“In the world of negligible interest rates or even negative interest rates, DeFi has come up with innovative options to provide a hefty and fixed rate of return on the investments made on these DeFi platforms. Though providing a fixed rate of return in the highly volatile crypto market is a challenging task, these DeFi platforms have somehow managed to introduce such innovative instruments.”
Fixed Rate of Return in the DeFi Space
Most of the DeFi protocols in the crypto space provide a variable rate of interest that keeps on changing with the fluctuation of prices of the crypto assets in the market. But, a new generation of DeFi protocols have originated that provides a fixed rate of return on the investments. The major advantage of the fixed rate of return is that more mature investors will enter the market and they will get guaranteed fixed returns.
Though the concept of fixed rate of return is a novel one, it is quickly gaining popularity among the investors that want to earn passive incomes on their assets.
The Secret behind Fixed Returns
There are numerous ingenious ways through which fixed rate of return can be obtained in the DeFi space and these include:
In this technique of providing fixed interest rate, the investor can purchase a fixed duration at a fixed interest in terms of a token on the DeFi platform. This token determines the duration of the investment made and the fixed interest that has to be paid on the completion of the duration. For example on a XYZ DeFi platform, an investor purchases $100 worth of USDT at a fixed 5% interest rate. At the end of the year the investor will receive $105.
These platforms achieve this fixed return by over collateralizing the investment to ensure that the fluctuation in price does not affect the return of the investor.
Another technique to provide a fixed rate of returns is through averaging. Such protocols offer fixed rate of return products that are based on the average returns from the lending platforms. For example, if crypto lending platforms offer an average of 10% interest on a particular cryptocurrency, these protocols will create fixed interest products that will offer around 7.5% interest in the short term and 2.5% in the long term. This low long term interest rate is kept as a hedge if the interest rates for the cryptocurrency are lowered by the lending platform.
Fee and Staking Technique
Another innovative technique to provide fixed rate of return in the DeFi space is by charging high fees from the borrower to create a treasury that will help in providing a fixed interest for a lender. These protocols have another method of earning crypto by using the deposited funds by the lender for staking the cryptocurrency thus ensuring a steady flow of income that can be used to provide a fixed rate of interest.
Disclaimer: The article is just to provide information and shouldn’t be considered as any financial advice. It is advisable to conduct thorough research before investing in any cryptocurrency.
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