Weekly Interest Rate Roundup: July 12

COMP recursive lending rate = all-in supply + 3 * (all-in supply - all-in borrow)

I recently spoke with an acquaintance who told me that he just borrowed ~30M USD from a large centralized lender for a 9 month term at a fixed rate of 11.5% on an overcollateralized basis.

What a shock! Why not borrow from Notional at 3% fixed (an 8.5% lower rate), or from Compound at 1.5% variable (a 10% lower rate)? What about centralized lenders, even now after all this turmoil, did he value so much that he was willing to pay such a substantial premium?

This friend of mine is not unusual - there are many such cases. You might expect that after a market crisis in which DeFi protocols worked perfectly while CeFi lenders went insolvent, you would begin to see borrowers migrate their positions over to these battle-tested DeFi protocols.

It hasn't happened. In fact, the spread between DeFi borrowing rates and CeFi borrowing rates has increased! Far from losing business, CeFi lenders are now charging their borrowers more than ever before due to a winnowed field of players.

It boils down to comfort - a lot of people really value the safety and flexibility of dealing with a human vs the rigidity of dealing with a protocol. We've all seen the downside of centralized lenders in the past few months, but it's worth recognizing the upside as well. I don't expect that rate differential to last forever, but at least for now it just shows how much people value relationships in business.

Teddy