A prominent player in the cryptocurrency sector has recently made strides in decentralized finance (DeFi) by integrating a new lending product that allows users to leverage Bitcoin-backed loans. This initiative, facilitated through the decentralized finance protocol Morpho, is notable for its collaboration with a curator known as Steakhouse. The capital generated through this partnership includes performance fees, which are derived from user repayments on the loans.
The increasing popularity of this product has been evident as users are employing their Bitcoin-backed loans for various significant purchases, including cars and home renovations. Although the product has started generating profits, its financial mechanisms are not entirely transparent on-chain. Coinbase, the exchange providing the infrastructure for this initiative, has been discreet about the specific arrangements tied to the performance fees being shared with Steakhouse, a collaborator on Morpho.
Coinbase allows users to deposit wrapped Bitcoin and USDC into vaults on the Morpho platform. Through these vaults, users can either post Bitcoin as collateral for loans or deposit USDC to earn yields. Morpho recently reported that its circular market has surpassed $1 billion in originations, underscoring the growing activity in this space.
Users making payments on their loans contribute a percentage of earned yield to curators like Steakhouse, who are responsible for managing risk on the platform. Notably, Steakhouse has established a vault that currently offers users a yield of 5.6% APY on USDC deposits, while also taking a significant performance fee of 25%, one of the highest on Morpho, which is shared with Coinbase.
This arrangement has raised questions about potential conflicts of interest, especially since the FAQ for the product indicates “no Coinbase fees” and suggests that interest rates are determined by “open lending markets.” Coinbase maintains that it is dedicated to a transparent and sustainable financial product ecosystem, but the finer details of the partnership with Steakhouse remain undisclosed, complicating users’ understanding.
Max Branzburg, head of consumer products at Coinbase, describes the company’s role as a “technology provider” rather than a direct lender, positioning itself as a bridge for users looking to engage with decentralized protocols. He emphasizes that this approach allows for greater scalability compared to traditional centralized lending services, which are often hindered by regulatory constraints.
Despite the significant demand—over 14,200 wallets have participated in the product since its launch in January—this still represents less than 1% of Coinbase’s user base. Branzburg notes that users are primarily taking out loans averaging around $50,000.
The lending product operates on Base, Coinbase’s Layer-2 Ethereum network, which indirectly contributes to the firm’s revenue through transaction fees on the platform’s sequencer. Furthermore, Coinbase benefits from the use of cbBTC, the wrapped Bitcoin variant provided by the exchange, and USDC, which is backed by Circle. Recent adjustments to USDC lending rates on Morpho have also highlighted discrepancies in what users receive versus on-chain representations.
As the regulatory landscape for cryptocurrencies evolves, there seems to be a more favorable environment for crypto lending in the U.S. Coinbase indicates plans to raise user loan limits dramatically, potentially unlocking billions in assets for lending. This proactive regulatory navigation reflects a commitment to embracing the power and utility of Bitcoin, DeFi, and self-custody within their offerings.
