Crypto Rates Markets

This post was originally published on July 31, 2019, and sent to Messari Pro subscribers.

If history is any guide, the rates market in crypto will ultimately be orders of magnitude larger than the spot market. These markets are still small, but they could surpass the $300 billion spot market before you know it. Just like the spot market, the rates market is becoming highly fragmented in crypto, with lots of platforms and assets. Fortunately, our friends at LoanScan built an awesome dashboard for people to monitor interest rates across all these platforms and assets. I spent some time playing around with it, and I’m reporting back with a few observations and insights to help you understand this ecosystem.

Observation 1: Borrowing/lending rates on stablecoins are high.

Currently, the borrowing/lending rates of stablecoins are much higher than those of other assets. The former are mostly in the double-digit percentage, whereas the latter are in the low single-digit percentage. Moreover, the rates of Dai are even higher by a few percentage points than those of fiat-backed stablecoins like Tether.

Why is this? My gut reaction is that the market sentiment is generally bullish and a lot of people are borrowing stablecoins to leverage-long other assets. On second thought, however, that doesn’t entirely make sense. Why would you borrow USDT at 16% to do margin trading when you can borrow USD at a much cheaper rate? You could argue that the dollar on blockchains is more frictionless than the dollar in the legacy financial system. For instance, sending USDT to Binance is more convenient than wiring USD to Coinbase. As such, the higher demand for USDT may increase the rates of USDT. But I’m not convinced that this fully explains the large spread between USDT rates and USD rates.