[oarabbus_]

Like the OP said, UST was paying 19.5% to depositors. In contrast borrowers were only charged ~13%. A regulated bank could choose to do this if they really wanted to.

So the main difference is really that banks run a sustainable model by charging borrowers more than they pay depositors (who are lenders in the fractional reserve model); by orders of magnitude. Being paid out more than is put in should've been a massive red flag to anyone who entertained the Luna ponzi.

[starfallg]

To add to that, financially, it makes no sense to borrow at such a high interest rate unless you have issues with obtaining credit traditionally.

There is a reason why payday loans charge extortionate interest. Their bad loan rate is usually sky high. Their returns are substantially lower.

Basically whether it works or not depends on if they could print money that holds value. Obviously they couldn't.

[raesene9]

I would guess that in many countries a regulated bank offering more to depositors than they charged borrowers (without some kind of strict limits on the amount per customer) would get a visit from their regulators quite quickly to understand how this was sustainable and in-line with Banking regs.

In the UK at least retail bank deposits are guaranteed up to £85k per account, so there's a real incentive for the banking industry to police their member as if one fails, they'll all take a hit.

[tialaramex]

> In the UK at least retail bank deposits are guaranteed up to £85k per account, so there's a real incentive for the banking industry to police their member as if one fails, they'll all take a hit.

As you wrote it this doesn't make a lot of sense, so I'll explain, in the process I'll actually fix some errors too.

The UK government protects up to £85k per person per banking license. So if you have £40k in accounts at each of four brand name banks but they're actually all part of one huge corporation "Big Banks Inc." with a single license then the government only protects £85k total, 'cos that's just one license.

Unlike FDIC this is not insurance, instead it's a Last Man Standing system. If some banks fail, the government re-coups its loss over time from all remaining licensed banks. So for example if Santander fails, the costs of fixing that problem land on HSBC and other enormous banks. As indicated this produces an incentive to "police" your rivals because if you allow them to go under by not warning of risky practices, you're going to eat that cost yourself.

As an individual in the UK, if the £85k isn't enough you can invest in the NS&I which is a bank owned by the government. Unlike commercial banks NS&I isn't lending your savings to some unknown (to you) borrowers instead they're effectively lending everything to the government, which would otherwise need to borrow that money commercially (ie issue bonds) so it knows what that's worth. The rates aren't great but since it's owned by the government there aren't a lot of scummy for-profit shenanigans like "introductory" rates that then zero out unless you're constantly opening new accounts and moving your money. Since NS&I is owned by the government who also print the money your savings are denominated in, it can't go bankrupt. The money could become worthless, but in that case it doesn't really matter who you banked with and the whole country is fucked anyway.

[gpderetta]

Also for some NS&I accounts interest is tax free because technically they are lottery (although with a relatively predictable return for large savings).

Mind, the interest is currently so low that it doesn't really make much of a difference.

[tialaramex]

The rationale for Premium Bonds isn't really the tax it's the fact that people like gambling.

It turned out that persuading Aunt Sally to buy the new baby £100 of investment that will earn interest and might be worth something when the baby goes to college is hard - whereas Aunt Sally is much more interested in buying the baby £100 of scratch-offs with a tiny chance it wins big but most likely it gets nothing. This is before scatch-offs were legal in the UK as they are now but NS&I tweaked the numbers to offer a product that is (from their point of view as a bank with many savers) just a bond, but from the individual saver's point of view works like a lottery.

https://www.nsandi.com/products/premium-bonds

[Closi]

It’s often the tax, my parents have premium bonds and cite the tax benefits as they have maxed their ISA.

[charcircuit]

>how this was sustainable

Why does it need to be sustainable? The APR can simply lower once the high APR is no longer sustainable.

[raesene9]

If you offer more to depositors than you charge borrowers, it's never sustainable you're making a loss.

If I make £3000 in interest from borrowers on a set of money and give away £5000 in interest to depositors of those same funds, even before I account for the costs of operations (systems don't develop and run themselves) I'm making a loss.

