Gemini Dollar lending rates on decentralized finance (DeFi) lending protocol Aave soared as high as 73% on Wednesday after Gemini announced that withdrawals from its Earn product may be delayed due to Genesis' lending arm halting withdrawals outright. Genesis services the exchange's Earn product.
There are two likely reasons that these rates would spike above 50%.
The first is that speculators are attempting to short the asset. Second, liquidity may be fleeing the pool and being converted to an alternative asset.
Rates on platforms like this are a function of supply and demand; as supply shrinks or demand spikes, the rate to lend out the asset in question will rise to attract holders to deposit their funds.
At its peak today, the rate for lending hit a whopping 73% as both of these conditions appeared.
By press time, however, the supply of GUSD on Aave had soared from 10 million to 15 million, and the rate had already dropped back down to 2.0%.
Mark Zeller, integration lead at Aave, reminded users on Twitter that GUSD cannot be used as collateral on the lending platform, "so no risk of bad debt."
But since GUSD can be lent out on Aave, liquidity providers who acted quickly enough could "enjoy near 3-digit yield."
Before u ask anon.
GUSD cannot be used as collateral on Aave. So no risk of bad debt.
I personally think there's zero issue with it with my current knowledge.
So if u wanna enjoy near 3 digit yield before it get arb, have fun! pic.twitter.com/Z5ay54PYeg
— Marc Zeller 👻 💜 🦇🔊 (@lemiscate) November 16, 2022
Gemini joins DeFi
Gemini was founded by billionaire brothers Tyler and Cameron Winklevoss in 2014. The Gemini Dollar, the exchange's dollar-pegged stablecoin, was launched in September 2018. Gemini published a blog post on Wednesday morning explaining their pause on Gemini Earn news was a knock-on effect from Genesis Capital.
Genesis suspended client withdrawals from its lending arm early Wednesday morning, citing "FTX impact." FTX Group, which includes Sam Bankman-Fried's crypto exchanges FTX.com, FTX US and trading desk Alameda Research, filed for bankruptcy on Friday.
For stablecoins, supply tends to track closely with their market capitalization since the tokens are created when investors buy them and destroyed when they're redeemed. GUSD's market cap blew past its recent all-time high market cap of $410 million last month when it signed an agreement with MakerDAO to offer the protocol 1.25% rewards on staked GUSD.
As of Wednesday morning, MakerDAO had $435 million worth of GUSD on its platform—a more than 10x increase from October. MakerDAO's GUSD supply accounts for roughly two-thirds of the stablecoin's $678 million market cap, which experienced a sharp drop on Wednesday morning's news.
Sébastien Derivaux, MakerDAO's asset-liability lead, told Decrypt that those funds "have no link with Gemini Earn."