Dive Into Defi: Why Are BSC Yields So High?

Why Are BSC Yields So High?

The inspiration for this article came from the unlikeliest source, an ad on a Youtube video I was listening to while in the shower. It went somewhere along the lines of, “our bonds allow investors to earn a market-beating 3 to 5% APY during this time of historically low-interest rates.” It got better… “You only have to lock your money in for up to 6 months to earn these competitive yields!”

My first thought was… HA! But then it brought me back to reality and made me think… are yield farming rates turning me into, dare I say, a degen? I don’t think that to be the case. I really don’t. So now, I’m going to convince myself in this article that I’m not. I think the younger crypto investors call this coping? 

Right now, at this moment, I have Vapor/BNB earning me a measly 2,278% APY in a compounding vault. Ridiculous if you stop to really think about it. I calculated the average pre-compounding yield across my portfolio in BSC Defi. I’m sitting at about .5%, per day, or 182.5% APY. So what’s my point? I think it’s time to sit back and take a minute to put perspective on these yields. 

‍

Savings Accounts

With a quick google search, I discovered that “High Interest” savings account find themselves with landing around .5% APY. That’s lower than the average inflation rate. If I leave my money in a savings account, I’m losing. 

‍

CD’s

I had a CD when I was a teenager and deposited small amounts with every paycheck. I remember the interest rate being around 6%, which was considered pretty good! According to bankrate.com, the best available CD’s are about .6% APY, with a 5-year commitment. What?

‍

Bond Funds

Using an ETF screener, I sought out the highest yielding bond funds available on the market. The top fund yielding fund with the symbol TYD has a 10.25% Dividend. Not too bad. I know nothing about the fund.  

‍

Real Estate Investment Trusts

I happen to like real estate investment trusts to diversify into real estate while earning a dividend and maintaining liquidity. Using the same ETF screener, the top REIT offers a 10.19% APY. 

‍

Individual Stocks

Individual stocks often offer dividends and can range in the single-digit territory. I think it is great that you can hold ownership in a company you believe in while earning a share of the profit, but the dividend is usually nothing to get too excited about. AT&T, for example, pays a dividend of about 7.1%.

‍

Crypto Stable Coins

I was having a discussion with my financial advisor and we got on the topic of stable coins, particularly in De-Fi. He was trying to understand their risk factors after I told him I could pull 20% APY from holding USDT (At the time of writing this the APY for USDT in Beefy is actually 30.7%). Ultimately, it came down to… while the risk factor is low in the crypto landscape, there are obvious risks regarding smart contracts, wallets, etc. Rather than considering this a cash position, it is best to consider it a low-risk crypto position. I can live with that, and the 30% APY it offers. I would not utilize stable coins as the vehicle for my emergency funds, but It’s probably next on the list in terms of the best place to park some cash. 

BTC and ETH

BTC and ETH both come in with APY’s in the mid-teens in Beefy Finance. This may not be the best yield, but considering the hypothetical upside potential, it’s a strong reward for holding the biggest crypto assets long term. 

Liquidity Pairs

De-Fi liquidity pairs offer APY’s ranging from 30% to 100% on most of the large-cap cryptos, this yield is magnified when a yield optimizer is added into the equation. 

When looking back through this list of a wide variety of available interest rates in the market, It’s pretty obvious that the incredibly high APY’s in the hundreds or thousands is simply bananas. Even a 30% APY on USDT is a bit mind-boggling. To me, there are only two variables that exist to account for the high APY’s of BSC yield farming: Risk and market efficiency. 

This leads me to one question that I can’t quite shake: 

If market interest rates are a measurement of an asset’s risk (or at least perceived risk in an efficient market), is De-Fii as risky as the rates indicate, or is the market simply inefficient?

To me, the obvious place to assess this question is the current APY of USDT. If the current savings rate is .5% in your bank, while USDT can earn 30% in Beefy, is the stable coin 60 times riskier than simply holding cash in a bank account. I don’t have a way to measure this, but I find that to be unlikely. It is my best guess that BSC yield farming rates are at a point of extreme inefficiency, and the high rates are not necessarily an indicator of excessive risk (don’t get me wrong, there is plenty of risk, and we should all know that by now). 

I think, or at least have a hunch, that more funds will flow into the space causing yields to drop in most cases. That sounds bad, but could also be good for us early adopters of BSC, as the inflow of funds should cause an increase in asset prices. For now, the growth of the ecosystem is outpacing the inflow of funds, keeping rates high and earning potential intact. I’m going to get it while the getting’s good and wait for market efficiency to catch up. At least that’s my bet on BSC.  

Disclaimer: Don’t read this to mean a 15,000% APY is simply due to inefficiency and you should yolo next month’s rent at it. Don’t do it.