The company, BlockFi, has been making headlines this week, after raising $18.3M. BlockFi is another player in the DeFi lending space, along with companies such as Dharma, Compound Finance, Salt Lending, Nexo, Coinloan, and Celsius. The current investment round for BlockFi has raised some eyebrows because it includes backing from a slew of notable investors. Investment participants in BlockFi include a Peter Theil fund, ConsenSys Ventures, Winklevoss Capital, Galaxy Digital Ventures, Morgan Creek Capital, Akuna Capital, and others. To date, BlockFi has raised over $78M.
Crypto Loans
Though BlockFi has been around for over a year, it has recently gained a lot of traction. It is handling over $250M in assets. BlockFi varies from some of the other crypto lending platforms in the market currently. Its main business is a lending product that allows customers to deposit their crypto and receive a loan in US Dollars. BlockFi allows for deposits in Bitcoin, Ether, and Litecoin.
The current loan-to-value (LTV) ratio for a loan is up to 50%, meaning that customers get half the amount of the crypto they deposited in USD. For instance, if you deposit 1 BTC when the price was at $10,000, then you would receive a $5,000 loan. This is consistent with a lot of the other LTV ratios across the DeFi landscape. If the price of Bitcoin dips significantly then customers have 72 hours to deposit more BTC or pay down their loan. If not, then BlockFi will margin call the account and take a portion of the Bitcoin deposit.
However, these types of loans are ideal for investors who believe that the price of their cryptoassets will go up over time. In a best case scenario, the price of the cryptoasset goes up, and the investor is both able to realize gains and get liquidity in the form dollars throughout the investment period. It is also a great way to avoid inciting a tax event by not having to sell any crypto for USD. Depending on the amount borrowed and amount of collateral deposited, interest rates can vary between 4.5% – 11.25%. Check out their loan calculator to see what their latest rates are.
Crypto Savings Account
Their crypto loan product is very similar to other competitors in the market right now. However, their second product, which they released in June, is getting a lot of attention. It is an interest-earning crypto savings account. Customers can deposit their Bitcoin, Ether, or Gemini Dollars and earn up to 6.2% a year in their respective currency. BlockFi pays out interest payments monthly allowing for substantial compound interest opportunity.
It’s one of the only products of its kind and offers substantial advantages over its competitors. It earns compound interest, has large institutional backing, pays out in cryptocurrency, does not require a utility token, and has the highest interest rate of any competitor. Other platforms like Salt Lending and Celsius require a utility token to access their services, while BlockFi is frictionless and free to open an interest-earning account. It also allows for shorter lock-up periods.
This type of savings account is above-and-beyond what traditional fiat banking accounts offer. Many traditional savings accounts offer no interest anymore or less than 1%. The substantial interest from these crypto savings accounts is a far more attractive alternative for customers with substantial savings. Even if the volatility of Bitcoin and Ether poses too much risk for an investor, they can make deposits in the USD-pegged stablecoin Gemini Dollar. This way investors can still have to stability of USD but earn a substantially better rate of return on their savings.
Risks
There are still a few downside risks involved in BlockFi savings account and loans beyond the volatility of cryptocurrencies themselves. One is that deposits are not FDIC-insured, meaning if BlockFi were to become insolvent that investors would have little remedy to reclaim their money. Also, the interest rates are at the sole discretion of BlockFi, which could change suddenly. It is not a permissionless lending platform either, like a Dharma or a Compound. All loans and savings accounts require an applications and approval. Additionally, many accounts that earn interest have minimums, so not all deposits can benefit. The platform is geared toward high-net worth individuals rather than customers looking to park a few hundred bucks worth of Bitcoin.
So, overall while there are some definite DeFi elements to BlockFi, it is not a complete open platform for financial services. In essence, BlockFi is more akin to a really forward-thinking traditional bank than a decentralized crypto project. It is a centralized institution that still functions within the framework of the traditional banking sector – welcoming oversight, regulations, KYC processes, and integration with bank accounts. However, by harnessing the power of cryptocurrencies, it is able to deliver far more than many other financial institutions currently.
With this new round in financing, BlockFi will be able to roll out more crypto financial products. It wouldn’t be surprising for them to roll out new services that involve crypto futures, custody, and other more complex products in the near future.
Connor is the founder of Tokenscope, a blockchain research and consulting company that specializes in media and finance. He has extensive experience working with crypto start ups, tech-focused venture capital firms, and traditional media companies looking for new fintech solutions. He holds a B.A. in Economics and International Studies from the University of Miami.