🏦 How does crypto offer ~10% savings interest rates?
This is Shashank’s Newsletter, a newsletter with bite sized content on everything that happened in web3 over the past week.
In today’s email,
🏦 How does crypto offer ~10% savings interest rates?
🪙 Up and coming decentralized stablecoin: FRAX
🛠️ How can web3 apps be censorship resistant?
🫘 Quick nuggets
Weekly gainers
Lido token is up a nice 54% since our post a month ago. Hope some of you bought the alpha :)
🏦 How does crypto offer ~10% savings interest rates?
High yield savings account in TradFi offer 0.5 - 1% at the moment but crypto offers 10% 🤑 These are the rates from leading crypto lending platforms on USDC stablecoin as of today:
So, how do these platforms work? Platforms like BlockFi are essentially borrowing/lending marketplaces where lenders can deposit USDC to earn 8-10%. BlockFi then lends this money to large institutions/ hedge funds who are willing to borrow at high 10-15% interest and BlockFi takes the spread in between. These institutions use collaterized loans for the large part to borrow money for yield farming/ market making/ cash and carry arbitrage.
Some high level thoughts on how crypto offers high yield compared to TradFi:
Market sizing plays a big role. Crypto loans are a very small portion of TradFi.
Crypto has efficient infrastructure with fewer middlemen and more autonomous code.
Since there is no central bank in DeFi, the lending rates respond more to market demand than in TradFi as there is no Federal Reserve effectively controlling the floor with the fed funds rate.
Crypto is a nascent space with higher risk/reward ratio.
🪙 Up and coming decentralized stablecoin
Stablecoin market cap is at a whopping 190B$ as of today. You might know about some of the largest stablecoins like USDT, USDC. We even covered DAI and UST (Terra) in our previous posts. Let’s talk about one of the up and coming smaller players here, FRAX - Fractional Algorithmic Stablecoin.
There are two main types of stablecoins generally:
Collateralized like DAI, USDT and USDC, meaning they are dollar backed by assets outside the protocol. Some of the problems with such coins are:
Potential loss of custody over the assets
Over collateralization: Assets worth $1 are collateralized by more than $1.
Algorithmic like UST, which maintains a stable peg to a chosen asset like LUNA within the protocol. Problems here:
Difficult to bootstrap liquidity
Exhibit extreme volatility during crisis
FRAX takes a hybrid approach where it is up to the free market to decide whether at a given point in time, it is more collateralized or algorithmic.
So how does it achieve this? FRAX is backed partly by collateral that lies outside the protocol and partly by FRAX Shares (FXS), which reside within the protocol. It leverages a dynamic collateral ratio. If this ratio == 100%, it is completely collaterized and similar to USDC. If this ratio == 0%, it is completely algortihmic like UST. Currently, this ratio is at 85% which means that to mint 1 FRAX, one would have to present the protocol with $0.85 of USDC and $0.15 worth of FXS. Similarly, one can redeem 1 FRAX for $0.85 of USDC and $0.15 worth of FXS, at which point that 1 FRAX would be burned.
Do you see the positive feedback loop here? Demand in FRAX = more confidence in FRAX = lower collateral ratio = even more demand in FXS, the wheels keep spinning. 🎡
The future looks bright for stablecoins and FRAX is well positioned with some great partnerships coming. Keep an eye on FXS price 👀
🛠️ How can web3 apps be censorship resistant?
Web3 has changed the paradigm of communication between apps and users. Grand vision of web3 apps:
They are never down because smart contracts live forever on the blockchain once deployed.
They can never be censored. Your data lives on the blockchain. When you decide to leave a platform, you can take your data with you, plugging it into another interface that more clearly aligns with your values.
They are accessible to all as long as you have a basic internet connection
But there is an issue here as most web3 apps still rely on a centralized entity to serve the application interface. How can we ensure censorship resistance here? This could be the “aha” web3 moment…
Since Web3 is open-source, you can use several web3 services like Yearn, Uniswap, Curve and others by downloading their source code from github and self-host their websites directly on your computer. No third-party servers needed! Once you’re set up, you can use these services directly in your browser without visiting their URLs (but instead typing in something like "localhost:3000").
If the centralized server is slow with too many concurrent requests, run your own! If you don’t like the latest UI changes of a certain version, you can freeze your UI to a version that you like! Self-hosting web3 apps gives individuals more resiliency. 💪
🫘 Quick nuggets
Three Arrows Capital just bought another 31,345 ETH ($101M). Probably they read about our bullish merge news 😉
Crypto Startup Wyre has been acquired by payments company Bolt for $1.5 Billion. Wyre provides wallet infrastructure services to exchange fiat currencies to cryptocurrencies using banks/credit cards. Integrating crypto within Bolt’s one-click checkout infrastructure could bolster the usage of crypto across wider commerce applications 🤝🏼
VaynerSports dropped a new NFT collection. It created so much hype that a total of 26M$ was spent just on gas for failed/successful transactions by users trying to mint the NFTs in a gold rush. A total of 12M$ was made from the primary sales 🤯
How did you enjoy this week’s edition?