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20% profit in CeFi, DeFi lives on


PARIS – Celsius and Voyager Digital were once two of the biggest names in the crypto-lending space, because they provide retail investors with sky-high annual returns, sometimes up to 20%. Now, both are bankrupt, as falling token prices – coupled with liquidity erosion following a series of rate hikes by the Federal Reserve – makes these and others promising. unsustainable profits.

Alkesh Shah, a global crypto and digital asset strategist at Bank of America.

But the easy money laundering is being welcomed by some of the world’s top blockchain developers, who say leverage is the panacea for those who want to make a quick buck – and need a systemic failure. at this level to eliminate bad actors.

Eylon Aviv told CNBC on the sidelines of EthCC, an annual conference that draws developers and cryptographers to Paris for a week: “If there is anything to be learned from this explosion, then you should be extremely vigilant. with very arrogant people.

“This is one of the common denominators among all of them. It’s like a combination of God – ‘I’m going to build the best, I’m going to be great, and I’ve just become a billionaire,'” Aviv continued. continues, currently a principal at Collider Ventures, an early-stage crypto and blockchain venture fund based in Tel Aviv.

Much of the chaos we have seen crypto markets hold back since May can be traced back to these multi-billion dollar crypto companies with centralized heads, the caller of the shock.

“The liquidity crunch has hit DeFi yields, but a number of irresponsibly central actors have exacerbated it,” said Walter Teng, Digital Asset Strategy Associate at Fundstrat Global Advisors. this”.

The death of easy money

Back when the Fed’s benchmark interest rate was near zero and government bonds and savings accounts were paying nominal returns, a lot of people turned to crypto lending platforms.

During a boom in digital asset prices, retail investors can make exotic profits by depositing their tokens on now defunct platforms like Celsius and Voyager Digital, as well as Anchor, the leading loan product ever since failed US dollar-pegged stablecoin project called TerraUSD offers an annual percentage yield of up to 20%.

The system works when cryptocurrency prices are at record highs and cash loans are virtually free.

But as research firm Bernstein noted in a recent report, the cryptocurrency market, like other risk assets, is strongly correlated with Fed policy. And indeed over the past few months, bitcoin along with other large-cap tokens fell in tandem with Fed rate hikes.

In an effort to curb rising inflation, the Fed increase its standard rate added 0.75% on Wednesday, bringing fund rates to their highest levels in nearly four years.

Technologists gathered in Paris told CNBC that siphoning off the dwindling liquidity in the system for years means the end of the era of cheap cryptocurrencies.

“We expect higher regulatory protections and necessary disclosures to support yields over the next six to twelve months, potentially dampening current high DeFi yields,” said Shah. in”.

Some platforms put customer funds into other similar platforms that yield unrealistic returns, in a dangerous arrangement where a single break consumes the entire chain. A report drawing on blockchain analysis found that Celsius has invested at least half a billion dollars in the Anchor protocol, providing up to 20% APY for customers.

“The domino effect is like interbank risk,” explains Nik Bhatia, a professor of finance and business economics at the University of Southern California. “If the credit has been extended without proper collateral or reservation, failure will mean failure.”

Celsius, which had $25 billion in assets under management less than a year ago, is also being accused of running a Ponzi scheme by paying early depositors with the money they receive from new users.

CeFi vs DeFi

So far, the failure in the crypto market has been in a very specific corner of the ecosystem known as centralized finance, or CeFi, as distinct from decentralized finance, or DeFi.

While decentralization exists along a spectrum and there is no binary designation separating CeFi from DeFi platforms, there are a few standout features that help place the platforms in either group. CeFi lenders typically adopt a top-down approach, where several powerful voices decide the financial flows and how different parts of the platform operate, and often operate within a category.” black box” where the borrower doesn’t really know how the platform works. In contrast, DeFi platforms cut out middlemen like lawyers and banks and rely on code for execution.

A big part of the problem with CeFi crypto lenders is the lack of collateral to back the loans. For example, in Celsius’s bankruptcy filing, it showed that the company had more than 100,000 creditors, some of whom lent the platform cash without receiving any collateral to back it up. agree.

With no real cash behind these loans, the whole deal depends on trust – and easy cash flow continues to keep it all alive.

In DeFi, however, borrowers put in more than 100% of the collateral to complete the loan. Platforms require this because DeFi is anonymous: Lenders don’t know the borrower’s name or credit score, nor have any other actual metadata about their cash flow or capital to base it on. decide to extend the loan. Instead, the only thing that matters is the collateral the customer can post.

With DeFi, instead of a centralized player calling shots, the exchange of coins is managed by a piece of programmable code called a smart contract. This contract is written on a public blockchain, like ethereum or solanaand it executes when certain conditions are met, negating the need for a central intermediary.

As a result, the annual returns advertised by DeFi platforms like Aave and Compound are much lower than what Celsius and Voyager once offered to customers, and their rates vary based on market forces, varying because fixing at double-digit percentages is not sustainable.

The tokens associated with these lending protocols have all increased massively in the last month, which reflects enthusiasm for this corner of the crypto ecosystem.

“Gross Yield (APR/APY) in DeFi is calculated from the token prices of relevant altcoins attributed to different liquidity pools, prices that we have seen fall by more than 70% since November.” Fundstrat’s Teng explains.

In fact, DeFi loans work more like sophisticated transactional products than a standard loan.

Otto Jacobsson, who worked in debt capital markets at a London bank for three years, said: “It’s not a mother-and-child product. You have to be quite advanced and capable of being dominant. market”. electronic money.

Teng believes that lenders that are not actively expanding their decentralized loans or, since liquidating their counterparts, will remain solvent. For example, Michael Moro of Genesis came out to say they have cut the risk of anti-party significantly.

“The interest rates offered to creditors will be compressed,” says Teng. “However, lending is still a hugely profitable business (second only to exchange trading) and the prudent risk managers will survive the crypto winter.”

In fact, Celsius, despite being a CeFi lender himself, also diversified its holdings in the DeFi ecosystem by depositing some of its cryptocurrencies into decentralized finance platforms. this medium as a way to make a profit. A few days before declaring bankruptcy, Celsius started its much return contracts with DeFi lenders like Maker and Aave, to unlock its collateral.

Andrew Keys, co-founder of Darma Capital, which invests in applications, developer tools, and protocols around ethereum, explains: “This is really the biggest advertisement to date on how to do this. Smart contract works.

Keys continued: “The reality is Celsius is returning Aave, Compound, and Maker before humans explain smart contracts to humanity.” “These are non-negotiable persistent software objects.”





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