On November 18, 2020, Ethereum Classic Labs, the organization behind Ethereum Classic (CCC:ETC-USD), published Packaged ETC (WETC).
The latter token allows ETC owners to “participate in Ethereum-based decentralized finance (DeFi) services,” according to Change.
One of these services, Celsius Networks, pays interest on investors’ cryptocurrency holdings.
At the time of the announcement, Decrypt contributor Connor Sephton wondered what was the interest to create the wrapped ETC. After all, for those who wanted to participate in DeFi, argued Sephton, wouldn’t it make more sense to buy Ethereum??
As someone who is trying to become crypto-literate, I wonder the same. From where I’m sitting, I don’t believe Wrapped ETC is DeFi nirvana.
To illustrate why I feel this way, I’ll take a look at Celsius Network, one of the biggest cryptocurrency lenders on the planet.
DeFi and CeFi
Celsius Networks has over 786,000 members and $ 21.3 billion in community assets. It has processed over $ 8.2 billion in loans since launch loan operations in July 2018.
In April, Benzinga published an article on the best brokers that pay interest on uninvested cash.
Interactive brokers was one of the names on the list. It has a multi-level blended rate system based on a combination of the money in brokerage accounts and the net asset value of the accounts. According to Benzinga, an Interactive Broker client with an account balance of $ 50,000 and $ 13,000 in cash would earn 0.219% interest on the entire $ 50,000.
Celsius’ offer is similar to that of Interactive, but the annual percentage rate that investors receive on their cryptocurrency is usually much higher.
For example, if an investor has two Bitcoins (CCC:BTC-USD) via Coinbase.com – currently worth around $ 35,775 per Bitcoin or $ 71,550 for both – and transfer them to your Celsius wallet, they are then online to earn 6.2% interest on a 12 month basis.
Celsius does a good job explaining how can it pay such high interest rates on its Bitcoin deposits. Much like the Interactive Brokers account, the amount of interest investors receive from Celsius will vary depending on the value of Bitcoin.
The risk associated with crypto loans
Hypothetically, if Bitcoin fell to zero, its owners could lose their investment and the interest they were paid on those coins.
When it comes to using Bitcoin as collateral for loans, because the collateral provided by borrowers is usually greater than loans, the risk of default is currently not very high.
For example, if someone were to use two Bitcoins as collateral for a $ 25,000 loan, 1%, over three years, he or she would have to provide an additional 0..8018 Bitcoins, or $ 28,684. That’s a 25% loan-to-value (LTV) ratio.
If the interest rate is raised to 8.95% over three years, the collateral drops to 1,4009 Bitcoins, which equates to an LTV of 50%. If the borrower does not pay the interest on time, Celsius will use the collateral to repay the loan.
The risk of such loans is minimal when the value of cryptocurrencies increases. However, given the volatility of Bitcoin and all other cryptocurrencies, including Etheruem Classic, a 50% LTV could quite quickly become a 100% LTV on a flash correction like the one that happened in May.
But as Celsius rightly suggests, banks could give savers higher interest rates, but they don’t.
“Most banks generally have between 14 to 25% return on their capital, so by paying 1% interest to customers, they keep more than 80% of profits and distribute these profits to their shareholders, usually in the form of dividends and share buybacks, ”Celsius wrote in 2019.
Crypto lending, while presenting risks, could become a more efficient peer-to-peer lending facility than what exists today, which makes this type of DeFi very compelling.
Ethereum Classic 2.0
As I continue to remind readers, I am becoming crypto literate. I am by no means an expert.
So when I was asked to write about Ethereum Classic, I immediately jumped at the concept of wrapped tokens and their use in DeFi. And while I have the idea of using a packaged Bitcoin token to facilitate smart contracts etc, I find it much more difficult to understand why I would want to own Ethereum Classic, packaged or not.
With so many different cryptocurrencies available that can be deposited with Celsius, I find it hard to understand why I should buy Ethereum Classic, the 22nd in terms of market cap.
In 2016, as Sephton mentions in his article, Ethereum Classic and Ethereum went in different directions due to a multi-million dollar hack.
Today, Ethereum pursues a proof-of-stake consensus algorithm, which I like from an environmental perspective, while Ethereum Classic sticks to a proof-of-work concept.
When researching DeFi nirvana, for me it’s almost like receiving top notch customer service. I’ll know when I see him. Wrapped Ethereum Classic is definitely not.
As of publication date, Will Ashworth did not hold (directly or indirectly) any position in the securities mentioned in this article. The opinions expressed in this article are those of the author, subject to the InvestorPlace.com Publication guidelines.
Will Ashworth has been writing about investing full time since 2008. His publications include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger and several others in the United States and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. As of this writing, Will Ashworth does not hold a position in any of the aforementioned securities.