Whopping interest rates on offer from crypto lending platforms have been a big story over the last several months. Now Coinbase and Compound, two giants in the space, are wading in with their own reinventions of an old banking staple — the savings account.
The question is, are customers ready for the torque and complexity of these new offerings?
Each platform has its own plan for delivering juicy yields to clients in a near-zero interest rate world. Compound is going after institutions and Coinbase is targeting consumers.
Yet both platforms are promising 4% rates — which are more than 50x the national average according to Bankrate.com’s June survey of savings accounts. And both face the same challenges: convincing customers their new products are stable and secure. On June 28, Compound Labs — best known for creating the algorithmic, autonomous interest rate protocol Compound — launched a spin-off company called Compound Treasury. Businesses that open a Compound Treasury account can convert their US dollars to USDC stablecoins, supply them to the Compound protocol, and earn a fixed 4% APR. Clients will not have to mess around with a DeFi protocol to manage their accounts.
The next day, Coinbase, a centralized crypto exchange, unveiled Coinbase Lend, which enables account holders to lend USDC to Coinbase in exchange for 4% APY. Customers also get a principal guarantee ensuring the safety of any initial funds invested, though that shouldn’t be confused with an FDIC guarantee enforced by the U.S. government.
Both platforms are tackling obstacles that have long deterred consumers and business from dabbling in DeFi. While DeFi protocols can offer ridiculously high returns on investments, with some extreme examples offering upwards of 1,700% APR, they are often whipsawed by volatility and potential exploits. Those aren’t scenarios that warm the hearts of company officers or consumers.
It can also be daunting to even get started on the most stable DeFi protocols. They tend to be complicated and demand a higher-than-average level of technical knowledge from their users (just try creating a Web3 wallet if you’re a crypto rookie).
Even for tech-savvy investors who don’t mind risking the money from their checking accounts on volatile DeFi plays, savings accounts–which grow steady interest over time–have traditionally been left in the safer TradFi realm. That said, interest rates for traditional savings accounts have stagnated, with the national average at a laughable 0.06% APY as of June.
Compound Treasury and Coinbase Lend are betting they can overcome those hurdles by offering products with far greater rewards than traditional savings accounts, while also maintaining the relative accessibility and stability of centralized products. To limit volatility, both firms’ offerings are limited to USDC, which is issued by regulated financial institutions, backed by fully reserved assets, and redeemable on a 1:1 basis for US dollars.
Still, there are risks. Compound Treasury transfers all invested USDC into the Compound protocol, which is a decentralized protocol governed by token holders and not subject to traditional market regulations.
As for Coinbase Lend, Coinbase guarantees investor’s initial USDC assets are protected but it’s unclear who will be borrowing Coinbase’s assets. Plus, it won’t guarantee any return beyond the principal investment.
Given the entry of these heavyweights, this week’s offerings are bound to take the crypto savings story up a notch.
Their move comes five months after Gemini, the centralized crypto exchange, launched its Gemini Earn savings product. It offered retail investors up to 7.4% APY on their cryptocurrency, including stablecoins. Gemini partners with accredited, third-party borrowers to offer such high rates, .
Gemini notes in its product description that the APY rates from their Earn program are subject to volatility. Unlike Coinbase Lend, Gemini doesn’t guarantee the initial principal. As safer, stabler, and more profitable alternatives to traditional savings accounts continue to emerge, retail and institutional investors are sure to take notice. Now all the players will see how many customers actually take them up on their offers.