Traditional money markets seem to be in a tough spot right now. A recent graph (shown above) released by the Bank of Canada shows that the yields from traditional money markets have drastically declined in just these last few months. The report clearly indicates a sharp decline in traditional Canadian money market yields starting in February 2020 and they have continued to drop rapidly since. On the contrary, decentralized money markets are booming with cryptocurrency yield rates soaring as demand for DeFi services (decentralized lending/borrowing and trading) continues to increase.
The year 2020 began with the traditional money markets in Canada providing relatively decent yields. For example the 3 month treasury bills were at 1.64% APY, 6 month treasury bills at 1.69% APY and 1 year treasury bills at 1.72% APY. As of now, however, the 3 month Canadian treasury bill is sitting at just a 0.15% APY, 6 month treasury bills are at 0.18% and 1 year treasury bills are down to 0.22%. The Canadian treasury bill yield decline is just one example of how low the returns have gotten in the Canadian money markets; financial instruments across the board are showing a similar decline in yield rates.
Canada is by no means the only country where traditional money markets are performing poorly. Financial institutions globally are also reporting drastically declining yield rates in the money markets. Canada represents a useful benchmark or indicator of traditional money market performance globally due to the relatively advanced and stable Canadain economy. The outlook is bleak for the whole traditional economy, at least in the short-term.
DeFi Competing With Traditional Markets
Decentralized money markets, unlike their centralized counterparts, are booming and expanding rapidly. At this very moment people are lending cryptocurrencies on decentralized money markets and earning anywhere from 0.01% APR all the way up to 100%+ APR. Many lending opportunities offer a yield of 3-8% APR and beyond. You might be wondering why the aforementioned APRs tend to have so much deviation, and the reason for this is that there are a variety of decentralized platforms, each with different cryptocurrencies listed. Each platform utilizes its own mechanics for establishing interest rates for specific assets.
It is important to note that decentralized lending and borrowing is an industry still in its infancy and it continues to expand. An example of this expansion is UniLend, an emerging entrant in the industry which claims that half of the decentralized money market still remains untapped. Their team intends to create a DeFi platform that will enable users to integrate any Ethereum-based cryptocurrency onto one platform for decentralized trading, lending and borrowing. The UniLend team estimates that allowing more cryptocurrencies to participate in the DeFi free market via permission-less listings could potentially increase the liquidity of the DeFi ecosystem by an additional $29 billion USD.