DeFi: crypto interest rates 2022

The interest rate for lending the Tether (USDT) stablecoin on DeFi platforms Aave and Compound was twice as high as the rates for DAI. The interest rate for depositing USDT on Aave, for example, was 3.35 percent - effectively meaning that the decentralized Aave platform pays out this percentage when it holds the Tether cryptocurrency much like a bank account pays out interest rate after a customer deposits money there. These lending platforms make up some of the most important DeFi services available. It is important to note that crypto lending - depositing your own cryptocurrencies for interest - is different from crypto borrowing - withdrawing crypto from a platform like a loan. Also, crypto lending should not be confused with crypto staking although it does have a lot in common with yield farming.

Validations at stake: What makes staking different from lending?

The staking of cryptocurrencies has to do with the creation of certain crypto through a process called "Proof-of-Stake" or PoS. What happens is that the owner of a particular coin, for instance Cardano (ADA), can opt to participate in a "staking pool", essentially saying he or she wants to help create new ADA coins by committing some of the ones he or she already owns. Whenever new coins are created, an automated system picks someone out of all the people who staked coins to be the validator of this new batch of coins. The reward for validating is additional cryptocurrency. This process is different from Bitcoin's energy consuming processes called "Proof-of-Work" or PoW, and has been described as a relatively easy point of entry point of entry for those who do not have a lot of cryptocurrency - although some have remarked it has the bearings of a lottery rather a bank account type of services like what crypto lending platforms provide.

Yield farming: strategically lending crypto

There is, however, a third way to possibly gain passive income with cryptocurrencies. Indeed, the interest rates shown in this graphic are closely associated with a phenomenon called yield farming. Much like crypto lending, yield farming means one hands over his or her own crypto assets to a DeFi platform in the hopes of gaining interest. Yield farming, however, is much more strategic as it involves moving crypto not to one DeFi platform but through multiple in search of the highest gains. Compound (COMP) and Aave (AAVE) are two very popular DeFi protocols for this, and have helped the DeFi market to grow in 2020 especially.