Cryptocurrency Lending Interest Rates for January 2020
DeFi is a new way to borrow & lend money
DeFi lending is a revolutionary new way to loan and borrow money, without the need for a third party, or written contracts.
Rather than relying on paperwork or a middle-man to facilitate the creation of loans, DeFi lending leverages automated systems – called smart-contracts – to issue loans using blockchain technology.
Smart-contracts use a series of pre-established rules to trustlessly arrange loans, calculate and transfer interest payments, and, if necessary, liquidate collateral.
For cryptocurrency holders, DeFi lending presents a smart and safe way to secure leverage, or simply collect interest on otherwise-idle digital asset holdings.
Top DeFi Lending platforms
Compound.finance is a permissionless lending platform built on Ethereum. The protocol uses smart contracts and native assets called cTokens to track ownership and interest across different lending pools. Compound offers a number of Ethereum-based stablecoins like DAI and USDC.
The platform has floating interest rates, which are continually recalculated according to supply and demand, with interest being calculated every block.
Lending periods are extremely flexible, with users able to withdraw their funds at any given time. There is no minimum limit on how long you lend your coins.
dYdX.exchange offers an entire decentralized trading interface as well as typical lending and borrowing functionality.
On dYdX, funds can be directly borrowed via the trading interface and used for margin trading.
The platform is built on Ethereum, and specializes in lending DAI, USDC, and ETH. As such, the market pairs are currently limited to ETH-DAI, ETH-USDC, and DAI-USDC.
Interest rates on dYdX are floating, and like Compound Finance, are adjusted regularly based on supply and demand.
Coins that you lend can be withdrawn at any time, and each loan is capped at a maximum period of 28 days.
Dharma offers annualized interest on popular stablecoins like Dai and USDC.
Users can connect to Dharma through web 3 wallets like MetaMask or by linking their Coinbase account.
Dharma is geared at new users, and currently supports a limited number of assets.
Dharma leverages Compound Finance smart contracts to offer an intuitive interest-earning solution.
DeFi Lending Growth
Total value locked has grown substantially in the past year, showing a clear trend in the adoption of DeFi lending platforms at large. TVL serves as a leading indicator as it represents the amount of capital being supply across most major lending protocols at any given time.
We’re now beginning to see a surge of new lending alternative emerge, all offering competitive rates and services to try and attract capital to their platforms. An active list of the most popular lending platforms can be found here.
DeFi Lending vs Traditional Money Markets
Although they are similar concepts, DeFi lending varies from traditional money markets in a number of ways.
First and foremost, DeFi lending currently revolves around cryptocurrency lending only.
Whereas traditional money markets consist of fiat currency, DeFi lending systems require the use of currencies which are able to interact with smart-contracts.
Since Ethereum is the most widely-used smart-contract platform, most DeFi lending systems solely support ERC20 tokens – unique Ethereum-based assets.
Stablecoins such as DAI and USDC are popular on DeFi lending platforms as they provide the potential for smart-contract interactions while holding a stable value (most are pegged to the US dollar).
In traditional lending, loans are often only partially-collateralized, collateralized with physical goods, or rely purely on legally-binding contracts. State legal systems are used to resolve disputes and liquidations.
DeFi lending, on the other hand, exists solely in the realm of the internet.
By design, it does not involve third parties or legal systems. Physical goods or paper-contracts are incompatible with DeFi protocols, which means that loans are often secured with other cryptocurrencies.
In order to erase the risk of default and ensure repayment, the vast majority of DeFi loans are over-collateralized with cryptocurrency, commonly at a rate of 150%.
Put simply, this means that a borrower must lock-up assets with a higher value than the amount that they are borrowing.
One can only participate in traditional money markets if they meet the criteria of local regulations and institutions.
This limits participation via a number of restrictions such as laws, capital requirements, lack of infrastructure, and more.
Individuals are also usually limited to operating only with people of their own geographical region.
DeFi lending, however, enables the participation of almost anyone with an internet connection.
Usage is not restricted by wealth, identity, or location.
Traditional peer-to-peer lending often carries a relatively high risk of default, and disputes can be time and money intensive.
DeFi loans are secure, thanks to over-collateralization and automated liquidation.
Any lending protocol is only as good as the infrastructure that it is built on.
This infrastructure is very different between traditional and DeFi systems.
If a DeFi smart contract contains any vulnerabilities, any currency stored within the contract may be at risk.
