24th November 2022 > > Crypto staking part 3.

tl;dr

Crypto staking part 3 – a look back at the CCC’s views on staking stablecoins, the conclusions for which remain very pertinent today.

Market Snap

Market Wrap

Public comments from the Fed that the steep trajectory of interest rates rises is likely to be moderated brings relief to risk markets. With oil now below the price prior to Putin’s illegal and murderous annexation of swathes of Ukraine (surely it won’t be long before his name appears on the Interpol list for crimes against humanity) this ridiculous notion that the global price for commodities can be controlled through Central Banks setting domestic interest rates can be temporarily ignored.

Occasional Series – World Cup 2022

Hot on the heels of my supporting Argentina (see commentary about ARG coin yesterday and previously) I now find I am supporting Germany too. What is the world coming to?

Let’s hope that all teams from Western liberal democracies protest as the Germans have done.

Curious Cryptos’ Commentary – Crypto staking part 3

On the 1st & 2nd November 2021 the CCC published some thoughts about staking (lending) stablecoins on centralised exchanges. I think they are worth repeating in their entirety. Of course, by doing this, I don’t have to write anything new this morning. Always nice to have a day off.

Curious Cryptos’ Commentary 1st November 2021 – Lending stablecoins

Following a discussion yesterday, I was asked to put down some thoughts about lending stablecoins.

There are many platforms that offer returns for depositing stablecoins in return for regular payments of interest. The rates can be as high as 8%, 10% or even more. Compared to the paltry returns on offer at your local bank, or National Savings & Investments, these rates look superficially attractive.

Note that the low returns offered by banks is directly due to the 0.1% base rate set by the Bank of England. This may increase on Thursday but by no more than 0.25% and probably less.

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It is my opinion that the government, through the medium of the Central Bank – which despite claims to the contrary is not independent of the government – should have no say in the setting of interest rates.

Such a situation would be a radical departure from the current global norm but would reap untold benefits. A discussion for another day perhaps.

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The first observation about lending stablecoins is that this isn’t really about cryptos at all.

It does incorporate cryptos for the execution of the trade, but cryptos are not central to the idea, and they are not necessary.

There are many opportunities to earn interest on your money. There are several P2P lending platforms with high interest rates on offer. Junk bonds are yielding up to 6% or more right now (in Europe the average is at around 4%). You can probably theoretically get 100% in a week from the bloke standing at the bar over there.

And the last one is the key point – the return on your loan (in whatever form it takes) should reflect the risk you are taking.

If the return is greater than the risk, then the investment is worth considering against all other possible investments.

If the return is not greater than the risk, then the investment should not be considered at all.

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Which leads to the thorny question of how to assess the risks.

There is no right way of doing that, but there are so many wrong ways.

How far you go down into this rabbit hole before you decide is entirely up to you. But I suspect the further you go, the less convinced you will be by the returns on offer for lending stablecoins.

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The very first risk you need to assess is whether your choice of stablecoin really is a stablecoin or simply smoke and mirrors.

On the 9th of October 2021 the CCC took a brief look at Tether (USDT), the largest, and I think the first, stablecoin. Backed by collateral that is less than ideal (including crypto collateralised loans introducing correlation risk where it really should not exist) USDT maintains its peg against USD simply because people believe it.

I haven’t investigated the other stablecoins in much depth, but it would come as no surprise to find they are all very similar in this respect.

I know some readers have little faith in fiat, quite rightly pointing out that fiat is all smoke and mirrors. But I have a lot more trust in fiat than stablecoins. And in any case – if you don’t trust fiat, you cannot trust a stablecoin.

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Once you have got over that hurdle (if you can), you need to look at the lending platform itself.

And this is where it is going to get tricky.

It is probably going to be very hard to do due diligence. A lot of these platforms are simply a website and not much more. Which is true of all Decentralised Finance (DeFi) platforms. But this is the beauty about decentralisation – there is no counterparty risk. There is market risk, there is smart contract risk, there is malicious actor risk. But there is no intermediary.

When you have an intermediary such as a centralised exchange, due diligence is required. And that means answering at least these questions in detail:

i) Is the platform owned by an incorporated company?

ii) If so, where? Who are the auditors? What did the last audited accounts show?

iii) Where do they pay tax?

iv) Are they regulated?

v) If so, where? Which regulator? Has the regulator ever issued a negative notice?

vi) Does the company have a credit rating?

vii) Does the company have outstanding bonds, loans, or overdraft?

viii) What other assets does the company have?

ix) What is its leverage ratio?

x) How do you contact the company?

xi) Do they have a phone number? What happens when you call that number?

xii) Is there insurance in place?

xiii) If so, can you see the policy? What does it cover and where?

xiii) What is the pay-out date? Mt. Gov creditors have been waiting years …

xv) What is their track record? How long have they been around?

I could go on and on if you wish, but there seems little point.

It seems unlikely to me that you can get detailed answers to even some of these most basic questions, let alone all of them.

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Lending stablecoins is an extremely high-risk proposition. My opinion, for what it is worth, is that even a 50% annual return would not get my attention.

But let me stress, that is my personal assessment, and clearly many people disagree with me.

That might be because they see lending stablecoins as akin to leaving money in a regulated and insured high street bank account.

Well, it aint.

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I do need to stress that just because I assess the return as not worth the risk, you are duty bound to come to your own conclusions.

If you lend stablecoins to a platform, you may well end up earning 8% a year. And when all is said and done, if you get your money back plus 8% interest, that isn’t a bad trade in terms of the outcome.

Curious Cryptos’ Commentary 2nd November 2021 – Follow up to lending stablecoins from yesterday’s CCC

I received a request through one of the CCC distribution channels as a direct response to my initial comments on lending stablecoins as outlined in yesterday’s CCC.

This request was specifically for my thoughts on Nexo, a platform that co-incidentally had been raised a day earlier in a different distribution channel for the CCC.

Armed with my hastily scribbled checklist (as quoted in yesterday’s CCC) I set about trying to answer the questions I had set for myself if I was to go down the route of lending stablecoins.

It is true that I could get some way to answering some of the questions. But that took up a large part of my day yesterday, time that I will never get back (it is all your fault JP).

I couldn’t get anywhere near answering all those questions – and I would have had more in any case, cos I am awkward like that – in any reasonable timeframe that involved me not dying.

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I admit I had never looked in detail into the potential opportunities offered by lending stablecoins before this.

I had set for myself (based on nothing more than blind prejudice) a minimum threshold of 50% per annum returns before even considering the idea.

After doing the work yesterday, taken on in the hope of benefitting the CCC community, it seems I was wrong (that is twice now in living memory) in setting the bar at the seemingly high rate of 50%.

I now know that I wouldn’t give the time of the day to the idea of lending stablecoins unless there was more than 100% per annum on offer.

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That is my personal assessment of the risk/reward ratio for me.

Everyone else will come to a different conclusion and a different assessment of the risk/reward ratio that works for them.