I am not sure of all the answers, but for the blockfi model here is what I took away from the hour I spent looking at this:
- People with a lot of cryptocurrency gains have a desire to get USD to pay for things without selling their crypto and incurring taxes. Therefore they will take a bitcoin backed loan and take out dollars. So yes, they may be giving 1.2 in collateral, but that collateral is highly volatile. They are trusting their crypto will continue to grow faster than the interest they pay on doing this.
- Institutions short bitcoin need to be able to borrow the bitcoin to do so, and blockfi provides that means. (Shorting, or short-selling, is when an investor borrows shares and immediately sells them)
- I think the stable coin loans are mostly for traders and liquidity who are using these coins to move in and out of crypto and across exchanges, or hedging shorts, etc.
After reviewing the below (
https://coincentral.com/blockfi-review/) and the above thoughts, I just decided that the fact I have crypto holdings is risky enough and can see how big enough volatility could cause problems that ripple through to blockfi users. They aren't paying 6-8% interest because this is "safe". The fact that bitcoin pays a lower interest rate then stable coins implies stable coin lending even more risky then bitcoin.
----------
How Does BlockFi Make Money?
At its roots, BlockFi is a spread business that makes money by borrowing capital at a certain rate (the interest rates it pays to users) and lends it a higher rate (the interest rates it offers for BTC/ETH/GUSD loans).
A BlockFi blog post notes that the company primarily works with institutional counterparties to offer them liquidity. These borrowers consist of:
Traders and investment funds that seek arbitrage trading opportunities in a fragmented marketplace. They borrow cryptocurrency to close mispricing gaps between exchanges or dispersed markets. Margin traders will borrow to fuel their trading strategies.
Over the counter (OTC) market makers that connect buyers and sellers that prefer not to transact over public exchanges, often at a steep mark-up. These parties need to keep cryptocurrency inventory on-hand to meet demand. Since owning the cryptocurrency is very capital intensive and bears the risks of price volatility, OTC market makers will borrow from lenders such as BlockFi to facilitate their needs.
Other businesses that need an inventory of cryptocurrency to provide their clients with liquidity. This category includes businesses such as cryptocurrency ATMs that keep the majority of their cryptocurrency assets in cold storage and need some level of liquidity to function on a daily basis.