Turn to high-yield crypto for better interest rates

There has been much talk about cryptocurrency as a hedge against inflation, but it is now becoming clear that this is not the sole reason for entering the crypto ecosystem – it also has the potential to offer high-yield rewards and be an alternative to low interest rates. This is especially important as bank interest rates have remained at their lowest point for some time and there doesn’t seem that much movement is likely in the near future.

DeFi has made earning interest on crypto a reality

This new benefit has largely come about with the growth of DeFi products over the past year. The summer of 2020 has been called ‘the DeFi summer’ by some, and since its explosion last year, “the optionality has only increased, along with the amount of “money legos” that are being combined in different ways,” as Benjamin Powers writes at Coindesk.

Consensus 2021 talks up interest rates in crypto ecocsystem

This week Consensus 2021 is in full flow, with lots of interesting ideas coming out of it. For example, Felix Fen, co-founder and CEO of Set Protocol; Zac Prince, CEO of BlockFi; and Stani Kulechov, Chief Executive Officer of Aave, formed a panel to discuss “how people seeking out higher yield on their crypto assets can access a variety of services, and what the tradeoffs there can be.”

Prince said he saw real value in using interest rates to translate something really powerful that’s happening in the crypto ecosystem in the terms that everybody is already familiar with. What exactly does he mean by that?

He said: “If you try to explain how the blockchain works, or why Bitcoin has value, or some of the other more complex and in-the-weeds topics to folks when they’re on their journey into the crypto ecosystem, they might struggle to wrap their heads around it. Everybody knows what an interest rate is. And everybody knows that earning 8.6% on something is better than earning 0.2%.” Furthermore, he quite rightly points out that traditional banks are a long way off “from being ready to finance the crypto ecosystem in a meaningful way.”

Kulechov spoke about how the Aave community governs the parameters of the interest rates, which are then determined by supply and demand and are transparent. “The fact that everyone can participate in affecting what the interest rate will be in these markets is a very big thing because, traditionally, big interest-rate movements have been decided by the banking industry; for example, by a few people sitting down with a room in London,” Kulechov explained.

Fen talked about the variable nature of interest rates. He suggested that users evaluate the risk of a protocol in terms of its insolvency and take that into account when considering where to allocate funds. He also emphasised evaluating the protocol’s community when making a decision. “How stable is a parameter selection, how conservative or aggressive is a community in terms of its parameter selection, and how decentralized is the protocol overall?” he said. “I think those are some of the elements that we look at when thinking about yield, and so not all interest rates should be just looked at as a headline number. One has to dig a little bit more into this.”

Has Ethereum’s time to shine arrived?

If you compared the crypto market to the music charts, it would be fair to say that no artist has ever managed to hold the No.1 position for as long as bitcoin has. Ethereum (ETH) meanwhile, has been holding the No.2 spot for such an extended period that is was doubtful this might ever change. Until now!

Those who are ETH holders and supporters have been disappointed that this blockchain has had to be content with playing second fiddle to BTC for so long. Surely its position as the bedrock of DeFi must indicate it is no poor relation? Now it seems that ETH is on a new trajectory into the limelight, something its fans welcome.

Everybody talks about bitcoin

It is true that BTC has been most people’s entry point into crypto, with the more adventurous diversifying into ETH and other altcoins after time. As Katharine Wooller writes, “I am interested to note that most of the more vociferous fans of crypto from the traditional banking industry (i.e. Blackrock, Citi, Goldman Sachs, JP Morgan) tend to limit their comments to Bitcoin.” This is also true of the MSM, when they do write about crypto – it’s all about the bitcoin, even though the journalists assigned these stories still appear to know very little about cryptocurrencies in general.

The market tells a very different story. This year and last, ETH ‘wiped the floor’ with BTC, as Wooller says. “In 2020 the appreciation was more than double – Bitcoin’s gains were a non-too shabby-240% vs Ethereum’s stratospheric 450%.”

Furthermore, ETH has only fallen below its initial price against BTC for the first five months of its existence in 2015.

Yes, BTC’s market cap does dwarf that of ETH, but that’s not the only data to look at. Since January 2020, Bitcoin’s dominance has fallen from 69% to 56% whilst Ethereum’s has risen from 7% to 12%. 

Ethereum has a great use case

The use case is another aspect to consider. BTC has become widely accepted as a store of value and “thus heir apparent to our current economic system.” Wooller correctly states. Ethereum’s utility on the other hand is more complex, and perhaps less comprehensible for retail investors. However, its smart contracts have the powerful potential to provide us with a huge variety of innovations in finance, gambling, gaming, advertising, identity management, and supply chain. As Wooller says, “Personally, I see Ethereum’s potential market as greater than Bitcoin’s albeit hard to explain to someone new to the industry!” I think most ETH owners would agree with that.

It is time that not just the crypto media, but also the MSM, gave ETH and the Ethereum blockchain more oxygen, so that the public can understand its potential. It has an excellent spokesperson in its creator, Vitalek Buterin, unlike BTC, which only has the mythical Satoshi.

