DeFi vs CeFi: Where should you be earning yield?

Posted: 6 July 2021 6:00 pm
News
defivscefi_finder_1800x1000

CeFi now offers highly competitive rates for cryptocurrency and fiat - how can you take advantage?

Earning interest on assets you already own is perhaps the easiest way to grow your portfolio.

The risk is considerably lower than trading, and doesn't require fresh capital. Plus it puts lazy money to work.

But where is the best place to earn interest for cryptocurrency users?

Most people think of DeFi as the only way of earning interest (ie, yield) on crypto assets. But there's a much easier and lower-risk alternative for earning interest: Centralized Finance (CeFi).

Best of all? The rates can be just as good, if not better.

CeFi vs DeFi lending rates

Take a look at this table from DeFi Rate which tracks lending rates for leading CeFi platforms.

A table showing lending rates from CeFi platforms BlockFi, Nexo and Celcius. Rates range from 3.5% - 8.88% on assets like BTC, ETH and USD stablecoins.

Then compare that to the rates for three of the biggest DeFi protocols.

A table showing lending rates from DeFi protocols Compound, Aave and Yearn. Rates range from 0.16% - 2.44% on assets like BTC, ETH and USD stablecoins.

The CeFi lenders (BlockFi, Nexo and Celsius) all currently offer higher rates than their DeFi counterparts (Compound, AAVE and Yearn). They also offer the highest rates for many assets, which we've highlighted in green boxes.

Why the higher numbers? CeFi lenders use more traditional business models which allow them to offer more stable rates. They lend your funds out to individual borrowers and institutions with fixed repayment rates. That makes for a more predictable rate.

Conversely, DeFi protocols mainly use variable rates that are dictated by algorithms, which respond to changes in the market every few minutes.

The table below contains some of the leading CeFi providers and exchanges that offer similar services, which can be compared on things like supported coins and fees.

Name Product Deposit methods Fiat Currencies Cryptocurrencies
Nexo Cryptocurrency Lending
Nexo Cryptocurrency Lending
Bank transfer, Cryptocurrency
EUR, GBP, USD

14
cryptocurrencies

Borrow and lend fiat, stablecoins or cryptocurrency, with 24/7 customer service and the option of using NEXO tokens for more competitive offers.
Celsius
Celsius
Bank transfer (ACH), Bank transfer, Credit card, Simplex
USD, AUD, EUR, GBP, CAD

42
cryptocurrencies

Earn interest on your cryptocurrency and stablecoins, or take out a cash loan against your holdings with Celsius. Enjoy perks with the CEL token.
BlockFi
BlockFi
Wire transfer
USD

10
cryptocurrencies

Deposit your cryptocurrency with Block.fi to earn interest, or take out a cash loan without having to give up your investment
Crypto.com App
Credit card, Cryptocurrency, PayPal, TransferWise, SEPA
USD, AUD, CAD, CHF, EUR, GBP, NZD, SGD, JPY, ZAR & 9+ more

145
cryptocurrencies

Get 0% fees on credit/debit card purchases for 30 days after signup.
Buy 80+ cryptocurrencies, earn up to 8% on holdings, pay with your crypto for cashback at stores, get loans and more with this complete crypto-finance platform.
Binance Cryptocurrency Exchange
Credit card, Cryptocurrency, Debit card, Osko, PayID
USD, AUD, GBP, CAD, EUR, CNY, RUB, TRY, NGN, UAH & 40+ more

263
cryptocurrencies

Binance is the world’s largest exchange by trading volume. Get started with instant zero fee AUD deposits and withdrawals in Australia, and enjoy low trading fees, a wide selection of cryptocurrencies and 24/7 local customer support.
KuCoin Cryptocurrency Exchange
Cryptocurrency, PayPal, Wire transfer, Credit or Debit Card, SEPA
USD, EUR, GBP, RUB, CNY, AUD, KRW, JPY, TRY, VND & 40+ more

238
cryptocurrencies

Finder Exclusive: Get up to 10 USDT in trading fee rebates for signing up and making a deposit, and up to 30 USDT in trading fee rebates after buying with fiat. T&Cs apply.
Browse a variety of coin offerings in one of the largest multi-cryptocurrency exchanges and pay in cryptocurrency.
loading

Compare up to 4 providers

DeFi protocols also suffer from popularity

When a protocol becomes popular, more lenders flock to it in order to earn yield. If the number of borrowers doesn't increase proportionally, then the interest rates for lenders go down.

