Crypto Investment Products Report July 2023

Generating interest on assets is one of the important user demands in the financial industry, and it appears in various scenarios. In the emerging crypto market, it is also the case. Due to the convenient mobility of assets in crypto, whether it is on centralized exchanges, centralized banking institutions, or decentralized protocols, users can easily transfer their assets from on to another. Such mobility convenience also results in highly similar investment products in crypto, with similar returns.

When the market is good, whether it is for direct investment in cryptocurrencies, leveraged trading, or participating in activities such as IDO and mining, the demand for liquidity is high, resulting in "expensive money". This makes purely financial products less attractive to users. Conversely, when the market is bad, with fewer trading activities and lower demand for liquidity, safe and stable interest-generating products become more attractive. However, it is common in the crypto field to use high-interest rates to attract users to deposit money but then make the whole process opaque and rug the users' principal.

In this report, we researched investment products with cryptos as the underlying asset, hoping to provide users with a more comprehensive market overview of financial products and help readers understand where your money goes when investing in crypto products. What are the risks? How to judge which investment products are relatively reliable?

We classified the products in the market into the following categories by the companies/protocols that provide such services

• Centralized
  • Investment products provided by centralized exchanges
  • Investment products provided by centralized banking institutions
  • Investment products provided by traditional companies
• Decentralized: Decentralized finance protocols (DeFi protocols)

CEX Investment Products Have High Returns, but Low Transparency on Returns and Fund Flows, Leading to Fund Risks.

In order to improve user stickiness and attract more users, centralized exchanges usually provide various related businesses based on the trading function. The investment products offered by centralized exchanges can be divided into 4 categories: flexible and fixed-term deposits, proxy participation in decentralized finance, options trading products, and Launchpool. Overall, the types of investment products offered by centralized exchanges are the most diverse, and the returns are relatively high, but the transparency is very low. Especially for non-compliant exchanges, the flow of user funds is not publicly disclosed, which exposes users to the risk of misappropriation.

Crypto Lending/Banking Investment Products Have High Transparency and Relatively Safer Funds

Crypto Banking companies are those that provide lending and borrowing services based on crypto assets, similar to traditional banks. Crypto banking institutions pay more attention to fund safety and can provide long-term loan services to institutional clients, and institutions can provide long-term stable borrowing interest to crypto banking deposit users. On the other hand, fixed-term deposits offered by centralized exchanges are only used for internal business, and the return depends on the utilization of funds, which is relatively unstable and may have lower returns during periods of low borrowing demand. Therefore, for users who have long-term financial needs and lower risk tolerance, crypto banking is a good choice.

Traditional Financial Institutions Offer Limited Investment Products but Are More Regulated and Transparent

Traditional financial institutions provide methods for users to invest in crypto using fiat currency instead of directly holding crypto assets. These institutions can only provide products to eligible investors in countries and regions where it is legally allowed to provide services, and they are relatively more regulated and transparent. Due to regulatory constraints, traditional institutions can currently only provide trusts/funds that track crypto trends, and the product types is relatively limited.

Decentralized Investment Products Provide Unstable Returns, but Are Highly Transparent and Permissionless

Decentralized investment products are defined as DeFi protocols based on ecosystems such as Ethereum or Arbitrum's Layer 1 or Layer 2, which provide users with asset allocation, management, and interest-generating functions. These protocols interact directly with users through crypto wallets, and users generally need to transfer assets from their wallets to the protocol's treasury/vaults (smart contract). These assets will then be allocated to other protocols in the market to earn profits by providing liquidity for various economic activities such as trading and borrowing.

Decentralized investment products mainly include lending (Aave, Compound), yield aggregators (Yearn Finance), structured products (Ribbon Finance), liquidity mining (Uniswap, Curve), and liquid staking (Lido).

Decentralized financial products have the advantage of high transparency, low entry barriers (only requiring a wallet address without the need for KYC), and transparent returns. However, their disadvantage is that they are severely affected by market conditions, with very low returns during bearish market. Currently, only lending protocols can barely maintain a certain scale, while other types of investment protocols' Total Value Locked (TVL) have decreased significantly. There are also few stable projects that can provide positive returns.