【Special Feature】In the zero interest rate era, the cryptocurrency fixed deposit products that you and I should be aware of

Many services originally provided by traditional banks have taken root in the cryptocurrency industry, with major cryptocurrency exchanges also increasingly "bankifying" by adopting various financial services long present in traditional institutions. The high interest rates offered on cryptocurrency collateral have become a key factor attracting users.

Preface: Unlimited QE, Zero Interest Rates, Where to Preserve Value?

The U.S. Federal Reserve unexpectedly cut interest rates by 0.5% on March 3rd this year and made another emergency rate cut of 4 percentage points on the 15th, bringing the benchmark interest rate to 0 to 0.25%, close to zero interest rates. On the 16th, they launched a $700 billion quantitative easing measure, and by the end of March, they directly implemented unlimited QE. Following suit, the Taiwan Central Bank also cut interest rates by 0.25% and revised GDP down to 1.92%, with the National Stabilization Fund entering the market.

Looking back at the last time the U.S. announced an unexpected rate cut was during the 2008 financial crisis. Additionally, the overall financial markets have been severely affected by the COVID-19 pandemic and the oil price war between Saudi Arabia and Russia. Within just a week, the S&P 500 index triggered the circuit breaker mechanism three times. The U.S. stock market circuit breaker has historically only occurred four times, with the previous one dating back to October 1997, painting a worrisome picture for the global economy.

Rate cuts may also affect currency devaluation, indicating a continuous shrink in cash value. Even if the public opts for bank deposits, they may face the consequence of asset devaluation. Currently in Taiwan, fixed deposit interest rates range from 1% to 2%, meaning that even if one were to deposit NT$10 million, they would only earn a little over NT$10,000 in interest each month.

In fact, as bank deposit interest rates continue to decline, even reaching negative rates, the relatively unfamiliar "cryptocurrency" savings and financial products have gradually matured and become a hot topic in the crypto industry over the past two years. Many services originally provided by traditional banks have taken root in the crypto industry, with major crypto exchanges also transitioning to more "bank-like" services, competing to adopt long-standing financial services available in traditional institutions. The high interest rates of cryptocurrency collateralization have become a key factor in attracting users.

Choosing Cryptocurrency Savings: Decentralized or Centralized?

While most cryptocurrencies do not require a central authority for issuance and accounting (similar to the role of central banks), mechanisms to allow users to save and provide interest-bearing loans are more complex. Based on trustworthiness or efficiency, there are different service types available on the market.

Currently, the market is divided into Decentralized Finance (DeFi), which executes financial contracts through code (smart contracts), and Centralized Finance (CeFi), which provides financial services using cryptocurrencies by private institutions.

DeFi: Financial System Controlled by Code

The term "DeFi" was coined by Brendan Forster, co-founder of the lending platform Dharma Labs, who introduced the concept of "DeFi" on August 1, 2018, in an article titled "Announcing De.Fi, A Community for Decentralized Finance Platforms."

Decentralized Finance (DeFi) is a financial system derived from the Ethereum blockchain protocol, encompassing lending, decentralized exchanges, derivative products, stablecoins, and more within its ecosystem. "Decentralized" means that DeFi cannot be "fully" controlled by any specific organization or institution. The rules of DeFi financial products are defined by code, and the relevant data can be transparently viewed and cannot be altered arbitrarily.

Popular DeFi service providers in the market include MakerDAO, Synthetix, Compound, and others.

CeFi: Financial System Controlled by People

Centralized Finance (CeFi) refers to financial services provided by private institutions using cryptocurrencies. Cryptocurrency exchanges, similar to securities exchanges, have also introduced services such as fixed-term deposits and loans, for example, Binance, Bitfinex, Pionex, as well as platforms specializing in savings and loans such as BlockFi, Celsius Network, and others.

Cryptocurrency exchanges have been influential players in the crypto industry and do not intend to let DeFi take all the spotlight. Leveraging their inherent advantages such as user traffic, high interoperability, and low entry barriers, CeFi has risen and typically offers better interest rates than DeFi products.

Here are a few well-known DeFi/CeFi projects that could be alternative choices in the "low interest rate era":

Introduction to DeFi Projects

(1) dYdX

dYdX officially launched in May last year and is a decentralized exchange (DEX) built on the Ethereum blockchain. In October 2018, it received strategic investments of $10 million from well-known venture capital firms such as a16z and Polychain Capital, and in September 2019, Coinbase also invested $1 million USDC in it.

dYdX offers lending, borrowing, and margin trading functions, providing up to 5x leverage for margin trading to achieve asset lending functions. The lending interest rates fluctuate based on supply and demand of the crypto asset, calculated based on the real-time "lending quantity and borrowing quantity (utilization rate)" of the crypto asset (such as Dai) on the platform.

dYdX currently supports web wallets like MetaMask, mobile wallets like Coinbase Wallet, hardware wallets like Ledger, and three crypto assets for trading and lending: ETH, DAI, and USDC. Among them, Dai, a stablecoin pegged to the value of $1, has a lending interest rate of over 5% annually.

dYdX has fewer supported cryptocurrencies, making it simpler to operate, and the team started charging trading fees from March 10, establishing a sustainable revenue model for dYdX. As of the cutoff date, with nearly $20 million locked in the platform, DeFi ranks 7th overall.

