There are 2 fundamental models to Cryptocurrency Lending, non-custodial and...
There are 2 fundamental models to Cryptocurrency Lending, non-custodial and custodial.
The vast majority of Cryptocurrency Lending options are custodial, and that means a third party has your coins. This entails counterparty risk.
What is an affordable Cryptocurrency Lending return to provide you on your Bitcoin?
Is 6% excellent?
Is it 15% that you want for cryptocurrency lending?
It entirely depends upon the counterparty risk. You’re not generating income for providing out BTC, you’re generating income for lending to a specific counterparty like BlockFi.
So, what’s a reasonable yield?
Junk bonds in the US have normally paid 4-6% over treasury rates. For a risky start-up, uncollateralized loans would normally be more like 15-25% over treasury yields.
Short-term Treasury yields are presently 2.5%, so I’d try to find ~ 22%+ yield to lend my BTC to a start-up at a minimum.
Now, this shallow analysis is unfair to Blockfi and others who would appropriately argue this isn’t a simply uncollateralized loan.
On their site, Blockfi states they “generally lends crypto on overcollateralized terms.” The specifics matter a lot here. These should most likely be seen as collateralized Cryptocurrency Lending loans if that collateral was legally owed to you like a particular lending institution.
They’re probably not. If you as the lending institution have no legal right to specific collateral, then you’re merely a lender to a single company, Blockfi (or whomever else), and you may not even be a senior lender (for Blockfi, I think you are a senior creditor, but this should be confirmed for each platform.).
So the right way to think about making a loan on a platform like this is very comparable to if a crypto start-up asked you for a loan and provided you some interest to borrow your cash, and assured to keep a stack of cash representing their general commitments to financiers.
Non-custodial services are really different. With these, you might possibly have absolutely no counterparty risk, rather you’d go through some sort of liquidation risk and protocol risk. The profits from liquidating collateral may not pay you back if the market gaps lower.
In addition, using things like multi-sig solutions for a Cryptocurrency Lending platform have a serious risk of bugs.
Simply how major?
Ask Parity, undoubted specialists on ethereum smart contracts, who twice lost tremendous sums to bugs in the most basic kind of multi-sig smart contract.
The development in crypto loaning markets is remarkable for the ecosystem (separate subject) but is exceptionally risky today however it’s done, and I think the yields are far too low to price that risk from my viewpoint.
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