Coinbase – the leading crypto bank in the US – is launching Dai rewards for Coinbase users. The promotion is starting off by offering 2% APY to anyone who holds Dai in the Coinbase App.

The rewards will be available for all users in the US, UK, Netherlands, Spain, France, and Australia. Given the current interest rate climate in traditional finance, offering 2% on USD holdings is an attractive offer for those looking for an alternative to traditional savings accounts or low-risk investors looking for passive income opportunities.

But when looking at the current DeFi lending landscape, it’s still lagging behind a fair amount. With Compound offering 7.71%, Aave offering 7.2%, and dYdX offering 5.51% annualized rates on Dai in a non-custodial fashion, Coinbase still has some distance to close before competing with the high-yields offered by DeFi protocols.

Equally as important, Coinbase doesn’t explicitly highlight how they’re offering this rate. While many would suspect integrating lending protocols like Compound or Aave would be the most intuitive move to offer competitive rates, it may be too high for their current risk profile. According to their FAQ on Dai rewards, they state that “the mechanisms by which rewards are earned (such as the Dai Savings Rate) may include holding funds in smart contracts”. The FAQ also highlights that Coinbase does not assume any responsibility for the operation of the underlying protocols, specifically naming MakerDAO.

All of that said, we can speculate that Coinbase may be looking to leverage the Dai Savings Rate (DSR) to offer these rewards. But with the current DSR at 0%, Coinbase is likely paying this rate out of pocket in order to promote its new program.

The Protocol Sink Thesis

One of the emerging mental models in the DeFi space is the Protocol Sink Thesis. In short, the thesis concludes that crypto banks (like Coinbase and Binance) will ultimately adopt DeFi protocols due to the massive efficiency gained relative to centralized infrastructure. By leveraging open financial software on Ethereum, they can offer their users the best services possible with minimal trust and counterparty risks. This may include integrating Uniswap to offer a diverse ecosystem of token swaps, Compound to provide users with the best interest rates on the market, and even Synthetix to give traders access to a growing number of derivatives products.


At the end of the day, the Protocol Sink Thesis contends that it’s impossible for centralized crypto banks to compete with decentralized protocols in the long run. Open, credible neutral money protocols become too dense in the crypto money stack that they eventually sink to the bottom, leaving the crypto banks (which build at the top of the stack) to leverage DeFi in order to offer their users a range of globally accessible financial services.

Right now, the protocol sink thesis may be playing out right before our eyes with Coinbase launching Dai rewards. While they didn’t directly promote the usage of the DSR, the fact that it was highlighted as a potential mechanism for accruing rewards strongly hints at the usage of Maker’s native savings rate, especially with the rate still sitting at 0%. In the coming future, we’ll have to keep an eye out on how Coinbase’s offered rates change once the Dai Savings Rate comes back online.

If you’re interested in staying up to date on Coinbase’s lending rates, make sure to check in on our lending page – rates are updated every hour!

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