Advantages:

• Backed by renowned venture capital firms
• Established presence in the DeFi margin trading market

Disadvantages:

• Only offers three assets
• Lower lending liquidity

(2) Aave

Aave introduced the lending platform ETHLend before DeFi gained popularity. After launching the well-known fast loan protocol "Flash Loan," the team shut down the ETHLend platform. Aave is a decentralized, permissionless, and non-custodial lending protocol. The platform supports 16 cryptocurrencies and recently partnered with the highly liquid USDT, offering Dai at interest rates around 5%.

The "aTokens" are Aave's interest-bearing tokens. They are minted when users deposit assets into Aave and destroyed upon redemption. The smart contract mints a 1:1 pegged aToken to the lender when assets are deposited. For example, if a user deposits 200 Dai, they will receive 200 aDai in their wallet. The underlying assets (the 200 Dai lent to borrowers) will be lent to borrowers, and aDai will generate interest in the lender's wallet in real-time.

Aave, launched this year, has already locked $30 million by the cutoff date and ranks 5th overall in DeFi.

Advantages:

• Years of technical team expertise
• Integration with Chainlink oracle
• Diverse asset selection

Disadvantages:

• Large interest rate fluctuations
• Lower liquidity

Introduction to CeFi Projects

(1) BlockFi

BlockFi is a centralized cryptocurrency lending platform backed by Gemini, the exchange founded by the Winklevoss twins. In August 2019, it raised $18.3 million in a Series A round led by Valar Ventures and secured another $30 million in a Series B round led by Valar Ventures in February this year, with participation from Coinbase Ventures, ConsenSys Ventures, Morgan Creek, Galaxy Digital, and other institutional investors.

BlockFi offers lending for five cryptocurrencies, with interest rates ranging between 2% to 8% for different coins. They also launched trading functionality at the end of last year, facilitating conversions between different cryptocurrencies. Recently, they introduced fiat deposits, allowing users to deposit funds via "USD wire transfer," which will be immediately converted to Gemini's USD stablecoin (GUSD).

According to BlockFi's latest announcement, starting April 1st, the interest rates for BTC in collateral tier one (less than 5) will be raised to 6%. ETH in collateral tier one (less than 500) will be adjusted to 4.5%. The stablecoin interest rates are around 8.6%.

BlockFi does not have a minimum deposit limit, but since its system is custodied through Gemini, the minimum withdrawal limit is 0.003 BTC and 0.056 ETH. Withdrawals below the minimum balance may still be processed but could take up to 30 days.

Lenders have a once-a-month free withdrawal opportunity for cryptocurrencies (BTC, ETH, LTC), stablecoins (USDC, GUSD), and beyond that, fees will be charged as shown in the chart.

BlockFi also allows fiat withdrawals via wire transfer, but currently, it only supports withdrawals of $10,000 and above, making it less suitable for retail investors.

Advantages:

• Backed by top-tier investment institutions
• High-interest rates of up to 8.6%

Disadvantages:

• Limited asset selection
• Opaque interest mechanism

(2) Celsius Network

Celsius Network, founded in 2017, is one of the fastest-growing crypto lending companies, with $300 million in deposits within 12 months and $2 billion in crypto loans. In 2018, it was named a "traditional banking disruptor" by Forbes. Celsius partners with BitGo, established in 2013, to provide users with a certain level of security, offering loans for up to 23 cryptocurrencies with interest rates ranging from 1.51% to 7.25% (as shown below). If users choose to receive interest in Celsius Network's token (CEL), they will earn higher returns (shown in green in the image).

The use cases for the CEL token include establishing user loyalty levels. Users who opt to receive interest in CEL will earn higher returns based on the amount of CEL tokens held in their wallet. The loyalty level can be checked on the wallet's personal information page.

However, the CEL token has dropped from its February high of $0.17 to $0.078 as of the cutoff date, so users considering passive income through CEL tokens should proceed with caution.

Celsius Network has established a partnership with payment processor Simplex, providing users with a fiat channel to purchase cryptocurrencies on the platform using credit or debit cards, with a 3.5% fee and only accepting USD. Unlike other lending platforms, Celsius Network can only be operated through a mobile app.

Celsius Network has not experienced any business crises so far, but its opaque interest mechanism has previously sparked controversy, with a risk of not disclosing the risk of deposit interest generation to users. Celsius emphasizes that the platform lends deposits to hedge funds, institutional traders, and exchanges to generate interest. Apart from large institutions, it also provides USD loans to users using cryptocurrencies as collateral and profits from these loans.

Advantages:

• Registered with the SEC registration
• Diverse lending assets
• High-interest rates of up to 12.3%
• Zero transaction fees (excluding credit card purchases)

Disadvantages:

• Operates only through the app
• Opaque interest source