In the old financial world, returns have dried up. US Treasury bond yields have never been so low. The 10-year government bond now offers you a yield of less than 0.9%. AAA corporate bonds don’t do much better at around 2.1% to 2.3%.
Knowing this while hearing about the Federal Reserve’s strong intentions to bring inflation above 2%, it’s no wonder investors are dropping low-yielding assets and making more speculative investments. The people distribute capital in an increasingly distorted way. How else will they get a return?
David Hoffman is the co-founder of Bankless, a content studio with a newsletter, podcast, and YouTube channel all about living a life without banks.
It is difficult to avoid income on Ethereum. The rate of return is the standard incentive for successful DeFi (decentralized finance) applications to attract capital.
At the simplest level, loan and credit applications like Compound and Aave offer 4.6% and 6.2% interest on deposited USDC, respectively. More sophisticated earnings aggregators like Yearn generate 7.8% in their basic earnings strategies and up to 16% in more aggressive strategies.
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With an average trading volume of over $ 1 billion per week, Uniswap puts its 0.3% trading fees in the hands of those who have liquidated the protocol. Those who have delivered ETH and USDC to Uniswap have received an amazing 35% APY on a USD / ETH hybrid position in the past 30 days.
No negative rates
The DeFi economy is fundamentally different from its previous counterpart. Overcollateralization is required for DeFi to work. Nobody can borrow more than they have deposited, and so far this simple safety net has been the foundation on which DeFi has been able to stand.
This is also the reason why Ethereum and DeFi will become synonymous with “yield” in 2021. In DeFi, interest rates cannot go negative. There is no room in DeFi for credit with broken reserves as it would break the trust model that these applications work with. To remove trust (and therefore centralization), you need to overcollateralise.
Eliminating the broken reserve credit in the DeFi economy is why the rate of return will always be found in DeFi. A negative yield is not possible in Compound or Aave. Mathematics doesn’t allow it. Because these logs are solvent-based in nature, in a scenario where credit demand is absolutely zero, the rate of return will also be zero, but not negative.
ETH: The internet connection
With the introduction of the Ethereum 2.0 Beacon Chain, the long-awaited ability to bet ETH and receive ETH-denominated returns was opened.
Source: Bankless
In addition to the local store-of-value qualities, the introduction of the ETH stake turns the ETH into a capital asset that generates a cash flow for its owner. We’ve seen other protocols offer proof-of-stake returns on alternative assets, but ETH is uniquely compelling as it is also backed by Ethereum’s domestic economy.
As the size of the Ethereum economy grows, the returns on investment are meant to reflect that growth. The relationship between the Ethereum economy and ETH should be familiar to the typical bond investor: healthy economies are highly valued, so there is usually a premium associated with domestic bonds.
Ethereum has no debts to pay, it is inherently solvent.
Ethereum cannot default on its ETH payments to ETH bondholders. ETH is reliably issued to ETH bondholders to receive compensation for providing collateral for Ethereum. Ethereum doesn’t need to levy taxes or generate revenue to compensate those looking for an ETH-denominated return. The removal of this requirement is a boon to the valuation of ETH bonds as there is no risk of default. Ethereum has no debts to pay, it is inherently solvent.
Bitcoin’s recent intrusion into the minds of the old class of investors shows that people are interested in protocol-constrained monetary wealth. Additionally, DeFi’s explosion, underpinned by extremely high returns not found anywhere else in the financial universe, shows how thirsty investors are for reliable returns.
The combination of ETH dividends to bondholders with restricted maximum issuance creates ETH’s uniquely compelling position as macro-assets in 2021 and beyond.
Last bastion for yield
In 2021, Ethereum will be positioned as the Schelling Point for earnings. While Bitcoin opens the doors to digital asset investability, in Ethereum it reveals a high-yielding world behind it.
The variety of investment types and the different strategies for generating income are likely to attract the attention of all types of income seekers. Whether investors are looking for stable, low-risk, dollar-denominated returns or aggressive, high-yield speculative instruments, Ethereum offers investors a range of financial products to choose from.
See also: David Hoffman – Ethereum is the frontier of financial innovation
In addition to dollar-denominated returns, ETH as an internet bond is positioned as an instrument that offers upside potential for the growth of the Ethereum economy while generating an ETH-denominated return for those willing to accept its volatility.
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