James owns ten bitcoin on which he’d like to earn a steady passive income. James may decide to deposit his bitcoin on a crypto lending platform. But he still has some decisions to make. Should he opt for a CeFi (Centralized Finance) or a DeFi (Decentralized Finance) platform? Is he going to get the best interest rates on bitcoin?
On the other hand, Stevey has 3 ETH. Stevey needs some cash but still wants to hold on to his ETH. Therefore, Stevey stakes his ETH as collateral and borrows money from James through a crypto lending platform.
If Stevey can’t pay James, James will liquidate Stevey’s ETH. This means that Stevey will lose his collateral of 3 ETH to James.
That was a simple illustration of how crypto lending and borrowing works. In this blog, you will learn what crypto lending is, the difference between CeFi and DeFi lending, and where you can get the best crypto lending rates from either.
Lending rates at the time of writing.
What is Crypto Lending?
Crypto lending is a type of Decentralized Finance that acts as a bridge to allow investors to lend money to borrowers in exchange for interest on the original amount. A crypto lending platform is, therefore, the channel that connects the two parties.
How Does Crypto Lending Work?
Like we have just seen, there are three major players in the crypto lending framework: lenders, borrowers, and a platform that connects the two.
|Lenders||Crypto Lending Platforms||Borrowers|
|These are investors who want to earn passive income on their digital assets. They lend their digital assets to crypto lending platforms in order to earn interest.||These are third-party platforms that could be either decentralized or centralized. They connect the borrowers to lenders and handle the transactions.||Borrowers need funds and use their digital assets as collateral to get a loan.|
DeFi vs. CeFi Lending: What’s the Difference?
Even though both DeFi and CeFi lending involves exchanging various digital assets, the platforms that facilitate them have different underlying infrastructure that determines whether the platform is centralized or decentralized.
In DeFi lending, transactions are not handled by people but rather by smart contract codes. Additionally, DeFi platforms are non-custodial, meaning that only the user can touch or control their own funds.
Moreover, many DeFi platforms do not adhere to KYC (Know Your Customer) or AML (Anti-Money Laundering) regulations, thus helping their users maintain anonymity and privacy.
|Pros Of DeFi||Cons Of DeFi|
|Peer-to-peer transactions with no third party involved.||Since there is no centralized authority, DeFi platforms lack accountability. For instance, losing private keys will result in the loss of digital assets since no intermediary will intervene to aid recovery.|
|User sovereign as only the user has control over their assets.|
CeFi platforms emulate traditional banking infrastructure and regulations, whereby third-party intermediaries keep custody of funds and profit by lending funds to borrowers. They additionally ensure that collateral is securely stored.
CeFi platforms integrate KYC and AML, among other protocols, into their system.
|Pros Of CeFi||Cons Of CeFi|
|Regulatory protocols like KYC protect the integrity of the system from illegal activities.||Users have to trust a third party with their funds.|
|Offer a broader range of financial services like direct support for fiat currencies.|
Best CeFi Lending Rates
Nexo is one of the largest crypto lending platforms in the market. Founded in 2017, it boasts over $13 billion in assets under its management and over 2.5 million users worldwide. Nexo may be the best place to start if you have never used a crypto lending platform. This is due to its easy to master layout.
Nexo offers Annual Percentage Yields (APY) between 6% to 12% on various digital assets.
Additionally, it offers up to 12% interest on fiat currencies like USD, GBP, and EUR.
Stablecoins enjoy the highest rates in Nexo at 10%, which could go up to 12% depending on your “loyalty level.” This is determined by the ratio of NEXO, the platform’s native token, to other digital assets in your account. The higher the loyalty level, the better the rewards like the number of free crypto withdrawals, slightly higher saving rates, etc.
BlockFi is another simple to use CeFi platform that was founded in 2017. BlockFi offers up to 8% APY on stablecoins like Tether (USDT) and DAI and 5% APY on BTC and Ether. Interest on your digital assets accrues daily and is paid monthly.
BlockFi offers customers one free stablecoin withdrawal and one free crypto withdrawal each month. After that, customers will have to pay varying fees depending on the digital asset to perform withdrawals.
Best DeFi Lending Rates
Aave is one of the major players in the world of DeFi. Since it is a DeFi platform, Aave allows users to borrow and lend money without a middleman involved. Additionally, no Know Your Customer (KYC) or Anti-Money Laundering (AML) protocols need to be followed to use the platform.
Aave allows users to lend and borrow in 30 currencies, including Ethereum (ETH), Tether (USDT), DAI (Dai stablecoin), to name a few.
Compound is up there with Aave as one of the most popular and influential DeFi lending platforms. Compound is also more user-friendly than Aave. Since it does not have as many features as Aave, it is relatively easier for new users to navigate their platform. Also, you won’t have to go through any KYC or AML protocols to get started with them.
Compound offers users 15 currencies for lending at rates up to 5% APY on stablecoins like DAI, 9% on USD Coin (USDC), and 0.25% on WBTC (Wrapped BTC).
Additionally, Compound gives its customers an opportunity to earn COMP, their native token. COMP may not only be a good long-term investment opportunity but can also be used to create proposals and cast votes on Compound network decisions.
Crypto lending platforms might be a good avenue for earning passively from your digital assets due to the competitive rates offered. That said, CeFi and DeFi platforms both have their perks and drawbacks. For instance, CeFi platforms such as Nexo offer interest on fiat currencies. On the other hand, DeFi platforms offer peer-to-peer transactions with no third party involved.
Want to learn about more exciting investment opportunities? Subscribe to Bitcoin Market Journal today!