Asset earning interest is one of the important user needs in the financial field, and there are various scenarios in which it occurs. In a new financial scene like Crypto, the flow of assets is more convenient, whether it is through centralized exchanges, centralized banking institutions, or decentralized protocols, users can easily transfer assets. Due to the convenience of such liquidity, financial products in Crypto are highly similar, and the returns tend to be similar as well.
When the market is good, whether it is for direct investment in cryptocurrencies, leveraged trading, participating in IDOs, mining, etc., there is a high demand for liquidity, which makes "money relatively expensive." This reduces the relative attractiveness of pure financial products to users. On the contrary, when the market is sluggish and there is less trading activity, the demand for liquidity is lower, making stable and secure financial products that generate returns more attractive. In Crypto, it is also common to see the use of high interest rates to attract users to deposit money, only to have their principal taken away in an opaque process.
In this report, we study different types of financial products in the Crypto market, hoping to provide users with a more comprehensive picture of the market's financial products and help readers understand what we are actually investing in when investing in Crypto financial products. What are the risks? How can we judge which financial products are relatively reliable?
We categorize the products in the market into the following types by providing the types of financial product platforms:
Centralized financial products
Financial products provided by centralized exchanges
Financial products provided by Crypto lending/banking
Investment financial products provided by traditional financial institutions
Decentralized financial products: Decentralized financial protocols (DeFi protocols)
Financial products provided by centralized exchanges have opaque returns and fund flow, existing fund risks, but they have a wide variety and relatively high returns
Centralized exchanges, in order to increase user stickiness and attract more users, generally engage in various related businesses on the basis of trading functions, and financial management is one of them. The financial products offered by centralized exchanges can be divided into four types: active and fixed-term deposits, proxy participation in decentralized financial management, options trading products, and Launchpool. Overall, centralized exchanges offer the most diverse range of financial products with relatively high returns, but also relatively high opacity. Especially for non-compliant exchanges, the flow of user funds is not publicly disclosed, which carries the risk of misappropriation.
Crypto lending/banking offers relatively high transparency and safer funds for financial products
Crypto Banking companies operate deposit and loan businesses using digital assets as the underlying assets, similar to traditional banks. Crypto Banking institutions place greater emphasis on fund security and are able to provide long-term loan services to institutional users, while institutions can provide long-term and stable interest rates for Crypto Banking deposit users. On the other hand, active and fixed-term deposits provided by centralized exchanges are only used for platform-related businesses, and the interest rate depends on the utilization of funds, making it relatively unstable with lower returns during periods of low loan demand. Therefore, for users with long-term financial management needs and lower risk tolerance, Crypto Banking is a good choice. These platforms offer a relatively wide range of financial products with higher transparency and safer funds. Currently, only Crypto Banking offers long-term fixed-income financial services with stable returns.
Traditional financial institutions offer a limited range of investment and financial products, but are more regulated and transparent
Traditional financial institutions provide users with channels to invest in Crypto using fiat currency without directly holding digital assets. Traditional financial institutions can only provide financial products to eligible investors in countries and regions where such services are legally allowed, and they are relatively more regulated and transparent. Due to regulatory constraints, traditional institutions can currently only provide trusts/funds that track Crypto trends, resulting in a limited range of product types.
Decentralized financial products have unstable returns but high transparency and low entry barriers
The definition of decentralized financial products is based on DeFi protocols built on Layer 1 or Layer 2 ecosystems such as Ethereum and Arbitrum, which provide users with asset allocation, management, and interest earning functions.
Users interact directly with these protocols through Crypto wallets, and in general, users need to transfer assets from their wallets to the treasuries (smart contracts) of these protocols. These assets will then be allocated to other protocols in the market, generating profits by providing liquidity for various economic activities such as trading and lending in the market.
Decentralized financial products mainly include lending ( Aave, Compound), yield aggregators (Yearn Finance), structured products (Ribbon Finance), liquidity mining (Uniswap, Curve), and liquidity staking (Lido).
The advantages of decentralized financial products are high transparency, low entry barriers (only requiring a wallet address, no KYC required), and transparent returns. However, the disadvantages include being heavily influenced by market conditions and having very low returns during bear markets. Currently, only lending protocols can barely maintain a certain scale, while the TVL of other yield types protocols has decreased significantly. There are few projects that can provide positive returns consistently.
For more information, please download the full report to read.
