Decentralised Finance - The Definitive Guide
In this guide, we explore cryptocurrency savings accounts, crypto-backed loans and staking, and the platforms that offer such products.
Updated 8 August 2023
As the cryptocurrency and decentralised finance sector mature, new investment products that mirror those of traditional finance emerge. In this guide, we explore cryptocurrency savings accounts, crypto-backed loans and staking.
Warning:
What is decentralised finance?
Although cryptocurrencies are highly volatile and speculative assets, the prospect of a decentralised and transparent financial system has advantages and is relevant whether you’re interested in using these services or not. Bitcoin was born in the wake of the 2008 financial crisis. The first-ever record in the blockchain contained a custom message, “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks” - referring to this article from The Sunday Times. Things have moved along since then.
To help explain the current decentralised finance market, we cover:
1. Decentralised finance products
2. Decentralised finance companies 3. Frequently Asked Questions
Know This: Learn more about blockchain
This guide assumes you’re already familiar with the concept of blockchain and cryptocurrencies. If these are new topics for you, we recommend starting with the following guides:
Summary
As the cryptocurrency and decentralised finance sector mature, new investment products that mirror those of traditional finance emerge. In this guide, we explore cryptocurrency savings accounts, crypto-backed loans and staking.
Warning:
- Decentralised finance is still in its infancy and remains lightly regulated, just like the rest of the cryptocurrency sector.
- We strongly suggest you remain vigilant when exploring new financial products, especially in this environment.
- As with any financial product, never invest more than you can afford to lose.
What is decentralised finance?
- Decentralised finance, as the name suggests, is a financial system that is decentralised in nature.
- The concept evolved from blockchain-based cryptocurrencies like Bitcoin, Ethereum and many more.
- Besides making peer-to-peer transfers using a decentralised network, blockchain technology has been harnessed by decentralised finance companies to issue stablecoins, collect deposits, pay interest, and write loans.
Although cryptocurrencies are highly volatile and speculative assets, the prospect of a decentralised and transparent financial system has advantages and is relevant whether you’re interested in using these services or not. Bitcoin was born in the wake of the 2008 financial crisis. The first-ever record in the blockchain contained a custom message, “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks” - referring to this article from The Sunday Times. Things have moved along since then.
To help explain the current decentralised finance market, we cover:
1. Decentralised finance products
2. Decentralised finance companies 3. Frequently Asked Questions
Know This: Learn more about blockchain
This guide assumes you’re already familiar with the concept of blockchain and cryptocurrencies. If these are new topics for you, we recommend starting with the following guides:
- The Beginner's Guide to Everything Bitcoin and Blockchain
- Guide to Bitcoin Mining
- Bitcoin Wallets Guide
Summary
- Decentralised finance, often abbreviated to DeFi, is an emerging business model that provides supplementary services to the cryptocurrency community.
- Decentralised finance comes in different formats, known as decentralised applications, often abbreviated to DApps. Besides the ledger being publicly visible on the blockchain, the application’s source code is also transparently shown in a smart contract.
- Exchanges like Coinbase, Kraken and Binance offer DeFi services alongside their core marketplace to increase value to users. Specialised DeFi platforms like BlockFi and Nexo have launched and operate similarly to digital banks.
- Stablecoins such as USDC and GUSD function like decentralised e-money and have introduced stability to the cryptocurrency ecosystem, lowering the volatility risk of holding cryptocurrency assets.
- The core products associated with decentralised finance are high-interest paying savings accounts and low-interest loans when providing cryptocurrency as collateral.
1. Decentralised finance products
Decentralised finance revolves around decentralised applications to ensure that the transactions are transparent and the terms, conditions, and obligations of the financial service provider and receiver. Here is an introduction to some of the most popular decentralised finance products.
Stablecoins
A stablecoin is a cryptocurrency issued by an institution, such as a cryptocurrency exchange, and is pegged 1:1 to an underlying national currency, such as US dollars, euro or pound. The issuer is responsible for issuing and redeeming the stablecoin and safeguarding the fiat money.
Popular examples of stablecoins include:
Stablecoins play an important role in the cryptocurrency ecosystem. They allow users to limit exposure to price volatility without having to cash out of the ecosystem completely, which typically involves high transaction fees.
