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It will be interesting to see if interest rates in government controlled currencies and crypto currencies will stay diverged in the long run. Without the disto

It will be interesting to see if interest rates in government controlled currencies and crypto currencies will stay diverged in the long run. Without the distorting action of governments printing money, interest rates might be set by market forces in "crypto land". This might lead to a long term situation where artificially low interest rates are paid in government controlled currencies, but market prices are paid in crypto currencies. Or will cheap interest rates in government controlled currencies somehow bring down the interest rates in crypto currencies? The 10 year yield of bonds in Europe is at 0%. While US bonds are currently at 1.5%. This might be an indicator, that rates in one currency will not completely control rates in other currencies.

dharma1 6y ago
I think the primary reason interest rates are high in crypto lending right now (also on USD stablecoins) is leveraged speculation - people using crypto as collateral to leverage their crypto positions higher (and/or yield farm) and are prepared to pay a relatively high interest rate for it (~10% on stablecoins) because the expected gains are a fair bit higher. I don’t expect this will last forever
- ArtTimeInvestor 6y ago
  You say that one can create leverage by borrowing? How does that work? Is it a contract like "You borrow me 1 ETH and I will pay back 1.1 ETH in a year. Except when X happens, then I will pay back 2 ETH"? If so, what is X?
  - runeks 6y ago
    The leverage is speculation using borrowed money. See: https://www.blueleaf.com/articles/how-leverage-works-in-investments/ https://www.blueleaf.com/articles/how-leverage-works-in-inve....
    - ArtTimeInvestor 6y ago
      That does not answer my question: How a smart contract can implement lending in a way that both parties are satisfied: - The lender gets their money back plus interest. - The borrower makes a profit if the price of the borrowed currency goes up.
      - cryptonautics 6y ago
        Majority of the lending platforms to date are centralized and custodial solutions
  - dharma1 6y ago
    Check out Aave or Compound. You basically use your crypto as collateral, and do whatever you want with the borrowed money. If you want to take the borrowed money and get even more (leveraged) exposure to crypto, you can. You don’t pay back more than the borrowed capital plus interest. https://docs.aave.com/faq/borrowing https://docs.aave.com/faq/borrowing
- orky56 6y ago
  Anecdotally many crypto holders prefer to not liquidate their crypto positions but instead take out loans via BlockFi to purchase hard assets like real estate. With cash in hand and now a property, they can get a cash out refi and the crypto loan is not a taxable event since the crypto was just collateral.
  - ArtTimeInvestor 6y ago
    Like this? 0: Holder has ETH 1: Holder borrows Tether, provieds ETH as collateral 2: Holder uses Tether to buy a house 3: Holder borrows Dollar, provides house as collateral 4: Holder buys Tether with Dollar 5: Holder pays back Tether, gets back ETH. 6: Holder now has ETH + House + Dollar Dept If so, why couldn't they lend the dollars to buy the house in the first place? The bank which lends the dollars certainly could make a contract that the dollars only can be used to buy the house?
    - kristjansson 6y ago
      Rates are lower on margin loan, and they’re easier to get compared to a proper mortgage (assuming, you know, you have value assets to borrow against)
      - ArtTimeInvestor 6y ago
        You say a bank loans money to someone who owns a certain house, but not to someone who uses the money to buy the exact same house?
