Cointelegraph spoke to CeFi leaders to understand where interest rates are going and what the future holds for CeFi.
Generating a yield on crypto is increasingly tricky. The Terra ecosystem implosion — where up to $50 billion was wiped out — led to a decline in decentralized finance (DeFi) protocols offering interest.
At the other end of the table, centralized finance, or CeFi, where all processes are rooted through a central body, has endured a comparatively peaceful bear market, yet interest rates are trending down.
On the first of the month, investors who have an account with a CeFi provider such as Ledn, Celsius, BlockFi or Nexo generally receive emails detailing the interest rate for the following month.
A blow for those looking for passive income, the interest paid from CeFi providers has ground down since the 2021 bull market. Giving up custody of a crypto asset for a miserly interest payment has encouraged some crypto enthusiasts to take control of their private keys, even drawing comparisons to legacy banking.
In the table below, three of the largest custodians of Bitcoin (BTC) and crypto assets have fallen, taking into account both the interest rate and the amount of interest paid on each asset.
CeFi interest rates have all but trended down over the past year. Source: Data was taken from each individual provider’s site.
Cointelegraph spoke to three of the largest lenders of Bitcoin and other crypto assets to understand whether interest rates from CeFi providers may eventually hit rock bottom, aka 0.01% interest — like at banks — and why these lenders and interest providers exist.
Interest rates will continue to be attractive
Representatives from Ledn, Nexo and BlockFi agreed that while interest in crypto is lower, it outcompetes legacy lending. Mauricio Di Bartolomeo, co-founder of Canada-based Ledn, told Cointelegraph, “We are still five to 10 years away from Bitcoin rates coming anywhere close to those of fiat bank accounts.”
In a tweet thread, Di Bartolomeo shared that “changing market conditions” have obliged lenders to drop their rates, as the difficulty level of turning a profit on arbitrage opportunities and the futures basis trade has risen.
In simple terms – this means that market makers are also seeing their average returns get compressed.
Which forces them to have to lower their borrowing costs.
Jonathan Haspel, senior institutional trading associate at BlockFi, agreed, stating that “yield related to crypto interest-bearing accounts is impacted by a number of factors, including market sentiment, funding rates, supply and demand, and balance sheet optimization.”
Bullish on CeFi: The future remains bright
Zac Prince, CEO of BlockFi, told Cointelegraph that he’s still “bulllish on […] clients’ desire to earn crypto interest back for the long term.”
In a similar note of optimism, Nexo co-founder and executive chairman Kosta Kantchev told Cointelegraph, “‘The times, they are a-changing,’ but crypto yields are still multiple times higher than those of traditional banks.” In a nod to the price of Bitcoin flatlining at around the $30,000 mark, Kantchev said:
Ultimately, and in agreement with Di Bartolomeo, “regardless of how historically volatile crypto has been, the opportunity is always there.” CeFi providers will continue to offer more attractive interest rates than legacy financial institutions.
It’s important to note that Nexo operates a different model, which would explain why rates are not technically dropping (as shown in the above table). Users experience higher rates of interest if they lock up the asset or hold a proportion of the Nexo token. Contrary to the other CeFi lenders, Kantchev explained:
Growing adoption and innovation, anticipating regulation
That dropping rates should not be cause for concern: Per Di Bartolomeo, not only are centralized entities “instrumental to the adoption and evolution of Bitcoin as pristine collateral,” but legacy banks may even look to “partner” with CeFi players in the future. He said:
BlockFi’s Haspel agreed, “CeFi offers a compelling use case supporting crypto’s narrative for global monetary access.” Despite the turbulent waters the crypto industry treads in spring 2022, BlockFi sees “an increase in global demand for risk-managed crypto products — such as interest accounts — in other emerging digital assets.”
For Kantchev, innovation, customers and new products are right around the corner: “Compliant, sustainable interest products that address regulatory guidance while profitably paying customers will be one of the next such products.”
Cointelegraph reached out to CeFi provider Celsius for comment but did not receive a response as of publishing time.