In a separate article about earning passive income we explained how interest rates are set in traditional banking – via a central bank. Crypto doesn’t have a central bank, instead rates are determined by demand. CEFI providers loan out deposited funds charging interest; the greater the demand for borrowing the greater the interest for savers.
This is why interest rates are highest for Stablecoins because the lack of volatility makes them a preferred coin within DEFI. Even better interest rates are offered if you accept the interest in a platform token.
Staking rates may also reflect the arbitrage available to CEFI providers from offering rates to customers that are below the rate they can earn by staking funds directly with Proof of Stake coins.
A platform token is a cryptocurrency created specifically to function within the economy of a specific CEFI provider.
- By offering interest in the token, it incentivises users to hold it;
- Higher rates are offered for token deposits.
- Premium interest rates on deposits are offered for staking the token for fixed periods.
- Staking the token can also unlock additional services like cash back on a Visa card or retail rewards.
- The token is traded on exchanges like any other crypto
- Where the CEFI provider also offers exchange services the token can be used e.g. paying trading commission.
- Token economies are circular and promote Community interaction but there is no guarantee that the value of the token will increase.
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