      - orky56 6y ago
        Rates might be lower but they're not usually fixed. They're easier to get assuming your liquidity is in equities versus crypto or even a stable income. There's a reason mortgage financing is still more prevalent than margin loans despite what you've stated which are inherent benefits.
    - orky56 6y ago
      Real estate financing is primarily done by lenders with very traditional underwriting practices that don't factor in crypto or avoid it entirely. Even HNI/private banking doesn't consider crypto part of a liquid portfolio. You can go to Interactive Brokers and get a 1.x% rate with 2x (margin) or 5x (portfolio margin) but that's off non-crypto. To get that same leverage with crypto, you can put in a down payment for real estate (20% down) in 5 properties for 5x leverage. BlockFi/Tether etc. make that liquidity possible without liquidation. Feel free to DM me for more conversation on this topic.
throwastrike 6y ago
I am sorry but what do you mean by interest rate in crypto?
runeks 6y ago
I agree completely. I think the greatest value proposition of non-government money (e.g. gold, bitcoin) — at least in the long run — is the ability to escape from zero/negative interest rates. I also agree that the different between EUR and USD bond yields seems to indicate that there exists no reliable way to arbitrage the spread in bond yields between different currencies (or, at least, that there exists a certain spread beneath which it's not profitable).
lottin 6y ago
You're comparing a risk-free rate (government bonds) with a rate on risky investments. Not really comparable at all. You can also find high-yield bonds (aka junk bonds) denominated in USD. Also real interest rates are set by the market not governments. Monetary policy has, at best, only small effects on real rates (in theory it should have none).
- ArtTimeInvestor 6y ago
  > You're comparing a risk-free rate (government bonds) > with a rate on risky investments. I don't think so. What is the "risky investment" here? I compared lending of different currencies. In the case of Euros or Dollars, the lender is a government. In the case of crypto, the lender is a smart contract. Both are assumed to be reliable.
  - bidirectional 6y ago
    The last resort of the US, UK, etc. governments is to print money if they really want to avoid defaulting on their debt. Can smart contracts print money? Surely there must be some way for the counterparty in the contract to default.
    - ArtTimeInvestor 6y ago
      "Defaulting" in crypto means the collateral goes from the borrower to the lender. The collateral is always more valuable than the borrowed asset. Otherwise, all borrowers would "default" all the time. As there is no other downside to it than to lose your collateral.
      - lottin 6y ago
        So, the borrower starts with X BTC. They post X BTC as collateral and borrow X-y BTC (where y > 0). Once the loan is paid off, they get the collateral back. This means they end up with X BTC minus the interest paid on X-y. Why would anyone do that?
kristjansson 6y ago
Since ETH staking returns do represent a (sort of) risk free rate for ETH denominated loans, low fiat rates would pull down on those rewards, if the exchange rate volatility comes enough for people to stomach the currency risk. The same sort of flows balance exchange rates and interest rates among national currencies, though as you point out, sufficient risks and controls abound to prevent complete parity between the rates. I’d challenge the notion that one side is paying market rates, and one isn’t, at least in nominal terms. Bond purchases and ETH stakes are both market transactions at the prevailing rate, just with different structural forces in play.