Most DeFi lending platforms have had their smart contracts rigorously audited prior to exchanging any value.
Ease-of-use & Fraud
Banks and other financial institutions bring a valuable layer of trust and protection into money markets, which users are charged for in the form of fees.
Traditional money markets have their limitations, however, and at times one may wonder if these fees are justified.
Excessive paperwork, slow transactions and processing, and other shortcomings in traditional systems are all characteristics that traditional systems suffer from.
Smart-contracts in DeFi lending remove the need for these third parties. This eliminates paperwork and administration costs, and significantly speeds up processing times.
Cryptocurrency networks also enable users to transact at any hour of the day, any day of the week – something that is near-impossible with traditional money markets.
Lending With Compound
You will be prompted to connect to the compound protocol, via a popup which looks like this:
You will be greeted with a similar window for each step that requires interaction with the Ethereum network. Each of these steps involves a very small fee, to power these network requests.
2. Once you are connected to the app via Metamask, you will have to “unlock” each asset you wish to lend.
3. You should see a transaction pop up via your wallet (like MetaMask) – if this does not happen within 30-60 seconds, refresh the page.
Once unlocked, you can select whichever token you wish to lend clicking “Supply”.
For this example, we’re going to lend some Ether (ETH).
4. Click the green “Supply” button.
5. A pop-up window will appear, like the one above.
Select the amount you wish to supply for lending, then click “supply”, at the bottom of the window.
Again, confirm the contract interaction in the Metamask pop-up.
Once confirmed, your balance will be updated on Compound. This means that your tokens (in this case ETH) is removed from your MetaMask wallet in place of cETH (Compound’s interest-earning version of Ether). You will collect interest for as long as you hold cETH in your wallet.
Please note that interest is not paid out, rather the value of you cETH grows over time. When redeeming your cETH, you will be returned your original collateral plus any interest that was accrued over time.
The tokens supplied also act as collateral for borrowing. You can view how much borrowing power you have in the box in the top right of the window.
All you have to do now, is let it sit and watch the interest add up with each block!
To withdraw your Compound Finance balance
You may withdraw your balance at any time, as well as any interest earned.
This is just as easy as supplying money to the protocol.
1. To withdraw your lent money, click the grey “Withdraw” button, as seen above.
2.You will see another pop-up window, asking how much you want to withdraw.
Enter the amount to wish to withdraw from your account, and click “Withdraw” at the bottom of the pop-up window.
Confirm the contract interaction in the Metamask pop-up.
And there you have it! Money-back in your Ethereum wallet, plus interest!
Popular Cryptocurrencies used in DeFi Lending
Dai – A decentralized, Ethereum-based stablecoin
Dai is the leading DeFi stablecoin due to the notion that it is NOT collateralized with fiat currency, which makes it very unique amongst its peers.
Rather than simply being backed 1:1 by US dollars, the value of the Dai token is stabilized via a smart contract with multiple mechanisms. These include over-collateralization in ETH, stakeholder incentives, and other automatic feedback mechanisms.
Dai is issued by Maker and has managed to hold its peg within a few cents of $1 for 99.9% of the time since it was created – even despite the price of Ether dropping 90% from all-time highs.
USDC – A fiat-collateralized stable coin by Circle & Coinbase
USDC is backed 1:1 with fiat currency and exists as a token on the Ethereum network so that it can interact with smart contracts.
USDC is one of the fastest-growing stablecoins and has excelled in widespread adoption. It has grown to a market cap of almost half a billion dollars since its inception in October 2018.
This is largely thanks to its reputable owners in Circle and Coinbase, and the coin’s integration into their infrastructure.
Ether (ETH) – The native token of the Ethereum Network
Ethereum is a blockchain platform which enables the use of smart-contracts – a form of automated agreement or system – and has been around since 2015.
Ether is the “fuel” that powers the platform and is used as payment for interacting with smart-contracts.
All of the above lending platforms are built on the Ethereum protocol.
DeFi Lending is just getting started
DeFi lending is a relatively new concept, but the infrastructure is already live, easy-to-use, and thriving!
Decentralization and smart contracts have given DeFi lending the power to be quicker, more efficient, and more accessible than traditional lending methods.
Whether you want to coordinate a leveraged strategy, or simply earn interest on cryptocurrency that you have lying around, protocols like Compound Finance, Dharma, or dYdX Exchange are here to help.