The above chart illustrates a wide variety of securities with some of the most popular crypto lending markets. You may notice that crypto lending is on the far right, with a riskier profile than cryptoassets — this is because of the added element of counterparty risk. To understand how rates are determined on crypto lending platforms I highly recommend reading this Medium by Roy Learner. Essentially, rates are determined by supply/demand and thus far due to the speculative nature of this activity we’ve seen a wide range of Annual Percentage Rates (APR) depending on the cryptoasset. Stablecoins and Bitcoin have benefited from higher rates ranging from 6% — 10%, with the exception of special circumstances where the rates will go up considerably (DAI is currently~12% APR on Compound, was at 15% last week). Rates on other cryptoassets such as ETH, BAT, REP etc. have ranged substantially lower from 0.1% — 2% (anything higher should be considered rather suspect).

By taking the above figures and comparing them to traditional fixed income securities we can attempt to price the risk/reward. For example, US treasury bonds — the 10 year currently yields around 1.75%. These bonds are generally perceived to be risk-free because it is debt backed by the US government — the chance of default is very low. You can even earn around the same just by keeping USD in a money market account that pays interest based on current rates. Going by that rationale, is 2% APR or lower enough to justify lending your cryptoassets and being subject to counterparty risk? Clearly not, one would expect much higher returns. Another example are high-yield (junk) bonds which currently have a yield of around 6% — even though they carry a greater chance of default, most are still backed by solid companies with assets that bond holders are entitled to in the event of a default. So, an investor would get 6% with more security for his/her principal, in comparison with crypto lending platforms where the risks are much higher and undefined. Again, the risk/reward doesn’t seem reasonable for 6% APR or lower. Referring back to Ari Paul’s article, crypto lending should be treated similarly to start-up loans and therefore should come with much higher yields (upwards of 20%) to justify the risk/reward. So far, only the Compound DAI market has gotten close to that number, during its peak reaching around 18% APR. But since it is a stablecoin it limits an investors exposure to the upside (and downside), effectively creating an opportunity cost.

Because borrowers want to limit their exposure to volatile cryptoassets, the largest loan originations we’ve seen on crypto lending platforms have been in stablecoins — higher demand = higher yield (~8% and above). Because this is significantly higher than what most banks offer nowadays, it’s evident why there’s been a large influx on the supply-side. But what’s the opportunity cost of keeping your majority portfolio in stablecoins to earn around 8% per year?