It will be interesting to see if interest rates in government controlled currencies and crypto currencies will stay diverged in the long run.
Without the distorting action of governments printing money, interest rates might be set by market forces in "crypto land".
This might lead to a long term situation where artificially low interest rates are paid in government controlled currencies, but market prices are paid in crypto currencies.
Or will cheap interest rates in government controlled currencies somehow bring down the interest rates in crypto currencies?
The 10 year yield of bonds in Europe is at 0%. While US bonds are currently at 1.5%. This might be an indicator, that rates in one currency will not completely control rates in other currencies.
I think the primary reason interest rates are high in crypto lending right now (also on USD stablecoins) is leveraged speculation - people using crypto as collateral to leverage their crypto positions higher (and/or yield farm) and are prepared to pay a relatively high interest rate for it (~10% on stablecoins) because the expected gains are a fair bit higher.
Anecdotally many crypto holders prefer to not liquidate their crypto positions but instead take out loans via BlockFi to purchase hard assets like real estate. With cash in hand and now a property, they can get a cash out refi and the crypto loan is not a taxable event since the crypto was just collateral.
1: Holder borrows Tether, provieds ETH as collateral
2: Holder uses Tether to buy a house
3: Holder borrows Dollar, provides house as collateral
4: Holder buys Tether with Dollar
5: Holder pays back Tether, gets back ETH.
6: Holder now has ETH + House + Dollar Dept
If so, why couldn't they lend the dollars to buy the house in the first place? The bank which lends the dollars certainly could make a contract that the dollars only can be used to buy the house?
Real estate financing is primarily done by lenders with very traditional underwriting practices that don't factor in crypto or avoid it entirely. Even HNI/private banking doesn't consider crypto part of a liquid portfolio. You can go to Interactive Brokers and get a 1.x% rate with 2x (margin) or 5x (portfolio margin) but that's off non-crypto. To get that same leverage with crypto, you can put in a down payment for real estate (20% down) in 5 properties for 5x leverage. BlockFi/Tether etc. make that liquidity possible without liquidation. Feel free to DM me for more conversation on this topic.
Rates might be lower but they're not usually fixed. They're easier to get assuming your liquidity is in equities versus crypto or even a stable income. There's a reason mortgage financing is still more prevalent than margin loans despite what you've stated which are inherent benefits.
Check out Aave or Compound. You basically use your crypto as collateral, and do whatever you want with the borrowed money. If you want to take the borrowed money and get even more (leveraged) exposure to crypto, you can. You don’t pay back more than the borrowed capital plus interest.
Since ETH staking returns do represent a (sort of) risk free rate for ETH denominated loans, low fiat rates would pull down on those rewards, if the exchange rate volatility comes enough for people to stomach the currency risk.
The same sort of flows balance exchange rates and interest rates among national currencies, though as you point out, sufficient risks and controls abound to prevent complete parity between the rates.
I’d challenge the notion that one side is paying market rates, and one isn’t, at least in nominal terms. Bond purchases and ETH stakes are both market transactions at the prevailing rate, just with different structural forces in play.
I agree completely. I think the greatest value proposition of non-government money (e.g. gold, bitcoin) — at least in the long run — is the ability to escape from zero/negative interest rates.
I also agree that the different between EUR and USD bond yields seems to indicate that there exists no reliable way to arbitrage the spread in bond yields between different currencies (or, at least, that there exists a certain spread beneath which it's not profitable).
You're comparing a risk-free rate (government bonds) with a rate on risky investments. Not really comparable at all. You can also find high-yield bonds (aka junk bonds) denominated in USD.
Also real interest rates are set by the market not governments. Monetary policy has, at best, only small effects on real rates (in theory it should have none).
> You're comparing a risk-free rate (government bonds)
> with a rate on risky investments.
I don't think so. What is the "risky investment" here?
I compared lending of different currencies. In the case of Euros or Dollars, the lender is a government. In the case of crypto, the lender is a smart contract. Both are assumed to be reliable.
If your smart contact is truly reliable and anyone can lend on it at a rate of their choosing, and all loans are fully and perfectly collateralized, the natural interest rate is exactly the risk free rate. As above, for ETH I think that ends being the return on staking, minus the costs of actually running a staking node - so pretty close to zero?
