I had started using a few alternative interest account that provides decent interest rates and liquidity and has good security systems.
Overall, the main appeal to BlockFi is that they offer a very simplistic product without a lot of bells and whistles. This is arguably a good thing, as it focuses development time and dollars on what matters – the financial products and the returns they give you. No attention is wasted on speculative coins with questionable use cases.
The company received an outstanding $18.3 million Series A fund in August of 2019, and they went on to receive an additional $30 million Series B fund.
- It allows users to earn competitive compound interest rates on a stable coin USDC (US Dollar Coin)
- Keeps cryptocurrency deposits secure. BlockFi’s cryptocurrency deposits are held by the Gemini Trust Company, regulated by the New York Department of Financial Services.
- It is available worldwide, outside of sanctioned or watchlisted countries.
- Allows for anytime withdrawals. Users get one free withdrawal per month.
- It offers simple and easy registration.
On the lending side, BlockFi also offers loans backed by your cryptocurrency with a 50% LTV ratio which is a very conservative ratio and even with a 50% dip in crypto value your collateral has higher value.
The BlockFi Team
BlockFi’s leadership team has decades of experience in the traditional financial services and banking world, and the company claims to take a conservative approach to regulation that will position it for sustainable long-term growth and expansion.
Founder & CEO, Zac Prince has experience in leadership roles at multiple successful tech companies. Prior to starting BlockFi, he led business development teams at Orchard Platform, a broker-dealer and RIA in the online lending sector, and Zibby, an online consumer lender.
Co-Founder & VP of Operations Flori Marquez has experience managing alternative lending products. In the marketplace lending industry, she helped build, scale, and optimize a $125MM portfolio for Bond Street (acquired by Goldman Sachs). As Head of Portfolio Management, Flori managed all operations from point of origination through to default and litigation.
Chief Risk Officer, Rene Van Kesteren spent over 15 years at BAML as a Managing Director of ML Professional Clearing / Prime Brokerage. During his time there, he built the equity structured lending platform, including risk and regulatory compliance frameworks. Prior to BAML, Rene worked as an equity derivatives trader in Caxton’s Strategic Quantitative Investment Division
How Does BlockFi Make Money?
At its roots, BlockFi is a spread business that makes money by borrowing capital at a certain rate (the interest rates it pays to users) and lends it a higher rate (the interest rates it offers for BTC/ETH/GUSD loans).
A BlockFi blog post notes that the company primarily works with institutional counterparties to offer them liquidity. These borrowers consist of:
- Traders and investment funds seek arbitrage trading opportunities in a fragmented marketplace. They borrow cryptocurrency to close mispricing gaps between exchanges or dispersed markets. Margin traders will borrow to fuel their trading strategies.
- Over the counter (OTC) market makers that connect buyers and sellers that prefer not to transact over public exchanges, often at a steep mark-up. These parties need to keep cryptocurrency inventory on hand to meet demand. Since owning the cryptocurrency is very capital intensive and bears the risks of price volatility, OTC market makers will borrow from lenders such as BlockFi to facilitate their needs.
- Other businesses need an inventory of cryptocurrency to provide their clients with liquidity. This category includes businesses such as cryptocurrency ATMs that keep the majority of their cryptocurrency assets in cold storage and need some level of liquidity to function on a daily basis.
What happens to user funds during each of these scenarios? How are they protected?
Even if we trust a business, which there is little to indicate BlockFi can’t be trusted, the doomsday “what ifs” hold primary real estate in our brains.
Some unwanted scenario’s and what to expect,as per the interview with the team:
BlockFi gets hacked?: “Gemini is BlockFi’s primary custodian and BlockFi doesn’t hold private keys directly. Gemini keeps the vast majority of its assets in cold storage and is insured by Aon. Gemini is a licensed custodian and regulated by the NYDFS. They recently received SOC2 Type 1 compliance audit from Deloitte for their custody solution. We encourage users to read more about Gemini’s security. “
A user account is compromised?: “Since inception, BlockFi has not lost any customer funds. In the event that a user’s account is compromised, which our security protocols have caught in the past, we freeze the individual’s account for one week. Then, we conduct a Videoconference with the affected individual to verify their identity. We can then change their email address and password, so they can regain control of their account.”
Suddenly everyone defaults on their loans?: “When we lend crypto assets to generate yield, we have an extremely thorough risk management and credit analysis process. We only primarily lend to large, well-capitalized, institutional borrowers, or to counterparties willing to post collateral and provide the ability to margin call them on a 24/7 basis.”
“What that means is, if we are lending $1M worth of BTC to Firm XYZ, Firm XYZ collateralizes the loan (typically ~120%) by giving us ~$1.2M USD. If the loan were to then enter margin call and the borrower was unable to provide additional collateral (default), we would use their USD collateral to buy crypto.”
“We have actively lent since January of 2018, including throughout multiple periods of high volatility, without any losses across our entire lending portfolio. BlockFi is bound by NDA’s to discuss terms of specific borrowers/rates.”