I agree with Wooller when she says, “Recently Ethereum has broken two all-time highs in quick succession this April. I would expect, therefore, in the medium term to see more investors and treasuries alike increasing their Ethereum holdings.”

It’s time to give Ethereum the limelight it deserves.

Cardano’s extraordinary 2021 success

While Bitcoin and Ethereum still hold the top spots on the crypto leader board, Cardano (ADA) was the top performer in terms of percentage gains, with a staggering 560% return in Q1. It is now the No. 5 cryptocurrency by market capitalization, according to Messari data.

ADA is the native token for the smart-contract blockchain Cardano, and its value tripled in February as traders bet on the success of the so-called “Ethererum Killers.” Ethereum as you know dominates the smart contract space and currently most DeFi projects are on its blockchain. This February success was followed by Coinbase exchange listing ADA in March, making it available to both institutional and retail members.

Significantly, Cardano became a multi-asset chain following its hard fork on 1st March this year, Named ‘Mary’, the hard fork allows users to create tokens that run on Cardano natively, just as ADA does. This is something that sparked a great deal of interest in Ethereum. When it enabled new tokens to be made on its platform, it was one of the first big use cases that caught on for Ethereum. It also made possible 2017’s multi-billion dollar initial coin offering splurge.

Enabling new tokens is a step on the path to full smart-contract functionality, so no wonder Cardano’s CEO Charles Hoskinson called the hard fork “historic.” Hoskinson, who founded IOHK, which runs Cardano, was an Ethereum and BitShares co-founder.

And, on 3rd April, IOHK announced that a further milestone had been reached with the Cardano blockchain now completely decentralized. This means that the community, or the network’s 2200 stake pool operators, are now exclusively responsible for block production on the network. To put this in perspective: Bitcoin’s blockchain, “is largely in the hands of the ten most prominent Bitcoin mining pools, which account for 85% of the network’s block production,” Samyuktha Sriram reports at Yahoo! Finance.

Do the numbers matter? Yes. Diversifying the block production across a larger number of people increases the security of the blockchain. It’s a big part of the argument for decentralisation. Cardano’s product director at IOHK, “Achieving decentralization of block production is significant not just for Cardano but also the wider blockchain industry.” The next steps for Cardano will be decentralization of the other two elements – governance and network. The governance is already in the pipeline with IOHK’s Project Catalyst, an $80 million fund that was funded by the community, which in turn votes on proposals for the improvement of the network.

Whilst Ethereum tends to dominate DeFi news, Cardano’s success in 2021 suggests that it is going to be a strong player in the smart contract sector. If you haven’t considered buying Cardano’s ADA before, perhaps now might be the right time to dip your toes in.

Persistence makes Staking easier for asset managers

A significant number of institutional investors are still getting to grips with investing in bitcoin, in crypto-friendly Switzerland, asset managers are already looking at staking in new generation blockchain networks.

Last week, Tavis Digital, a firm based in Zurich, announced its partnership with Singapore-based Persistance to provide an opportunity for traditional firms to explore token staking and DeFi. Tavis Digital is a spin-off of Tavis Capital, an asset manager regulated by the Swiss Financial Market Supervisory Authority (FINMA), which has some $1.07 billion in managed assets. Once again, agile countries, such as Switzerland and Singapore, are ahead of the pack in offering investors opportunities in cryptocurrencies and related apps.

Using white label

To assist clients, they are being offered white label products. Tushar Aggarwal, CEO and co-founder of Persistence explained why they are doing this: “We white-label our services to institutional clients and stakeholders who do not know how to run a validator node both on the software side as well as on the hardware side. It’s not a trivial thing to run a validator node, you need almost close to 100% uptime otherwise you get slashed.”

Interest with Proof-of-Stake (PoS) networks

Staking rewards are a new thing for institutional investors, and are much like interest on other investments. By using Persistence, investors can access proof-of-stake (PoS) networks such as Cosmos, Polygon (formerly Matic), NEAR, SKALE, Terra and others. The partnership with Tavis, indicates that traditional funds are now looking beyond bitcoin (BTC) as the ‘only’ crypto asset class.

What is PoS?

A PoS system “proposes to solve the “nothing at stake” problem by apportioning some skin in the game,” as Coindesk says. It resolves the intense energy use of bitcoin transactions and the ‘nothing at stake’ problem. Essentially, when you stake, you purchase and hold onto a blockchain network’s tokens, that then gain you rewards for validating the network’s transactions. However, if a validating node goes offline or is unresponsive, then those who have staked may experience losses. This is known as ‘slashing’.

Participating in staking networks is complex, which is why support is needed. Persistence provides a complete handholding service for firms that don’t want to set up dedicated blockchain teams. Presently, the staking hosting service has some $260 million in assets under delegation, mostly on Cosmos. 

Aggarwal commented, “With a backdrop of most parts of western Europe now at 0% interest rates, or negative interest rates in certain jurisdictions, there is an increased demand from institutional folks to generate fixed income yields,” and staking is looking like the way to achieve better rewards.