In this post, we explain how BlockFi sets crypto interest rates for the BlockFi Interest Account (BIA*), what influences the rates, and a couple of real-life scenarios.
How Does BlockFi Set Crypto Interest Rates?
We offer a crypto interest-earning account through a product called “BlockFi Interest Account” (BIA). Currently, non-US clients can sign up for a BIA and US clients who had funds in their account prior to February 14, 2022 can continue to hold their funds on the platform. BIA allows some retail clients to hold certain cryptoassets on BlockFi and earn crypto interest. To generate revenue to pay this interest, BlockFi engages in a variety of activities, primarily lending those assets—cryptoassets and stablecoins—back to clients.
Supply and Demand of Crypto Lending
Illustrative example of how retail client funds and institutional demand intersect on BlockFi.
The crypto interest rate paid to retail clients is adjusted based on supply and demand. The supply is the amount of crypto funds that retail clients store on the broader market, which includes BlockFi and other crypto borrowing platforms. The demand comes from institutional and retail clients who borrow crypto funds. The crypto borrowing demand primarily falls into four categories:
1. Financial Institutions (majority of institutional clients)
Asset Managers, for hedging and shorting
Market Makers, for liquidity
2. Commercial (non-FIs, for regular business purposes)
Mining Companies, for equipment
Crypto Corporations (exchanges, custodians, etc.), for working capital
Crypto Foundations, for expenses (developer salaries, for example)
3. Retail Loans
BlockFi engages in crypto staking, which is the active participation of a user or institution contributing to a Proof of Stake (PoS) consensus protocol (such as ETH, DOT, SOL etc). A network participant can lock or "stake" their funds on-chain to participate in securing said network and get rewarded for doing so in the form of new coin issuance. BlockFi only engages in protocol-level staking and does not have any exposure to staking derivative tokens (e.g. stETH).
A majority of the demand for borrowing crypto comes from the first bucket—financial institutions. These institutional clients are willing to borrow crypto from BlockFi at specific rates based on the size and profitability of opportunities. For example, if there’s an opportunity where an institutional client has high confidence they can generate a certain return on the amount borrowed, they would be willing to pay less than that return to ensure their profit margin.
The demand from the four categories above provide the aggregate revenue for BIA. We pass the majority of this revenue to retail clients in the form of monthly interest payments, retaining some of it to sustain business operations, such as reinvesting into our product development, ensuring prudent risk management, and maintaining the security of our platform. We monitor institutional borrowing demand throughout the month for guidance on how we might adjust the crypto interest rates for the next month.
What Influences Institutional Demand for Crypto Borrowing?
Since institutional borrowers have the biggest influence on our crypto interest rates, it’s important to understand what influences their demand. Generally, there’s significant demand to borrow USD/stablecoins as the crypto economy has limited access to traditional USD funding sources. Traditional financial institutions typically don’t lend to crypto institutions, which has created an opportunity for BlockFi and other platforms to meet this funding demand. There are a number of factors that affect institutional borrowing demand, including:
Supply and Demand Macro Market: One of the biggest use cases for institutional clients is borrowing crypto to execute basis trading—which takes advantage of the difference between an asset’s current spot price and its futures price(s). It’s essentially an arbitrage where a trader benefits on the overpriced assets. For example, if the trader thinks the futures contract price of BTC is overvalued, they would buy the spot price of BTC and sell the BTC futures contract.
When the difference between the spot price and futures price is significant, there’s more demand for institutional clients to borrow crypto.
Since November 2021, we’ve witnessed Deribit and CME BTC Futures Implied Funding decrease, which means lower yield for institutional clients. This leads to less borrowing demand from institutions, and decreases the total interest revenue available to pass to clients.
New Entrants: When new lenders enter the market, whether from DeFi or CeFi, they attract more cryptoassets from retail clients. These new players bring more supply and drive down the rates that institutional clients pay. This may put pressure on APY interest rates paid to retail clients.
Regulatory Clarity: When there’s greater regulatory certainty around borrowing crypto assets, more institutional clients are more willing to borrow crypto. Given the regulatory uncertainty within crypto borrowing, there are a number of players on the sideline. Once there is more regulatory clarity, more institutions will likely enter the crypto borrowing market, which will likely increase APYs.
Why Does BlockFi have Tiers with Different Rates?
We primarily base crypto interest rate APYs on the rate and amount we’re able to originate loans with institutional clients, as well as market competition.
Some cryptoassets have a higher loan demand from institutional borrowers than other cryptoassets, generally meaning that BlockFi can pay higher rates on those assets and likely need to pay higher rates to attract assets to BlockFi. This is why different assets have different crypto interest rates—institutional clients are willing to pay different rates to borrow those assets. Borrowing demand also shapes the tiers we offer. If one cryptoasset has lower borrowing demand, and thereby BlockFi has lower utilization, then the tier ceilings and rates will be lower. If another cryptoasset has higher borrowing demand, and thereby BlockFi has higher utilization, then the tier ceilings and rates will be higher.
The diagram below is an illustrative example of this dynamic. In this hypothetical example, BTC has more supply and less demand, whereas USDC has less supply and more demand. We aim to match supply and demand, and the main lever we have to do that is adjusting crypto interest rates.
Illustrative example of how we aim to match supply and demand for each cryptoasset
Finally, it’s important to note the price of a cryptoasset such as BTC or ETH doesn’t have a significant impact on our interest rate APYs. The price could go up or down and that movement by itself doesn’t have a significant impact on the potential APY rate for that month.
We hope this provides useful insight into how crypto interest rates are set at BlockFi. One of our core principles is “transparency builds trust.” As the digital assets space continues to evolve, we aim to keep you informed about how we operate. We’ll continue to build and publish educational resources for you as we uphold this principle.
*The BIAs have not been registered under the Securities Act of 1933 and may not be offered or sold in the United States, to U.S. persons, for the account or benefit of a U.S. person or in any jurisdiction in which such offer would be prohibited.