Checking the math on Lava’s ‘millions’ in user savings
Bitcoin-backed lending company Lava claims to have saved users millions in interest costs by offering loans with interest rates as low as 7% annually. However, critics, including Jack Mallers of competitor company Strike, have questioned these claims, arguing that Lava's actual interest rates, including promotional rates, additional charges, and effective annualized percentages, can reach over 35% after one month. Lava's lack of regulatory credentials, as opposed to Strike's money transmitter licenses, has also been highlighted as a concern. Questions remain about how Lava achieved such savings for users given the high actual rates, but the company has yet to respond to these critiques.
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Lava's Interest Rate Claims
Bitcoin (BTC)-backed lending company Lava recently claimed to have saved its users “millions in interest costs” by refinancing their loans to interest rates as low as “7% all-in for a full year.” However, to several critics who have questioned the company over the past few weeks, this claim was the straw that broke the camel’s back.
Jack Mallers' Response to Lava's Claims
Jack Mallers, CEO of Lava's competitor Strike, published a spreadsheet to debunk Lava’s claim. In response to a customer request to match Lava’s advertised 5% rate after Strike announced a 9.5% rate for BTC-backed loans, Mallers explained the differences between the two lenders in detail.
Mallers pointed out that Lava is “not a regulated financial institution,” while Strike holds money transmitter licenses (MTLs) in the vast majority of U.S. states. In contrast, Lava has no MTL licenses in any U.S. state. Mallers also questioned Lava founder Shehzan Maredia’s assertion of achieving “7% all-in” interest rates. "What is your actual pricing?" Mallers asked, highlighting a lack of clarity in Lava’s claims.
Comparison of Effective Interest Rates
Mallers provided a detailed comparison of the effective interest rates between Strike and Lava. According to his calculations:
- At the end of the first month, Strike offers an effective APR of 10%.
- Lava’s effective APR, however, reaches 35.2%, significantly higher than Maredia’s “aim” of 7% all-in interest rates.
Lava reveals the following breakdown for its rates:
- 5% promotional rate for two weeks.
- 7% post-promotional rate.
- An additional 2% capital charge.
This results in an annualized interest rate of 35.2% for Lava users after the first month, according to Mallers’ analysis. He noted that a $750,000 BTC-backed loan from Lava would not fall below Strike’s 10% effective rate unless held for more than nine months.
Questioning Lava's Claims of Saving Millions
Lava’s founder Shehzan Maredia has tweeted claims of saving users “millions in interest costs” even though the company’s loan product has only been available for a few weeks. Given that Lava’s one-month effective APR is higher than 35%, many critics find the math behind this claim hard to believe.
Indeed, Maredia’s aspiration to achieve “7% all-in” interest rates for BTC-backed loans leaves one critical question unanswered: How has Lava saved its users “millions in interest costs” within a few weeks at such high annualized rates?
Social Media Criticism and Lava's Silence
On social media, critics have repeatedly asked Maredia to address the gap between his 7% “aim” and the actual effective rate Lava users are paying after the first month. Despite the criticism, Maredia has refused to back down from his stated guidance.
Protos has reached out to Lava for additional comment and will update the story if and when new information is received.