Popular examples of stablecoins include:
- Tether (USDT)
- USD Coin (USDC)
- Binance USD (BUSD)
- Gemini USD (GUSD)
Stablecoins play an important role in the cryptocurrency ecosystem. They allow users to limit exposure to price volatility without having to cash out of the ecosystem completely, which typically involves high transaction fees.
Crypto-backed loans
Cryptocurrency holders in need of cash can take out loans using their crypto as collateral. A long term investor can access liquidity through a low-interest short-term loan without selling their coins. The advantage of this arrangement is benefiting from potential upside price movements. When the principal and interest are repaid, the borrower gets their cryptocurrency back. Crypto-backed loans are typically paid in stablecoins, meaning the borrower needs to convert to fiat.
If a loan is not repaid, the collateral will be liquidated. Typically, only 50% of the collateral value is lent, allowing room for depreciation too. If the value of the collateral falls substantially, the lender can request additional funds or liquidate the asset to prevent loss.
Because crypto loans are backed by collateral, they come with low-interest rates. The lowest interest rates start at 4.5% APR for medium-term loans and 0.15% per day for short term loans.
If a loan is not repaid, the collateral will be liquidated. Typically, only 50% of the collateral value is lent, allowing room for depreciation too. If the value of the collateral falls substantially, the lender can request additional funds or liquidate the asset to prevent loss.
Because crypto loans are backed by collateral, they come with low-interest rates. The lowest interest rates start at 4.5% APR for medium-term loans and 0.15% per day for short term loans.
Interest paying crypto savings accounts
Cryptocurrency holders looking to put their money to work can deposit their coins to an interest-paying savings account. Although the loans are secured with cryptocurrency collateral, loan issuers are looking for liquidity, especially stablecoins, to pay out loans to borrowers. Since most of the loan counterparty risk is covered by the cryptocurrency collateral, the lender can give higher interest payments to depositors. Depending on the deposit terms, interest payments can be as high as several per cent per year. Considering the low-interest environment at commercial banks, earning interest on stablecoins looks attractive.
CoinMarketCap provides a section dedicated to crypto interest rates showing rates for depositing and borrowing.
CoinMarketCap provides a section dedicated to crypto interest rates showing rates for depositing and borrowing.
Smart contracts
A smart contract is an evolutionary step up from a transactional blockchain. While the Bitcoin blockchain offers an immutable ledger of transactions, other systems, like the Ethereum network, support smart contracts. A smart contract is a script embossed on a public ledger. Instead of moving units of accounts from a-to-b, it can host details of an agreement between various parties. As it's a script, complex functionality can be developed to execute an agreement automatically. Loans and investments can be written into smart contracts to eliminate counterparty risk when certain conditions are met, such as time passing or repayments being complete; the script will settle obligations, such as paying interest or returning collateral.
Staking
Proof of stake is a mechanism practised by some blockchains to select validators to process blocks of transactions and attach them to the chain. The concept is the validator, also known as a miner, is credited with the success of processing a block simply by having the most tokens. The logic is the miner with the most tokens is the most committed to supporting the network. Staking is the activity of contributing tokens of a particular cryptocurrency, such as Cardano, to a shared pool. The mining rewards are distributed proportionally.
2. Decentralised finance companies
There are a handful of reputable decentralised finance companies providing services to New Zealanders. Although none of the companies listed below are registered financial services providers (FSPR) in New Zealand, they are licensed or registered elsewhere, typically in the United States. Most cryptocurrency companies require regulation for the activities involving legal tender, in particular, processing payments and lending money. Cryptocurrency-related activities are typically unregulated since most jurisdictions don’t recognise them as financial instruments.
Binance
Binance is the world’s largest cryptocurrency exchange by trading volume. Over the years, the company has been adding new products and services to complement its core business. Binance has even gone as far as to build proprietary blockchains; Binance Chain and Binance Smart Chain. They offer:
1. Interest account
Binance offers fixed and flexible savings accounts. Flexible savings accounts have no restriction on adding or removing coins from the account, and interest starts accruing from the second day. Locked savings require locking coins for a predefined period; possible intervals are 7, 14, 30 and 90 days. The longer the lock-up period, the higher the interest paid. Flexible savings are available for dozens of coins, with APY rates ranging from 0.15% up to 10% depending on the coin. For fixed deposit savings, only three stablecoins are offered.