As a centralised business, CeFi lenders can avoid this. They can prop up rates by sacrificing their own capital, or cap deposit amounts for individual lenders.

For instance, Celsius currently guarantees "6.20% on 1st BTC, 3.51% after".

So you don't just get potentially higher rates, but they are more stable, allowing you to forecast your returns and plan accordingly.

CeFi isn't just eating up DeFi. Banks are also in the crosshairs. Just take a look at the rates offered on fiat deposits from Nexo.

An image showing lending rates from Nexo on EUR, USD and GBP. All three currencies earn 10% APY.

A 10% rate absolutely smashes anything conventional banks are offering these days. And unlike DeFi which is restricted to digital assets, CeFi providers accept your old-fashioned dollars, pounds and euros. Celsius is also offering 8.88% on AUD, CAD and HKD stablecoins.

Insurance and risk

Another upside to using CeFi is insurance.

As a traditional business, CeFi platforms have more access to insurance options than their DeFi counterparts. Insurance policies vary between providers, ranging from comprehensive to "nothing to see here". Here are some example approaches from industry leaders:

  • Nexo: Digital assets are insured through a combination of specialist policies, up to a total of $375 million. Nexo plans to increase this amount to $1 billion by the end of 2021.
  • Celsius: Celsius doesn't guarantee insurance itself, but user assets are custodied with FireBlocks and PrimeTrust who have their own insurance policies. Details of those policies haven't been disclosed, however.
  • BlockFi: BlockFi doesn't publicly disclose any sort of insurance policy.

Another key benefit of using CeFi is avoiding fees. You only need to transfer your assets once. DeFi protocols can require multiple transactions which can easily eat away at your profits.

So we've gone through the benefits, but what about the risks?

  • Smart contract risk: CeFi lenders still utilise smart contracts which makes them vulnerable to many of the same risks as DeFi protocols. Some even use DeFi protocols to generate a portion of returns.
  • Deposit limits: There is typically a deposit limit for high-interest rate products, with the rates decreasing once the limit is crossed.
  • Centralisation: By using a CeFi platform you are trusting your cryptocurrency with a third party, rather than a smart contract which allows you to retain control over your private keys.

Even with the risks in mind, CeFi offers a seriously attractive alternative to DeFi.

Rates are stable and competitive, risk is reduced, and the process is straightforward. There's no need to learn how to use dapps, or chase yield across multiple protocols.

An increasing number of exchanges such as Binance, Crypto.com and KuCoin now offer lending products, which makes it even easier to keep your finances in one place.

Compare cryptocurrency lenders

Interested in cryptocurrency? Learn more about the basics with our beginner's guide to Bitcoin, dive deeper by learning about Ethereum and see what blockchain can do with our simple guide to DeFi.


Disclosure: The author owns a range of cryptocurrencies at the time of writing

Get into cryptocurrency

Ask an Expert

You are about to post a question on finder.com.au:

  • Do not enter personal information (eg. surname, phone number, bank details) as your question will be made public
  • finder.com.au is a financial comparison and information service, not a bank or product provider
  • We cannot provide you with personal advice or recommendations
  • Your answer might already be waiting – check previous questions below to see if yours has already been asked

Finder only provides general advice and factual information, so consider your own circumstances, or seek advice before you decide to act on our content. By submitting a question, you're accepting our Terms of Use, Disclaimer & Privacy Policy and Privacy & Cookies Policy.
Go to site