On Wednesday, Gemini Dollar lending rates on the decentralized finance (DeFi) lending protocol Aave surged as high as 73% when Gemini indicated that withdrawals from its Earn product might be delayed owing to Genesis’ lending arm halting withdrawals entirely. Genesis provides support for the exchange’s Earn product.
Two possible explanations exist for why these rates would rise beyond 50%. The first is that traders are seeking to sell the asset shortly. Second, liquidity may be leaving the pool and converting to another purchase.
Rates on platforms like this are determined by supply and demand; when supply declines or demand increases, the rate to lend out the asset in question will climb to encourage holders to deposit their funds. As both of these circumstances appeared today, the loan rate reached a stunning 73% at its height.
The supply of GUSD on Aave had increased from 10 million to 15 million, and the rate had already gone back to 2.0%. Mark Zeller, Aave’s integration lead, cautioned Twitter users that GUSD cannot be used as collateral on the lending platform, “thus there is no chance of bad debt.”
However, because GUSD may be loaned out on Aave, liquidity providers who move swiftly enough may be able to “enjoy near 3-digit return.” Tyler and Cameron Winklevoss, millionaire brothers, established Gemini in 2014. The exchange’s dollar-pegged stablecoin, the Gemini Dollar, was released in September 2018.
On Wednesday morning, Gemini issued a blog post clarifying that their halt on Gemini Earn news resulted from Genesis Capital. Genesis’ lending arm blocked customer withdrawals early Wednesday morning, citing the “FTX effect.” On Friday, FTX Group, which comprises Sam Bankman-crypto Fried’s exchanges FTX.com, FTX US, and trading desk Alameda Research, declared bankruptcy.
Because stablecoins are generated when investors purchase them and destroy them when they are redeemed, supply tends to correspond closely with market capitalization. GUSD’s market worth surpassed its all-time high of £344.19 million last month when it inked a partnership with MakerDAO to pay the protocol 1.25% incentives on staked GUSD.
MakerDAO has £365.07 million in GUSD on its platform as of Wednesday morning, a more than tenfold rise since October. MakerDAO’s GUSD supply accounts for about two-thirds of the stablecoin’s £569.01 million market valuation, which fell sharply on Wednesday morning’s news.