DeFi vs CeFi: Where should you be earning yield?
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.
Then compare that to the rates for three of the biggest DeFi protocols.
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.
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.
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.
Disclosure: The author owns a range of cryptocurrencies at the time of writing