High-Yield Crypto Ecosystem Offers Alternative to Low Interest Rates

People have flocked to high-yield crypto environments because interest rates for traditional investments are staying low by comparison. It’s been nearly a year since "DeFi summer", but the optionality has only increased, along with the amount of “money legos” that are being combined in different ways.

At Consensus 2021, Felix Fen, co-founder and CEO of Set Protocol; Zac Prince, CEO of BlockFi; and Stani Kulechov, CEO of Aave, came together to discuss how people seeking out higher yield on their crypto assets can access a variety of services, and what the tradeoffs there can be.

Overall there was agreement that given the low interest rates seen in traditional finance at the moment (in the U.S. they’re at 0.25%, the lowest they’ve been in history) people are turning to crypto generally, not just as a hedge against inflation but also for the high returns they offer.

Translating crypto with interest rates

Prince said he saw real value in using interest rates to translate something really powerful that's happening in the crypto ecosystem in the terms that everybody is already familiar with.

“If you try to explain how the blockchain works, or why bitcoin has value, or some of the other more complex and in-the-weeds topics to folks when they're on their journey into the crypto ecosystem, they might struggle to wrap their heads around it,” he said. “Everybody knows what an interest rate is. And everybody knows that earning 8.6% on something is better than earning 0.2%.”

However, he said, banks are still a long way from being ready to finance the crypto ecosystem in a meaningful way. From his perspective on the front lines of trying to integrate crypto with traditional financing channels, he said, “we're not a day or two away.”

Read more: What Is Yield Farming? The Rocket Fuel of DeFi, Explained

Kulechov spoke about how the Aave community governs the parameters of the interest rates, which are then determined by supply and demand. That transparency is appealing to people, as is the decentralized model of Aave, meaning no one entity can arbitrarily change those rates.

“The fact that everyone can participate in affecting what the interest rate will be in these markets is a very big thing because, traditionally, big interest-rate movements have been decided by the banking industry; for example, by a few people sitting down with a room in London,” said Kulechov.

Examine the variables

As an asset manager, Fen emphasized that the variable interest rate is indeed variable by nature. He noted it's important to take into account that associated risk as well, whatever platform people use. For example, he suggested that users evaluate the risk of the protocol in terms of its insolvency and take that into account when considering where to allocate funds. To him, a big part of that decision-making should involve evaluating the community.

“How stable is a parameter selection, how conservative or aggressive is a community in terms of its parameter selection, and how decentralized is the protocol overall?” he said. “I think those are some of the elements that we look at when thinking about yield, and so not all interest rates should be just looked at as a headline number. One has to dig a little bit more into this.”