There are several platforms that allow you to take credits in digital USD (USDC, DAI, etc.) leaving other cryptos as a backup in a higher percentage than the one borrowed (over collateralization), assuming an interest rate. For example, I could block (guarantee) 1 ETH (~ 240usd) and with that take me 150DAI. Whenever I want, I return the 150DAI + interest, and with that my ETH is unlocked. All this can be done automatically, without intermediaries and through smart contracts.
The counterpart of this system are those who provide that DAI to provide. Just as the banking system works in theory, other people deposit their DAI, which are loaned, and in exchange they receive monthly, daily or even every second interest (to see live how interest is received per second is a nice experience) . The security of the depositors is given in that the system is "overcollateralized", that is to say that there are more assets blocked as collateral than those lent. Unlike banks that work with fractional reserve.
The interest rates to take credits or lend vary according to different market circumstances. The LoanScan site is a good start to know that they pay on different platforms to lend your crypto, which can be traditional (BTC, ETH) or stablecoins (USDC, DAI). It is important to differentiate between centralized platforms, that is, the one to which the assets are transferred and they remain in their custody, from the decentralized ones, in which there is no actor or company to whom it is deposited, but everything is managed through smart contracts and there is no risk that the company founds or hacks it and the funds disappear. Another (big) difference is that in the centralized ones you will have to create an account, go through a KYC process, present documentation, etc., while in the others all this is not necessary, since it is handled directly from the wallet own.
In this LoanScan capture you can see the interest rates that the loans pay in USDC and DAI. Currently the centralized platforms are paying better, but this may vary over time. Let's take some as an example:
BlockFi
Blockfi is a US company that is dedicated to lending cryptos and allows other users to finance those loans by obtaining an interest rate in exchange. They currently pay 6% for BTC, 4.5% for ETH and 8.6% for stablecoins (USDC included). Just by creating an account on this site and depositing some USDC, they will start earning interest without doing anything else. Payments are made on the first day of the month for the accumulated in the previous month. Ex: if I deposit 100USDC, at the end of the month they will deposit 0.71USDC of interest. That amount is added to the one that one has acquiring interest, and the following month the interest will be about 100.71USDC (compound interest). One can choose whether to receive the interest in the same currency that generates it (in BTC if I have BTC and ETH if I have ETH) or all in one, at the corresponding exchange rate (for example, I can have BTC, USDC and ETH deposited and collect all interest in USDC).
Nexus
Nexo is a very similar site, based in Switzerland, where various types of cryptos can also be deposited. In this case, apart from USDC, DAI can be deposited. The rate for these stablecoins is 8%, and the interest is paid every day, at midnight in Europe.
The operation of both is basically the same, and the risks too: having funds deposited in these companies, they can always be blocked, locked, stolen, melted, etc. as in any traditional bank or broker. The pros: a much shorter learning curve, not many technicalities or complex issues to understand. You simply lend your money to a company, and it pays you interest. Creating an account is very simple, they do not have country restrictions and it is a 100% online process that only takes a few minutes.
Exchanges
There are some exchanges (Poloniex, Bitfinex among others) that also offer the possibility of lending crypto and pay interest. In this case, the funds are used by those who operate with leverage (margin trade), where they also have to collateralize their position and that reduces the risk of non-payment. Rates vary according to the number of bidders and applicants and what each is willing to receive and pay.
Do these companies share tax information by automatic information exchange treaties? I do not know, and if anyone does, it would be good to comment. The only thing that can give me a clue is the country in which each one is registered. What cannot be avoided in these cases is having to register with real personal data by presenting documentation, just like a broker or traditional bank, although much easier and faster.
Decentralized Services
They are those in which there is no company that guards and manages the loan, but rather works directly through protocols (or smart contracts) that manage everything.
Oasis Save
Maker DAO (DAO is a decentralized autonomous organization) operates the DAI coin and three services on its OASIS platform: Trade, Borrow, Save. With Oasis Save you can lock your DAIs, which are in turn loaned to others in Borrow, and get an interest in return. The interest rate is defined by the participants of this autonomous organization through a vote, and is used to incentivize or discourage the demand for DAI, and thereby maintain the 1: 1 peg with the USD. Generally speaking, if the DAI trades below USD 1, the interest rate rises, and if it operates above the dollar, it falls.
To participate, you only need to enter Oasis, log in with your own wallet and decide how many DAIs to block in Save. Interest will automatically begin to be received for every second that passes with your borrowed money. DAIs are never transferred to anyone, they are simply blocked in a smart contract, so while they are there you will not be able to transfer or use them for anything else. To exit, all you have to do is withdraw the funds, which will stop you from receiving interest.
Today DAI Save's interest rate is 0%, which makes it obviously pointless to participate, but this changes permanently. As DAI was trading above the USD (approx. 1.02) the interest rate was lowered until it reached 0%. Today it is trading at $ 1 again, so it is likely to rise again in the short term.
Aave, Fulcrum, Compound, dYdX
Just as Oasis is DAI's native platform, there are many others that work basically in the same way, operating as an intermediary (although it is just code) between lenders and debt holders.
Aave, Fulcrum and Compound are three of the main ones, although there are many others. In all three there are options to lend various cryptos, each managing its interest rate, which can be fixed or variable. dYdx is a decentralized exchange, where the loans are for traders using leverage, as described above with Bitfinex or Poloniex, although without a third party that manages everything.
At the time of writing, if you have DAI and want to lend them, you should deposit them in dYdX which offers a 3.24% rate and if you have USDC the best option would be Aave, which yields 3.68%. But this can change at any time, the best advantage of trading crypto being that moving from one platform to another can be done in a matter of minutes and at a very low cost. There are even robots that can be used to manage funds and move them to where it is most convenient at all times (we will discuss it in another chapter)
Pool Together
Another interesting project is Pool Together, which they define as a lottery in which you cannot lose. Participating in this game requires depositing DAI in a pool to which other people also contribute, then that pool is invested and an interest is obtained and at the end of the week that interest acquired is raffled among all participants with chances proportional to the amount contributed. In other words, if I have 100DAI, instead of investing it on my own, I can participate in this pool and have the possibility of earning a much larger interest generated by a larger pot. To all those who do not win the contribution is returned, hence the initial capital is never lost.
Conclusion
The most interesting thing about what is explained in this last part is that all this is managed without an intermediary person or company that you have to trust, but simply with code that is executed according to the predefined rules in the protocol. The key to these decentralized services is that they are non-custodial, that is, no one (other than oneself) is in custody of the funds, and therefore, at no time does one lose control of them or have to transfer them, they simply block them in a smart contract under your control.
As explained in the previous chapter and this one, one could pass their paper money to DAI in an operation with another person and then invest them in one of these decentralized protocols. You would happen to be receiving an interest in a currency tied to the dollar that you can reinvest, save or transfer wherever you want, without permits or papers, forms or any bureaucracy. All this operation is private, with no one who can intervene, give an opinion on whether it is correct or not, define whether you can do it according to whether you previously participated in another market or kicking because of capital flight or similar nonsense.
Across the street are centralized services, regulated by the state as financial entities, and where one must always send their personal data in order to operate. The most prudent thing in these cases in my opinion is to assume that all this information is shared with the tax authorities, either automatically or upon request. This applies to both an exchange and the lending platforms described above.
Lending allows you to lend your money safely and obtain interest in return. To put an equivalent that everyone knows, it would be something like having a bond but instead of being issued by states or companies, other people are the ones who take the debt. And you can also do it if you need liquidity and do not want to sell your assets.
Next chapter:
- Synthetix and how to get exposure to any real world asset.
