
Even though inflation finally appears to be on the decline, interest rates are still rising rapidly.
This is painful for several reasons, but for crypto bros it basically means risky assets like Bitcoin And Dogecoin are not as attractive as, for example, conservative US government bonds.
But it’s not a total wash.
Actually it is DeFi The sector – particularly stablecoin providers – is finding unique measures to make the most of the current high interest rate environment.
Yes folks, it’s the return of the interest-bearing stablecoin. This time, however, things look very different than Terra’s Anchor protocol.
From Maker’s DAI to Frax Finance’s sFRAX, the arena is being filled with different flavors of this new stablecoin variant.
sDAI (the name of the interest-bearing version of the stablecoin) and sFRAX both generate their returns from T-bills and other real asset investments, which are, for example, corporate bonds.
And with this “safe” return of up to 5% on those idle dollars, investors are flocking to it.
Spark Protocol, the project powering Maker’s sDAI push, just announced that the token has reached a total circulation of 1 billion.
It’s not just the dollar coins; Euro-pegged stablecoins such as Angle Protocol are also taking part in the campaign. Angles agEUR earns a 4% return on its holdings of real assets.
Are you still wary of anything related to cryptocurrency returns?
Pablo Veyrat, the co-founder of Angle, told Decrypt: “You should be worried about outrageous returns if you don’t understand where the return comes from. “A stablecoin is a Ponzi if it relies on endogenous collateral.”
In the case of agEUR, it generates its return from a tokenized representation of a European government bond. In other words: It’s just boring national debt.
And while some other stablecoins generate this return via the ETH staked, Veyrat says he is not a fan of it.
“I don’t like mechanisms with returns on staked ETH because there is hardly any value created there,” he told Decrypt. “And it often comes down to selling the stETH yield to purchase another USD-denominated asset.”
Still, alternative approaches—particularly those not based on interest rates—could see a rise once the Fed begins cutting rates.
“Currently, interest-bearing stablecoins like sDAI, whose yield comes primarily from US Treasuries, will fall in parallel,” Tom Wan, analyst at 21.co, told Decrypt. “However, others such as eUSD, USDe, whose yields come from stETH, or other ETH LSTs will be able to maintain user interest.”
Until then, however, this product is currently enjoying great popularity with one of the most powerful central banks in the world.
Of course, the irony of this entire niche is that the industry now appears to benefit from centralized governments and their financial policies, a dynamic that Bitcoin fans wanted to stay away from.
This also makes many of these stablecoins vulnerable to changes in monetary systems.
“When stablecoin issuers start offering interest, they will become reliant on the interest market for the currency to which the stablecoin is pegged,” Gísli Kristjánsson, co-founder and CTO of Monerium, told Decrypt. “The most influential factor in this market is the interest rate on overnight deposits at the central bank.”
And while Kristjánsson points out that there is clearly a higher risk compared to more simple, non-yielding stablecoin varieties, he is still aware of their “advantages.”
“One of the key benefits is the transparency of the assets and liabilities of these protocols, which can be audited,” he said. “Because the data is in a standardized format on the blockchain, tools can be developed to monitor the health of the protocol in real time. This represents a significant improvement over traditional banks’ quarterly financial reports.”
And that is the key to success.
Rather than a complete rejection of traditional finance, crypto is emerging as a fairly dynamic new tool to make money better and more transparent, regardless of the market environment.
Of course it is anything but conclusive. But it is definitely progress.
“Decrypting DeFi” is our DeFi newsletter led by this essay. Subscribers to our emails can read the essay before it is published on the website. Subscribe here.
Learn Crypto Trading, Yield Farms, Income strategies and more at CrytoAnswers
https://nov.link/cryptoanswers
Comments are closed.