—By Ben Schuldenfrei, COO at Lendingblock—
Unlike savings accounts, crypto wallets don’t offer their users any interest on deposits. Crypto investors looking to generate extra return have recently turned to lending them out. But then comes the question: How? Well, there are many services and apps that allow you to do just that, but crucially, you need to decide if you want to use a CeFi (centralised finance) platform or a DeFi (decentralised finance) protocol.
Below are some factors to consider when trying to pick which one to use.
Custodial Vs Non-Custodial
One of the obvious differences is the custodial (CeFi) vs. non-custodial (DeFi) aspect to lending out your crypto. With CeFi services like Lendingblock, Celsius, Nexo and Crypto.com, the company becomes the custodians of your crypto and they lend it out to other parties. Whereas with DeFi dapps like Aave, Compound and dYdX, the protocols rely on smart contracts to execute transactions and lend out your crypto into liquidity pools for other DeFi users to dip into and borrow.
So, What Could Go Wrong?
In the case of CeFi, you are trusting the company you lend with to not run off with, or lose, your crypto. You also trust that you’ll be able to withdraw your tokens within a reasonable time, and that you’ll get the advertised interest rate you signed up for. Centralised lending services are often less transparent, whereas with DeFi dapps, everything happens on the blockchain.
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In the case of DeFi, there is the risk of getting scammed or hacked and oftentimes, the teams behind these protocols are completely anonymous, which makes recourse impossible. As DeFi protocols are run using smart contracts, it’s very possible for adept blockchain users to exploit the system and extract vast sums of money in the process, most recently seen with the recent $130m hack of Cream Finance in October.
“Our customers choose to use our platform because we offer institutional-grade security and unparalleled customer service that simply isn’t possible in DeFi, due to its inherently decentralised and anonymous nature.”, says Ben Schuldenfrei, COO at Lendingblock.
Lastly, the interest rates for lending vary greatly if you decide to go the CeFi or DeFi route, and typically, CeFi platforms offer greater interest rates than DeFi protocols. Customers of CeFi platforms such as Lendingblock, Nexo and Celsius can enjoy returns of over 10% a year on their crypto, whereas DeFi protocols offer only around 3%.
“People often assume that with more risk comes greater returns, but that simply isn’t the case in DeFi vs CeFi, where the safer option (CeFi) offers a greater return than the riskier (DeFi).”, says Alex Halamins, Operations Director at Lendingblock.
Lendingblock has was founded in 2018 and after creating and licensing our institutional grade lending and borrowing exchange to Eqonex (formerly known as Diginex, Nasdaq listed exchange), we have recently launched a new service to empower you to earn additional return on your crypto. Earn and Borrow are our new flagship products that allow you to securely earn regular interest at competitive rates and cheaply borrow stablecoin against your BTC and ETH holdings.
Learn more about Lendingblock here: https://www.lendingblock.com/