dharma1 6y ago

I think the primary reason interest rates are high in crypto lending right now (also on USD stablecoins) is leveraged speculation - people using crypto as collateral to leverage their crypto positions higher (and/or yield farm) and are prepared to pay a relatively high interest rate for it (~10% on stablecoins) because the expected gains are a fair bit higher. I don’t expect this will last forever

ArtTimeInvestor 6y ago
You say that one can create leverage by borrowing? How does that work? Is it a contract like "You borrow me 1 ETH and I will pay back 1.1 ETH in a year. Except when X happens, then I will pay back 2 ETH"? If so, what is X?
- runeks 6y ago
  The leverage is speculation using borrowed money. See: https://www.blueleaf.com/articles/how-leverage-works-in-investments/ https://www.blueleaf.com/articles/how-leverage-works-in-inve....
  - ArtTimeInvestor 6y ago
    That does not answer my question: How a smart contract can implement lending in a way that both parties are satisfied: - The lender gets their money back plus interest. - The borrower makes a profit if the price of the borrowed currency goes up.
    - cryptonautics 6y ago
      Majority of the lending platforms to date are centralized and custodial solutions
- dharma1 6y ago
  Check out Aave or Compound. You basically use your crypto as collateral, and do whatever you want with the borrowed money. If you want to take the borrowed money and get even more (leveraged) exposure to crypto, you can. You don’t pay back more than the borrowed capital plus interest. https://docs.aave.com/faq/borrowing https://docs.aave.com/faq/borrowing
orky56 6y ago
Anecdotally many crypto holders prefer to not liquidate their crypto positions but instead take out loans via BlockFi to purchase hard assets like real estate. With cash in hand and now a property, they can get a cash out refi and the crypto loan is not a taxable event since the crypto was just collateral.
- ArtTimeInvestor 6y ago
  Like this? 0: Holder has ETH 1: Holder borrows Tether, provieds ETH as collateral 2: Holder uses Tether to buy a house 3: Holder borrows Dollar, provides house as collateral 4: Holder buys Tether with Dollar 5: Holder pays back Tether, gets back ETH. 6: Holder now has ETH + House + Dollar Dept If so, why couldn't they lend the dollars to buy the house in the first place? The bank which lends the dollars certainly could make a contract that the dollars only can be used to buy the house?
  - kristjansson 6y ago
    Rates are lower on margin loan, and they’re easier to get compared to a proper mortgage (assuming, you know, you have value assets to borrow against)
    - ArtTimeInvestor 6y ago
      You say a bank loans money to someone who owns a certain house, but not to someone who uses the money to buy the exact same house?
    - orky56 6y ago
      Rates might be lower but they're not usually fixed. They're easier to get assuming your liquidity is in equities versus crypto or even a stable income. There's a reason mortgage financing is still more prevalent than margin loans despite what you've stated which are inherent benefits.
  - orky56 6y ago
    Real estate financing is primarily done by lenders with very traditional underwriting practices that don't factor in crypto or avoid it entirely. Even HNI/private banking doesn't consider crypto part of a liquid portfolio. You can go to Interactive Brokers and get a 1.x% rate with 2x (margin) or 5x (portfolio margin) but that's off non-crypto. To get that same leverage with crypto, you can put in a down payment for real estate (20% down) in 5 properties for 5x leverage. BlockFi/Tether etc. make that liquidity possible without liquidation. Feel free to DM me for more conversation on this topic.

throwastrike 6y ago

I am sorry but what do you mean by interest rate in crypto?

runeks 6y ago

I agree completely. I think the greatest value proposition of non-government money (e.g. gold, bitcoin) — at least in the long run — is the ability to escape from zero/negative interest rates. I also agree that the different between EUR and USD bond yields seems to indicate that there exists no reliable way to arbitrage the spread in bond yields between different currencies (or, at least, that there exists a certain spread beneath which it's not profitable).

lottin 6y ago

You're comparing a risk-free rate (government bonds) with a rate on risky investments. Not really comparable at all. You can also find high-yield bonds (aka junk bonds) denominated in USD. Also real interest rates are set by the market not governments. Monetary policy has, at best, only small effects on real rates (in theory it should have none).

ArtTimeInvestor 6y ago
> You're comparing a risk-free rate (government bonds) > with a rate on risky investments. I don't think so. What is the "risky investment" here? I compared lending of different currencies. In the case of Euros or Dollars, the lender is a government. In the case of crypto, the lender is a smart contract. Both are assumed to be reliable.
- bidirectional 6y ago
  The last resort of the US, UK, etc. governments is to print money if they really want to avoid defaulting on their debt. Can smart contracts print money? Surely there must be some way for the counterparty in the contract to default.
  - ArtTimeInvestor 6y ago
    "Defaulting" in crypto means the collateral goes from the borrower to the lender. The collateral is always more valuable than the borrowed asset. Otherwise, all borrowers would "default" all the time. As there is no other downside to it than to lose your collateral.
    - lottin 6y ago
      So, the borrower starts with X BTC. They post X BTC as collateral and borrow X-y BTC (where y > 0). Once the loan is paid off, they get the collateral back. This means they end up with X BTC minus the interest paid on X-y. Why would anyone do that?

kristjansson 6y ago

Since ETH staking returns do represent a (sort of) risk free rate for ETH denominated loans, low fiat rates would pull down on those rewards, if the exchange rate volatility comes enough for people to stomach the currency risk. The same sort of flows balance exchange rates and interest rates among national currencies, though as you point out, sufficient risks and controls abound to prevent complete parity between the rates. I’d challenge the notion that one side is paying market rates, and one isn’t, at least in nominal terms. Bond purchases and ETH stakes are both market transactions at the prevailing rate, just with different structural forces in play.