Coinbase explains why DeFi interest rates rose during the crisis for COVID

Coinbase described in detail the factors that determine DeFi rates, the impact of the March market crash and the potential for stablecoin growth.

The crypto loan market has reached prohibitive rates due to the crisis

The cryptocurrency market plummeted last month when the new coronavirus pandemic began to expand in the United States.

Since then, the prices of the coins have stabilized - despite some decreases before the weekend - but the sudden collapse that has occurred has shown exactly how the crypto industry starts to give way in some places when it is put under pressure.

The crypto loan market, through which lenders accept cryptocurrencies as collateral, has struggled to stay on its feet and has become incredibly expensive.

The reason, explained the Coinbase cryptocurrency exchange in a blog post "Around the Block" on Friday, is due to the fact that cryptocurrency is, in general, much more volatile than money and more risky than other forms of capital.

As a result, cryptocurrency lenders require much higher rates from borrowers. If we add to this a global financial crisis, it is clear that rates have become even higher.

Rising demand for stablecoins behind rate growth

In particular, Coinbase said that the increase in interest rates is partly attributable to the increase in demand for stablecoins, that is, cryptocurrencies anchored to legal currencies (such as the US dollar).

The stablecoins are exchanged easily and quickly with Bitcoin, for example, and this possibility is invaluable when trying to profit from a last second trade. So, when the market collapsed, stablecoins were traded for some profit; more stablecoins have been issued to meet demand; and there was a lot of activity while traders were transferring funds between exchanges.

Traders rushed to the loan markets to borrow more stablecoins. But, unfortunate for borrowers, popular loan banks, such as Compound, Dharma and Dy / Dx, are niche and present their "smart contract risk", said Coinbase.

“DeFi platforms are a collection of smart contracts and are potentially vulnerable to exploits. More risks require a higher interest rate, "he wrote. And so the prices have skyrocketed.

Rates will decrease if there is a greater adoption of cryptocurrencies

Coinbase predicts that interest rates "will eventually shrink as cryptocurrency adoption grows," he wrote. "Many more loan banks will accept crypto as collateral, stablecoins will grow by adoption, cryptocurrencies for bridges with the fiat currency will be more efficient and DeFi will become more mainstream and will have better protections against smart contract risk." Maybe in time for the next pandemic.

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