[runarberg]

I’m confused. Banks and credit unions pay interest on savings because they can loan or invest that money with higher yields then the interest they pay to the customer/member.

How exactly do cryptocurrencies finance their DeFi yields to their investors? The only way I can think of is with the money of future investors, but that is a pretty blatant Ponzi scheme.

[tyrfing]

Loans.

[runarberg]

Yeah, that still doesn’t make sense. If that were to be sustainable you would have charge higher interest on the loans then you give to savings. That means a customer has the potential of getting a loan in an alien currency which they’d have to sell to USD, and then buy some more of that alien currency to pay it back with much higher interest then if they would have just gone to a bank/credit union/loan agency.

These DeFi yields must be funded in other ways than just loans.

[tyrfing]

> If that were to be sustainable you would have charge higher interest on the loans then you give to savings.

Which is exactly how protocols like Compound work, although 'governance tokens' are also issued simply for using the system.

> These DeFi yields must be funded in other ways than just loans.

Which? DeFi stands for Decentralized Finance, which pretty much means the rules are easily available - as long as you talk about a specific example, not spherical cows.

[runarberg]

I’m sorry but I’m still confused. Who are the people taking these inconvenient, unoptimal and expensive loans, when they can get better and cheaper loans through traditional means? Something doesn’t smell right.

Also ‘governance tokens’? This smells like another term for “money from new users entering the system”. Which is precisely how Ponzi schemes work.

EDIT: I went on a little scouting mission on google (well DDG actually) to find out if I could borrow some USDT on the Compound and how much it would cost me. But I mostly came across articles explaining how you could make money by doing the opposite (buying Tether and lending it), and numerous dashboards with all sorts of hard to understand data with the prices of various cryptocurrencies and some rates I couldn’t understand. I suspect that the only people borrowing USDT are actually also speculators that are invested in the cryptocurrency market (perhaps they are trying to short it).

[tyrfing]

> Who are the people taking these inconvenient, unoptimal and expensive loans, when they can get better and cheaper loans through traditional means?

USDC is at 2.3% APR, USDT 3.78%. I think you'll find that most people cannot obtain unsecured loans that low, and the forms of collateral a bank will accept are much more limited. The biggest reason is also the reason why people like Elon Musk have massive loans: avoiding taxes on realized gains.

https://compound.finance/markets

> Also ‘governance tokens’? This smells like another term for “money from new users entering the system”. Which is precisely how Ponzi schemes work.

Sure, just like how "startups" are actually Ponzi schemes with early investors preying on the later ones. Same people owning it, too!

[runarberg]

Looking at these rates they are all over they place, but I at least understand now that this probably isn’t a ponzi scheme. I see that the borrowing rate is always higher then the savings rate, and therefor the money people are making adds up.

That said GP’s claim was that these yields are “much better "passive" interest than bank deposits or treasuries” however that doesn’t seem to be the case for all but few of the currencies. I get better interest rates at my credit union. For those currencies that are actually yielding higher interest (USDT being one of them) are also being borrowed with higher interest then loans at my credit union. So I think GP’s claim is simply wrong. Yields are only higher if you offer your money in a lending scheme with abnormally high interest.

As for who takes these loans. I don’t see that though. You need up to 2× the loan amount as collateral in an asset that is already as liquid as the cryptocurrency you are getting. Normal people would just use the money they already have and pay 0% interest, not put it up as collateral so they can borrow half that amount. I don’t even see how this could even be used as a tax evasion scheme because the collateral is equally liquid to your lending amount and should be under the same tax clause. The only use case I can see are speculators. And the only way to make these higher yields, is if a speculator makes a financial blunder, which is not sustainable either.

[lottin]

Why would anyone pay 30% interest on a loan, in an environment of negative interest rates?

[tyrfing]

Can you explain where the 30% number comes from?