In a world of zero and even negative interest rates, DeFi offers one of the few opportunities to earn a real return on your money. While most DeFi protocols have variable interest rates that change according to market activity, a new generation of protocols are finding ingenious ways to give investors a fixed interest return on their crypto assets.
The major advantage of fixed-rate protocols is that they let investors earn a guaranteed rate of return, and open up crypto savings for more mature market participants. Although fixed-rate protocols are relatively new they’re quickly growing in popularity.
The following are three of the most popular fixed-rate protocols, as well as a brief explanation of where to get the best interest rates in DeFi.
Notional Finance
In Notional Finance an investor can purchase a fixed duration “fCash token” with a preset interest rate. For example, a lender could supply $100 of DAI for three months at 5%. At the end of the three months the lender gets their $100 of DAI back, and $5 of DAI in interest.
Borrowers must over-collateralize their loans, protecting lenders against loss. Just like T-bills (a United States treasury security that has a duration of one year or less) fCash tokens can be traded on the open market.
As an example of how T-bills work, Imagine that Bob pays $99 for a T-bill on January 1st and one year later the government pays Bob $100. By buying the T-bill at a discount and receiving its full value upon maturation, Bob earned 1% interest on his money.
More information about Notional finance is available on their website. Investors can currently earn 10.3% APR on USDC with Notional.
88MPH
88MPH takes a slightly different approach to fixed interest rates. Rather than having a fixed-rate bond, the crypto savings protocol offers a product that’s based on the average returns from lending platforms.
For example, if the average returns on Aave are 10%, 88MPH might offer a short-term fixed interest rate of 7.5%. A longer-term deposit, up to one year, could earn a yield of 2.5%. The long-term yield is significantly lower to hedge against the risk of Aave (or any other lending protocol) reducing their interest payments.
With 88MPH investors must sacrifice some upside to get a fixed rate of return. Limited upside but also limited downside. If the lending rates on a protocol drop, 88MPH lenders will still get the same rate of return, even if a protocol’s APR dips below the APR on the fixed-rate loan.
More information about 88MPH is available on their website.
Anchor Protocol
Anchor is a fascinating new protocol on the Terra blockchain. With its fixed 20% interest rates, Anchor is one of the highest yielding protocols anywhere in crypto. Here’s how Anchor uses Terra’s native UST token to generate such high yields.
Part of the return comes from borrowers on Anchor who pay unusually high fees, in excess of 15%, to get UST (the current borrow rate on MakerDAO is around 5%). These revenues partially account for earnings in Anchor. Another source of revenue is staking rewards.
To take out a loan from Anchor you need to deposit the bLUNA token. Similar to stETH representing a claim on staked Ethereum, bLUNA is a token that represents a claim on staked Luna. When a borrower deposits bLUNA into Anchor to borrow money, Anchor claims the staking reward and uses it to fund the 20% APR. Anchor also recently added bETH as supported collateral, and plans to introduce other tokens like bDOT and bATOM in the future.
To ensure a fixed yield, anytime that Anchor earns more than 20% it saves the revenues it earns. If the fixed interest rate on Anchor dips below 20% it uses savings to subsidize the rate, keeping it constant.
More information about Anchor is available in this Medium post, as well as on Anchor’s home page.
How to get the best interest rates in DeFi
Interest rates are constantly changing in DeFi so it’s impossible to provide a definitive list of which protocols are offering the best interest rates. For example, Aave is currently offering an unusually high lending rate on USDT Tether. However, that wasn’t the case earlier this year.
One of the easiest ways to get the best interest rates in DeFi is to use a yield aggregator like Yearn Finance. With Yearn you can deposit your coins and the protocol will automatically move them around to capture the best rates. You can check the rates on Yearn for various assets here.
DeFi Rate is another easy way to find the best interest rates in DeFi. Just remember that the newer the protocol, the riskier it can be. There is a lot of smart contract risk in DeFi and hacks are common. But it’s also exciting to see how much innovation and excitement crypto is bringing to the relatively mundane topic of savings accounts and interest rates.
This content is for informational purposes only and is not investment advice. You should consult a qualified licensed advisor before engaging in any transaction.
