It turns out that the high yields offered by centralised platforms are too good to be true!
During this bear market, we are experiencing an unprecedented number of platforms becoming solvent, or even bankrupt.
Amidst all the chaos, here are some key takeaways as we continue navigating the market:
#1 Transparency is key
When you deposit your funds into these platforms, they will usually use these methods to generate a high yield:
- Lending out to institutions
- Depositing into DeFi protocols
- Using your crypto for staking and mining
However, they are not fully transparent on who they lend to, or what DeFi protocols they use.
As they aim to continue providing high yields, they may start performing riskier moves, which could result in a loss of funds.
One such incident occurred when Celsius’ funds were placed in DeFi protocol BadgerDAO.
This protocol was hacked, and Celsius reportedly lost $50 million from the hack.
Celsius Network confirms it lost money in the BadgerDAO DeFi hackhttps://t.co/NC75tp7DLM
— The Block (@TheBlock__) December 3, 2021
If we had better transparency on where our funds are being loaned out to, it may help us to make more informed decisions on whether we want to deposit our funds in these platforms.
This is because some of the strategies that these platforms use may be much higher than our risk tolerance!
Some companies like Nexo have been rather transparent about where their funds are.
Nexo experiments with liquid staking of client assets in hunt for DeFi yield (by @Timccopeland)https://t.co/SMUlgZYCiW
— The Block (@TheBlock__) March 24, 2022
Meanwhile, Finblox has also started to share where its funds are being allocated.
With the turmoil caused by these lending platforms, regulators have now stepped in as well.
A California regulator has warned consumers to “exercise extreme caution” in dealing with interest-bearing crypto platforms, amid the recent fall of Celsius and Voyager Digital. https://t.co/731FwiZOfp
— Cointelegraph (@Cointelegraph) July 13, 2022
Hopefully, this will mean greater transparency required by these lending platforms, which gives us more information before we decide to deposit our funds with them.
#2 Greed will be our downfall
When we’re comparing 2 different platforms to deposit our funds, one of the ‘dealbreakers’ may be the yield that both platforms offer.
We may tend to deposit our funds with the platform that offers a higher yield!
However, this current crash is a painful lesson where we should be considering the sustainability of the yield that they offer as well.
Celsius has been accused of being a Ponzi scheme, where a class action lawsuit has been filed against them.
JUST IN: A class action lawsuit has been filed against Celsius Network alleging the company is "much like a literal Ponzi scheme."
— Watcher.Guru (@WatcherGuru) July 15, 2022
The lawsuit alleges that Celsius uses the high yields to attract more users to the platform, so that they are able to use these fresh funds to pay back the initial depositers.
Another example was Anchor Protocol, which promised a 19% yield on UST by just depositing your funds.
While this yield was super attractive, it turned out to be unsustainable the amount that the protocol was earning via interest was not high enough to pay the depositors.
As Anchor’s TVL grows (currently at a staggering 19.4B $UST), it’s increasingly more important for the community to come together to discuss & debate impactful decisions around both the Earn & Borrow sides of the protocol.
Join us tomorrow to discuss semi-dynamic Earn rates 👇 https://t.co/5AaICnKV5y
— Anchor Protocol (@anchor_protocol) April 27, 2022
While high yields are always welcome, it can be extremely painful when the entire system collapses!
You can find out more about Terra’s crash in our analysis here.
#3 Not your keys, not your crypto
Placing your funds in centralised platforms will mean that you do not actually own your crypto.
This gives you very little control over your funds, as seen when these platforms have halted withdrawals.
The safest way would be to store your cryptocurrencies in a non-custodial wallet, where you will have access to your private keys.
One such wallet you can consider is our Krystal mobile app, where you can store assets on 10 different blockchains (including Ethereum, Polygon, Solana and Klaytn).
Cons of a non-custodial wallet
While having full control over your funds is safer, there are still some considerations to keep in mind:
Since your funds are not with a centralised entity, you will have to take full responsibility for the safety of your funds.
An important thing is to ensure that your seed phrase and private key are secure, as these will give anyone access to all of your funds!
It is extremely important that you do not share this phrase with anyone, as this may result in you losing all of your funds!
Earning passive income
If you would like to earn passive income on your idle crypto assets, there are a variety of ways you can do so:
It can be quite overwhelming to find the best DeFi lending platforms to lend out your crypto. We’ve simplified the process by integrating with trusted DeFi protocols, and you can access them on the ‘Earn’ tab on our platform:
This feature is only available for Ethereum, BSC and Polygon, but do stay tuned as we release it on more networks soon!
Conclusion
The bear market has brought lots of turmoil, especially for these centralised lending platforms.
This may result in many firms being either merged or acquired as the crypto industry starts to consolidate.
What Could Crypto M&A Look Like in This's Year's Second Half? Read the insights here: https://t.co/2hHsHlyAVh via @Blockworks_
— Acquire.Fi (@Acquire_Fi) July 12, 2022
It also serves as a painful reminder to us that if yields are too good to be true, it may just be the case!
🔍 Navigate the DeFi Space NOW with Krystal!
Start your journey NOW on Desktop, iOS or Android
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