You seem to be suggestion luring people in with a high rate and then dropping it later. That only really works if there's some kind of lock-up to prevent all your depositors fleeing as soon as you lower the rates again.

If you lock-up funds, generally you have to guarantee the rates for the period of the lock-up otherwise that's a bait-and-switch, which is generally going to get you into legal problems :)

[rawoke083600]

>If you offer more to depositors than you charge borrowers, it's never sustainable you're making a loss.

Only if the amounts being borrowed and loaned are exactly the same.

I.e 20% on $100 is less than 10% on $1000

[charcircuit]

>If you offer more to depositors than you charge borrowers, it's never sustainable you're making a loss.

Like a sibling comment you are not accounting for the profit that comes from the collateral.

Maybe a nondefi example would help. Imagine if a landlord got a loan using a rental property as collateral. In this example the lender will now get the payments of rent. Now the lender makes money from both the interest rate on the loan and from the renters of the property. Depending on the demand for the rental property the amount of rent you may collect can fluctuate. This means that some months you may make more money than others. So in order to sustain a certain level of profits the amount of rent you collect will need to be worth a certain amount.

[stephen_g]

That’s not how it works in the real world though. A landlord takes out a loan at a particular interest rate, and makes repayments based on that. The bank doesn’t “get” the rent, they get the repayment that ideally for the landlord is less than the rental income, unless they’re relying on capital gains. The collateral only comes into account if the borrower defaults, for the lender to sell to make back what they were owed. Otherwise they have no claim on anything to do with the collateral - neither the rent nor capital gains.

[charcircuit]

I was just trying to make up some sort of example where you can gain income by holding on to someone's collateral. I wasn't trying to say how something typically works.

[Closi]

> Why does it need to be sustainable? The APR can simply lower once the high APR is no longer sustainable.

At which stage, people with savings withdraw funds because of the lower interest rate and the Ponzi scheme collapses.

[charcircuit]

>the Ponzi scheme collapses

The only thing that collapses would be the APY. Everyone can still withdraw their full deposit.

[Closi]

Their deposit has been loaned. No free lunch here…

[UncleEntity]

As in they lose money on every loan but make it up in volume?

The irony here is that’s supposed to be a joke and not an actual business plan.

[charcircuit]

I think you missed a key detail. The collateral for taking out a loan earns staking rewards that get distributed to the depositors. The amount of money staking rewards are worth can fluctuate too depending on the state of the project / cryptocurrency ecosystem.

[Tenoke]

A lot of businesses operate at a loss for the sake of growth early on, including a lot of the unicorns from the last decade or more.

[SAI_Peregrinus]

Yes, but most of them have a business plan that doesn't involve taking a loss, once they've reached a certain scale. And while they're taking that "loss" it's not usually due to revenues being below the cost of goods sold, it's because they're spending all profits + some investor money to grow. Many (though not all) can simply stop growing and be instantly profitable. Businesses that sell you $10 for $5 tend to fail as soon as they run out of capital, because they've got no path to profitability.

[jannes]

So you are saying it was sustainable at some point?

[charcircuit]

Yes, it was sustainable for a period of time.

[Jensson]

The most likely reason to pay much higher interest on money deposited than money they lend out is to steal the deposited money. It isn't illegal to do it, but it is a huge red flag which is why it would warrant an inspection.

Smart contracts doesn't save you here, since the deposit happened when you bought their crypto coins, not when you signed the smart contract.

[Vespasian]

I wonder how they verified borrowers identity.

Stealing the deposits would require

a) Verification happens without any government id (I assume this is true) b) depends somehow on the bank / smart contract authors

Then it would be trivially easy to generate huge amount of "borrowers" who simply "default" on their "loan".

[Grustaf]

The sky high interest is its sole raison d'être

[UncleMeat]

How do they prevent people from borrowing to deposit? If I own two wallets, would I be able to borrow some coins, transfer them to my other wallet, and then deposit them so I'm netting 6.5% for free?

[jboy55]

Well, the rigorous KYC regulations and policies mean they can ensure every person owns just one wallet... /s