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Diehards Continue to Lend Crypto in Spite of Plummeting Yields

2 mins
Updated by Geraint Price
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In Brief

  • One crypto lender lost 25,000% in yield earned during the current crypto winter.
  • Much of the yield in DeFi lending comes either from staking or from yield farming.
  • The total value locked in decentralized protocols dropped 60% to $39 billion in Jan.
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Despite collapsing returns on loaned crypto in the current bear market, some investors are in it for the long haul.

Outsized annual yields of 25,000% are not unheard of for seasoned crypto investors who earn money through farming or staking crypto tokens. 

The current crypto winter, however, has seen much of that yield vaporize, although exact amounts are hard to pin down. It is unclear whether investors will get their crypto back from crypto banks and apps hit hard by the recent market downturn.

But it also depends on whether the crypto institutions involved are established players or experimental startups. A 55-year-old law enforcement officer Craig Bowman, who lends out the stablecoin USDC, is confident that the token will keep its peg to the U.S. dollar because Circle, the issuer of USDC, is audited and backed by collateral. 

The veteran trader believes that even if his investments can offer him a 9% return, this is still better than 0.5% at a traditional bank.

Two basic ways to lend and earn interest

Yield farming is often responsible for high returns. It has been criticized by notable names in the field, including FTX CEO Sam Bankman-Fried in an interview on the Bloomberg Odd Lots podcast. 

It involves giving the crypto institution a mainstream cryptocurrency in exchange for a “governance token,” granting the holder voting power and a particular equity stake in the platform. The institution then lends out the depositor’s mainstream cryptocurrency at a fee. 

The governance token can be sold at another crypto exchange, and the more people use the platform, the governance token increases in value. Your original crypto is returned after a while.

In staking, the number of coins staked improves the chance of getting selected to secure a network from a 51% attack. To their horror, investors in TerraUSD found that staked tokens could not be withdrawn. 

Crypto winter bites DeFi lending

New York resident Nhat Nguyen entered the lending space about eight months ago, lending out Avalanche. As the market tanked, she lost $2,000 but continues to try to earn a return from lending some stablecoins. 

After leaving Wall Street positions at JPMorgan and Goldman Sachs, Nguyen now works at a crypto firm and is confident that others will continue to build despite the inevitable loss of some crypto businesses. This shake-up is not the end, in other words.

Others are not so optimistic. Lukas Levert, 25, who invested $25,000 lending out various coins, says he is pulling back amidst the significant sell-off. 

He will return when the market steadies again. Levert’s choice highlights how deeply the crypto ecosystem is interconnected. 

The collapse of the TerraUSD stablecoin, lender Celsius pausing withdrawals, and mass lay-offs by Coinbase, BlockFi, and BitPanda has reached deep into the recesses of decentralized finance. 

The total value locked in decentralized protocols, including interest-bearing accounts, has decreased 60% since Jan to approximately $39 billion, according to DeFiPulse.

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David Thomas
David Thomas graduated from the University of Kwa-Zulu Natal in Durban, South Africa, with an Honors degree in electronic engineering. He worked as an engineer for eight years, developing software for industrial processes at South African automation specialist Autotronix (Pty) Ltd., mining control systems for AngloGold Ashanti, and consumer products at Inhep Digital Security, a domestic security company wholly owned by Swedish conglomerate Assa Abloy. He has experience writing software in C,...