The last resort of the US, UK, etc. governments is to print money if they really want to avoid defaulting on their debt. Can smart contracts print money? Surely there must be some way for the counterparty in the contract to default.
"Defaulting" in crypto means the collateral goes from the borrower to the lender. The collateral is always more valuable than the borrowed asset. Otherwise, all borrowers would "default" all the time. As there is no other downside to it than to lose your collateral.
So, the borrower starts with X BTC. They post X BTC as collateral and borrow X-y BTC (where y > 0). Once the loan is paid off, they get the collateral back. This means they end up with X BTC minus the interest paid on X-y. Why would anyone do that?
I am not sure if lending makes sense if the collateral is the same asset that is borrowed.
A more typical example I can envision:
Someone owns land in Decentraland. The land is an NFT on the Ethereum blockchain. To make profits from the land they need to put a hotel on top of it. But they don't have the means to buy/build the hotel. So they lend Decentracoins (some other asset on the Ethereum blockchain) and provide the land as collateral.
If all goes well, the borrower buys/builds a hotel with the decentracoins. Makes more decentracoins from visitors. Pays back their debt.
If it does not work out, the land goes to the lender.
> I am not sure if lending makes sense if the collateral is the same asset that is borrowed.
It doesn't. And if the collateral is a different asset, there is no certainty that the value of the collateral exceeds the value of the principal. So there's a risk involved and that explains the premium over the risk-free rate. It's got nothing to do with the fact that the loan is denominated in some cryptocurrency.
Proof needed. I can in fact think of counter examples:
Say there is a DAO that gives more voting power if you own more ETH. In that situation, it might make sense to borrow 900 in ETH with 1000 ETH collateral. Then you make your vote on the DAO with a power of 1900. And pay back 910 in ETH to the lender. The vote on the DAO might trigger an action that is worth more than the 10 ETH you paid in interest. For example if you run a company and the vote on the DAO was to buy a service from your company.
Well, you tell me. Where do the profits come from?
> In the case of crypto, the lender is a smart contract.
That doesn't make sense. The smart contract is a contract, that is, an agreement between two or more parties. An agreement is not a lender. The lender is one of the parties.
Let's pretend the lender is "smart contract" (even though it's not). You lend X to the smart contract, and after a while the smart contract pays you X+y. Where does the y come from?
The government prints money and buys government bonds with it. And other assets. When you have infinite amounts of money, you can dictate the risk premium.
> When you have infinite amounts of money, you can dictate the risk premium.
But how? If you're an investor who is considering buying government bonds, how can the government dictate the interest rate that you are willing to accept in return for buying the bonds?
Sorry, that's not how it works. The governments runs an auction where the bonds are sold to investors. That sets the market rate. The government would not buy its own bonds in the auction (it wouldn't make sense) and cannot force investors to buy the bonds at a particular rate.
In Europe, the government does buy its own bonds. Via the central bank. They print the money. Hold it for a few days. Then buy government bonds with it.
Read what the european central bank (ECB) writes about it:
The central bank buys bonds in the secondary market, and any effect on the risk premium is only indirect (investors perceive the bonds as being safer). This is completely different from the government "dictating the risk premium". The risk premium is the spread deemed necessary by the market to compensate for credit risk, and as such it can't be dictated by anyone.
Then there is also the downstream effects of buying these "safe" bonds on the secondary market: strip mining the "highest" quality collateral out of markets, and making markets ever more reliant upon fewer on tradeable cusips…
Yet, i've seen defi protocols that tried to fix the rate + maturity of said "bonds" they were offering and be complete baffled why demand for them changed when market conditions changed… wish there were more voices like yours in the sea of fecal matter floating around in the ecosystem…
Without the distorting action of governments printing money, interest rates might be set by market forces in "crypto land".
This might lead to a long term situation where artificially low interest rates are paid in government controlled currencies, but market prices are paid in crypto currencies.
Or will cheap interest rates in government controlled currencies somehow bring down the interest rates in crypto currencies?
The 10 year yield of bonds in Europe is at 0%. While US bonds are currently at 1.5%. This might be an indicator, that rates in one currency will not completely control rates in other currencies.