Lending coins was initially considered a safe alternative than other high-risk crypto investments. However, with the recent Terra disaster, Celsius pausing withdrawals and possibly facing a looming bankruptcy, people are worried that these investments aren't as stable as they claim to be.
As crypto lending is going through an overall bearish restructuring phase, what are the alternatives choices for investors? How do lending coins compare to AMM / liquidity pools like PowerPools?
Lending Coins (Celsius):
- APY: 2.5 - 18% (varies depending on the asset)
- Company loans funds out to retail and institutional borrowers
- No transparency
- Market volatility is makes it highly risky (underlying asset is not hedged)
- APY: earn up to 44%
- Yield is earned by the investor fulfilling the role of the market maker by providing liquidity to the platform.
- No lock-in or staking period, assets can be withdrawn anytime
- PowerPools is fully transparent (yield generated)
- Hedge market volatility using Options
- Auto hedging with pool protection (coming soon)
Traditional Crypto Lending Overview:
The Crypto Lending premise seemed relatively simple and worked similarly to traditional banking institutions.
- You would deposit cryptocurrency into the system.
- The company would then loan those funds out to retail and institutional borrowers.
- Every week you would receive interest payment from the revenue gained from those loans and other activities.
However, with the crypto market being more volatile than traditional markets, the overall crypto lending model makes it more vulnerable to risk for the investor. The crypto lending model is very close to conventional banking institutions as they are mostly based on liquidity transformation (short-term debts like deposits finance long-term investments like loans).
Those who lent coins were paid weekly yield into their accounts. However, they did not know how the companies generated this yield for them and what they did with their deposits.
With lending coins and volatility in the market, it's difficult to protect the underlying assets thus yield becomes irrelevant if the underlying BTC, ETH, or altcoin investment lose more than half its value.
PowerPools AMM / Liquidity Pool Overview:
PowerPools: Automated Market Maker (AMM) is the next generation of yield products. The concept of retail Automated Market Making allows smaller players and retail investors to contribute to the exchange's liquidity in exchange for rewards, typically paid out in cryptocurrency.
Check out our "What is an AMM? " video if you need a refresher.
How PowerPools works compared to Crypto Lending:
- You provide liquidity (deposit) to your PowerPool with an equal ratio of USD to BTC or other currency (BTC, ETH, SOL, AVAX)
- Yield is earned by the investor, fulfilling the role of market maker by providing liquidity to the platform. AMM is different from traditional lending since you understand how the returns are generated. With conventional lending, it is almost like a blackbox, where you put money in and lend it out, but you're not sure who, where, or how they lend your money to make a return.
- There is no vesting, staking, or lock-up period. You are free to pull out your returns anytime.
- One of the most notable differences is hedging your risks with options contracts. If you allocate enough money toward hedging risk, you can fully hedge your investments in case of a catastrophic drop in the market like recent market events.
If you would like to get a deeper understanding of PowerPools, check out our white paper that gets into the weeds of how PowerPools works.
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