20% returns over in CeFi, DeFi lives on

PARIS — Celsius and Voyager Digital were once two of the biggest names in the crypto lending space, because they offered retail investors outrageous annual returns, sometimes approaching 20%. Now, both are bankrupt, as a crash in token prices — coupled with an erosion of liquidity following a series of rate hikes by the Federal Reserve — exposed these and other projects promising unsustainable yields.

“$3 trillion of liquidity will likely be taken out of markets globally by central banks over the next 18 months,” said Alkesh Shah, a global crypto and digital asset strategist at Bank of America.

But the washout of easy money is being welcomed by some of the world’s top blockchain developers who say that leverage is a drug attracting people looking to make a quick buck — and it takes a system failure of this magnitude to clear out the bad actors.

“If there’s something to learn from this implosion, it is that you should be very wary of people who are very arrogant,” Eylon Aviv told CNBC from the sidelines of EthCC, an annual conference that draws developers and cryptographers to Paris for a week.

“This is one of the common denominators between all of them. It is sort of like a God complex — ‘I’m going to build the best thing, I’m going to be amazing, and I just became a billionaire,'” continued Aviv, who is a principal at Collider Ventures, an early-stage venture capital blockchain and crypto fund based in Tel Aviv.

Much of the turmoil we’ve seen grip crypto markets since May can be traced back to these multibillion-dollar crypto companies with centralized figureheads who call the shots.

“The liquidity crunch affected DeFi yields, but it was a few irresponsible central actors that exacerbated this,” said Walter Teng, a Digital Asset Strategy Associate at Fundstrat Global Advisors.

During the boom in digital asset prices, retail investors were able to earn outlandish returns by parking their tokens on now defunct platforms like Celsius and Voyager Digital, as well as Anchor, which was the flagship lending product of a since failed U.S. dollar-pegged stablecoin project called TerraUSD that offered up to 20% annual percentage yields.

The system worked when crypto prices were at record highs, and it was virtually free to borrow cash.

But as research firm Bernstein noted in a recent report, the crypto market, like other risk-on assets, is tightly correlated to Fed policy. And indeed in the last few months, bitcoin along with other major cap tokens have been falling in tandem with these Fed rate hikes.

In an effort to contain spiraling inflation, the Fed hiked its benchmark rate by another 0.75% on Wednesday, taking the funds rate to its highest level in nearly four years.

Technologists gathered in Paris tell CNBC that sucking out the liquidity…