1. Interest account
Binance offers fixed and flexible savings accounts. Flexible savings accounts have no restriction on adding or removing coins from the account, and interest starts accruing from the second day. Locked savings require locking coins for a predefined period; possible intervals are 7, 14, 30 and 90 days. The longer the lock-up period, the higher the interest paid. Flexible savings are available for dozens of coins, with APY rates ranging from 0.15% up to 10% depending on the coin. For fixed deposit savings, only three stablecoins are offered.
Coin |
Flexible (APY) |
30-days Fixed (APR) |
90-days Fixed (APR) |
Bitcoin (BTC) |
1.20% |
N/A |
N/A |
Ethereum (ETH) |
0.87% |
N/A |
N/A |
Tether (USDT) |
5.79% |
6.66% |
7.00% |
Binance USD (BUSD) |
5.05% |
6.66% |
7.00% |
USD Coin (USDC) |
5.05% |
5.66% |
6.00% |
2. Crypto backed loans
The Binance loan facility offers dozens of cryptocurrencies to borrow and provide as collateral. For example, you could borrow Litcoin by providing Ethereum as collateral. Interest rates and loan limits depend on the coin borrowed and loan duration. Interest is calculated hourly, and there is no penalty for early repayments. Loan durations are 7, 14, 30, 90 & 180 days. If a loan is overdue, interest is charged at triple the hourly rate. The most you can borrow is 70,000 USDT (NZ$96,600). Binance requires the loan value plus 60-65% for collateral. Interest rates range from 0.05%-.0176% per day.
3. Staking and liquidity pooling
Besides decentralising traditional savings and loans facilities, Binance offers more complex passive investing products. The Binance Liquid Swap lets users earn interest and rewards by providing liquidity to support market-making activities on the exchange.
Binance Staking pays users a reward for locking up their tokens for a fixed period. When staking, the coins locked up aren’t borrowed to other customers; staking is an essential characteristic of blockchain networks using the proof-of-stake consensus algorithm. To be a successful miner under the proof-of-stake algorithm, miners need to have the most tokens for the longest time to be rewarded.
The Binance loan facility offers dozens of cryptocurrencies to borrow and provide as collateral. For example, you could borrow Litcoin by providing Ethereum as collateral. Interest rates and loan limits depend on the coin borrowed and loan duration. Interest is calculated hourly, and there is no penalty for early repayments. Loan durations are 7, 14, 30, 90 & 180 days. If a loan is overdue, interest is charged at triple the hourly rate. The most you can borrow is 70,000 USDT (NZ$96,600). Binance requires the loan value plus 60-65% for collateral. Interest rates range from 0.05%-.0176% per day.
3. Staking and liquidity pooling
Besides decentralising traditional savings and loans facilities, Binance offers more complex passive investing products. The Binance Liquid Swap lets users earn interest and rewards by providing liquidity to support market-making activities on the exchange.
Binance Staking pays users a reward for locking up their tokens for a fixed period. When staking, the coins locked up aren’t borrowed to other customers; staking is an essential characteristic of blockchain networks using the proof-of-stake consensus algorithm. To be a successful miner under the proof-of-stake algorithm, miners need to have the most tokens for the longest time to be rewarded.
BlockFi
BlockFi is an alternative banking platform providing credit services revolving around blockchain technology and crypto-assets. The company is licensed or registered to provide lending and money transmission services in most US States. Despite only having official authorisation in the United States, the company offers services worldwide, including New Zealand, despite some limitations on features like wire transfers. BlockFi is backed by large fintech venture capital firms like Valar Ventures, Galaxy Digital, Fidelity and Coinbase Ventures. BlockFi:
1. Interest savings account
BlockFi pays one of the highest interest rates on Bitcoin deposits, paying up to 5% APY on deposits up to 0.5 BTC. The interest rate falls on higher crypto deposit tiers. Besides Bitcoin, BlockFi pays up to 8.6% APY for BUSD, USDC and GUSD deposits. Although BlockFi supports coins, it offers better rates and doesn’t have additional requirements for accessing better rates.
2. Crypto backed loans
BlockFi accepts Bitcoin, Litecoin, Ethereum and PAXG as collateral, at a loan to value ratio of 50%, meaning you can borrow up to 50% of the value of your crypto. The loan is paid in GUSD or USDC, and interest rates are as low as 4.5% APR with no early repayment penalties.
