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Interest Rates in DeFi Applications ...

DeFi interest rates jump amid coronavirus
CONTENT

  • Coronavirus crashes rates everywhere except DeFi

  • Cryptocurrency is a risk, and you have to pay for the risk

  • The demand for stablecoins made the situation worse

International consortium of news organizations developing transparency standards.

The cryptocurrency market crashed in mid-March along with other risky assets as the coronavirus pandemic swept across Europe and began spreading rapidly into the United States. Governments around the world have turned on printing presses at full capacity, promising unprecedented incentives for a sinking economy.

Interest Rates in DeFi Applications ...

Since then, prices for key digital currencies have won back some of the losses and stabilized. However, the collapse exposed the industry’s vulnerabilities. In particular, the crypto lending market came under severe pressure due to the massive liquidation of collateral.

Analysts from the American cryptocurrency platform Coinbase figured out why the coronavirus has collapsed rates everywhere except for decentralized financial applications (DeFiDecentralized finance (DeFi) is financial services built on the basis of blockchain technology that offer users access to an open, efficient and … More).

Volatility and risk

Digital currencies are much more volatile than cash and much more risky than other forms of raising debt capital. And the higher the risk, the higher the rates charged by the lenders. The global financial crisis and widespread panic have only exacerbated the situation, provoking a massive flight from risks.

Earlier, the editorial staff of BeInCrypto reported that the DeFi market lost over $ 330 million in a day due to the market crash. The system turned out to be so overloaded that participants could not promptly deposit funds and respond to extreme volatility. As a result, several major players were on the verge of collapse, and the community even started talking about the need to introduce forced stops, similar to those that exist on traditional exchanges..

This situation clearly demonstrates the risks that exist in the DeFi industry as it is today. And you have to pay for the risk.

Interest Rates in DeFi Applications ...

 

Stablecoins fueled demand

The volatility of major coins has provoked an increase in demand for stablecoins, coins pegged to fiat currencies or real assets (for example, to the US dollar, euro or gold).

This trend could also be one of the reasons for the rise in interest rates in the DeFi segment, notes Coinbase. Stablecoins are very easy to exchange for bitcoins and other digital money, which means they are ideal for those trying to make money on short-term trades in high volatility..

Thus, when the market crashed, stablecoins were trading at a premium. Moreover, as stablecoin issuers began printing new batches to meet the growing demand, exchange activity skyrocketed as traders flocked to the lending markets to borrow stablecoins and trade with borrowed funds without selling their digital assets. In this regard, the volume of assets placed in stablecoins on the market has significantly increased..

But they were in for a failure: popular lending platforms such as Compound, Dharma and Dy / Dx have a narrow specialization and their own “risks of smart contracts,” writes Coinbase. Basically, DeFi platforms are built on smart contracts that are potentially vulnerable to hacks and abuse. And here again the principle applies the higher the risk, the higher the rate.

A light in the end of a tunnel

Coinbase believes that DeFi interest rates will eventually decline as the crypto industry matures and crypto services proliferate.

Interest Rates in DeFi Applications ...

“Traditional lending platforms will start accepting digital coins as collateral, stablecoins will go mainstream and enable more efficient interaction between crypto and fiat. DeFi applications, in turn, will also become more mature and reliable. “.

It is hoped that this will happen before the next “black swan” arrives..

Disclaimer

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