Where do those high interest rates and yields in crypto come from?

Welcome to the cryptohunt jam where we spend one minute a day to explain crypto. In plain english.

Last time we layed out how stable coins are risky, without the benefit of potential rewards. But by now you will have probably screamed: “Not so fast, what about those interest rates I can make?”

And we’ll give it to you: All over the crypto world, projects are paying out crazy high interest rates just for depositing your stable coin. What could possibly go wrong?

Let’s look at the Anchor Protocol, the project that brought down the entire Terra Luna blockchain and ultimately destroyed $80-100 billion dollars in investments. They promised you 20% returns - but let’s look at how that worked.

First, they would loan out your TerraUSD to others, where they asked for 10% interest. You were the one eating the risk that those borrowers won’t return the money. They would also ask the borrowers for collateral - other types of crypto, which they lend out again for interest. Fine, as long as prices increase. Once they decrease, everyone is losing. And lastly, a large part of the remaining interest was given back to you in ANK tokens, their own native asset which fluctuated wildly in value.

Sounds a bit like someone was trying to obfuscate things? We think so.

And that’s why it is important to realize that financial systems are zero-sum games. Someone gains what somebody else loses. And in the next episode, we’ll look into that more and why it is a dangerous game to play.

Disclaimer: This podcast references our opinion and is for information purposes only. It is not intended to be investment advice. Do your own research and seek a duly licensed professional for investment advice.