1. Interest savings account
BlockFi pays one of the highest interest rates on Bitcoin deposits, paying up to 5% APY on deposits up to 0.5 BTC. The interest rate falls on higher crypto deposit tiers. Besides Bitcoin, BlockFi pays up to 8.6% APY for BUSD, USDC and GUSD deposits. Although BlockFi supports coins, it offers better rates and doesn’t have additional requirements for accessing better rates.
2. Crypto backed loans
BlockFi accepts Bitcoin, Litecoin, Ethereum and PAXG as collateral, at a loan to value ratio of 50%, meaning you can borrow up to 50% of the value of your crypto. The loan is paid in GUSD or USDC, and interest rates are as low as 4.5% APR with no early repayment penalties.
Crypto.com
Crypto.com is a decentralised finance platform offering a wide range of services. The company offers loans, savings accounts, crypto payment acquisition, VISA debit cards connected to a crypto wallet and a non-fungible token marketplace. Crypto.com has a strong leadership team. The company is PCI DSS and ISO 27001 & 27701 certified, all of which are important accreditations for companies dealing with cardholder information and other sensitive data, such as cryptocurrency keys. Crypto.com has launched its own blockchain and a native cryptocurrency called CRO, currently worth NZ$0.222 each. Products include:
1. Interest savings account
Crypto.com offers one of the highest paying cryptocurrency savings accounts. For USDC deposits, the company pays up to 14% per annum and pays interest weekly. Crypto.com interest rates depend on a few factors: the token, duration, deposit amount, and how much CRO you will buy and hold.
The Crypto.com website has a convenient calculator tool. Here are two interest rate examples:
1.5% p.a.
2. Crypto backed loans
Crypto.com allows you to provide loan collateral in several cryptocurrencies, including Cordano (ADA), Polkadot (DOT), and classics like Bitcoin and Ethereum. Loans are paid out in stablecoin, with a loan to value ratio of 50%. The interest rate is 12% p.a. It’s possible to reduce the loan interest rate to 8% p.a. by staking the equivalent of US$40,000 (NZ$55,262) in CRO token, which seems to defeat the objective of getting a loan.
1. Interest savings account
Crypto.com offers one of the highest paying cryptocurrency savings accounts. For USDC deposits, the company pays up to 14% per annum and pays interest weekly. Crypto.com interest rates depend on a few factors: the token, duration, deposit amount, and how much CRO you will buy and hold.
The Crypto.com website has a convenient calculator tool. Here are two interest rate examples:
1.5% p.a.
- Deposit token = Bitcoin (BTC)
- Deposit = US$10,000 (NZ$13,815)
- Deposit term = Flexible
- CRO Stake = US$1 (NZ$1.38)
- Deposit token = USD Coin (USDC)
- Deposit = US$10,000 (NZ$13,815)
- Deposit term = 3-months
- CRO Stake = US$401 (NZ$554)
2. Crypto backed loans
Crypto.com allows you to provide loan collateral in several cryptocurrencies, including Cordano (ADA), Polkadot (DOT), and classics like Bitcoin and Ethereum. Loans are paid out in stablecoin, with a loan to value ratio of 50%. The interest rate is 12% p.a. It’s possible to reduce the loan interest rate to 8% p.a. by staking the equivalent of US$40,000 (NZ$55,262) in CRO token, which seems to defeat the objective of getting a loan.
Frequently Asked Questions
Are there any New Zealand dollar stablecoins?
The first-ever New Zealand dollar stablecoin, NZDs, was recently announced. Techemynt is the issuer of NZDs and is a Registered Financial Service Provider (FSP: 9429048880428), located in Auckland, New Zealand. There is a minimum order of NZ$100,000 to buy the coin directly from Techemynt. Typically stablecoins are exchanged in a secondary market rather than bought directly from the issuer. So far, the details are light; the company hasn’t said where the reserve of New Zealand dollars will be held or which auditor will audit the accounts.
What is the best way to sell stablecoins in New Zealand?
New Zealand-based cryptocurrency exchanges like EasyCrypto offer various stablecoins, allowing you to cash out any loans straight into NZD. EasyCrypto offers USDT, BUSD and DAI.
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