Decentralized Finance (DeFi) is only one of many different ways to earn passive income by lending crypto. Over the past few days, I have received an increasing number of questions about Centralized Financial (CeFi) crypto lending. Before beginning the article, I want to be clear that I currently do NOT use any CeFi lending platforms and believe that DeFi better embodies the decentralized, pseudo-anonymous goals that cryptos were originally designed to promote. That being said, I do recognize that CeFi can offer some benefits if the users are willing to comply with KYC requirements and trust a centralized third party with their coins. My goal in this article is to highlight the areas in which CeFi compares favorably to DeFi and give my opinions of two leading CeFi platforms.

Part I CeFi vs DeFi

Let's start off with the basics of what I mean by a centralized financial platform. A centralized financial platform is any platform where you must deposit your coins into a wallet that is not your own. For example, your traditional fiat currency bank is a centralized institution. You deposit your money in the bank and in return, the bank gives you a claim on the money. The money itself is no longer yours, you just have a claim on a certain amount of money that the bank now owns. CeFi applications work much the same way, you deposit money into a centralized account that the institution then lends out. It is a bit of an oversimplification, but think of CeFi as a "Crypto Bank." It borrows many features of a traditional bank (KYC, custodial deposits), but applies these features to crypto.

For a variety of reasons, many crypto purists view CeFi as the antithesis of what crypto was designed to represent. Cryptos were meant to give people a decentralized way to transact and store value. With crypto, we don't need a third party to make a payment, secure a loan, or transfer value. As long as we own the keys to our wallet or funds cant be frozen when some third party wants to suspend our account. Cryptos really do bring a significantly higher level of security and personal freedom than traditional financial systems, so many feel that introducing a centralized entity into the decentralized crypto space runs counter to this decentralized ideology.

That being said, I realize that sometimes practicality takes precedence over purism and I do admit that there are some instances in which CeFi can outperform DeFi. One of the best arguments for CeFi is considerably higher interest rates. As many of you may know, the highest-earning assets on DeFi are stablecoins. Depending on the protocol and coin you are lending, interest rates bounce between 4-6%. On DeFi, non-stable cryptos, such as BTC and ETH have considerably lower interest rates. At the time of writing, WBTC earns less than 1% interest on Compound while BAT earns just .28% and 0x earns about .14%.





CeFi applications are able to offer considerably higher interest rates than DeFi. For example, Nexo offers 8% interest on its stablecoins, which more or less doubles the interest rate found on Compound, and Celcius network offers 3.55% interest rate on BTC which is more than 3X the interest rate that users could earn on Compound.





In economics, I learned the "Rule of 72" which is a good rule of thumb for determining how long it will take your money to double at a given interest rate. To estimate how long it will take your money to double, simply divide 72 by the interest rate.For example, the 4% interest rate for USDC on Compound and the 8% on Nexo may not seem like a big difference, but it would take 18 years for your money to double on Compound vs 9 years on Nexo.

Part II Nexo vs Celsius

As much as I hate to admit it, CeFi platforms simply out-compete DeFi in terms of the interest rate. Whether or not that higher interest rate is worth giving up decentralization is a call that you will have to make yourself. While I was researching CeFi, I compared two different platforms - Celsius Network and Nexo. Although CeFi is not my specialty, I did notice some quite striking differences between the two platforms.

Audit - Nexo takes the edge here. They are audited by Deloitte, one of the most prestigious accounting firms in the world. By contrast, Celsius is "finalizing an agreement with a reputable external auditor." I give Celsius credit for pursuing an audit agreement, but at the end of the day, I have to give the edge to Nexo. I am a very conservative investor, and at least in my mind, and the fact that Nexo is currently audited by a Big 4 accounting firm gives me peace of mind that my investments will safer than a firm that has not yet completed a formal audit.

Insurance - Nexo is insured by BitGo for up to $100 Million, but I am a little bit confused by Celsius's insurance status. Three months ago, the company posted that they had coverage by BitGo for up to $100 Million, which is a good thing. However, the FAQs still have a post from four months ago which indicates that there is no insurance on deposits. After digging deeper into the FAQ section, I believe that Celsius is insured, but has just not updated this old material on their site. It may seem small to some people, but I have to admit that the lack of clarity regarding the insurance policy/failure to maintain updated info would make me a bit less likely to use the site.

Supported Coins - Celsius is the clear winner here. At the time of writing, Nexo allows a wide variety of coins to be used as collateral for loans, but you can only earn interest on fiat and a few stablecoins. By contrast, Celsius supports crypto lending for 24 coins with three more on the way soon.

Accessibility - This is a relatively minor issue, but Celsius has an app only interface. By contrast, Nexo has a website and app.

Rates - Celsius takes the title on interest rates as well. Not only does Celsius offer interest rates on more coins, but they also have a slightly higher interest rate on the coins that are common to both Celsius and Nexo. Stablecoins which earn an 8.05% rate on Celsius and 8% on Nexo.









Summary

In general, I prefer DeFi over CeFi, but I have to admit that the higher interest rates on CeFi are very tempting. Of the two platforms that I analyzed, I think that I would be more likely to lend on Nexo. I mainly lend stable coins, which have comparable interest rates on Nexo (8%) and Celsius (8.05%). I am a very risk-adverse investor, so I would gladly give up an extra .05% interest so that I could feel more comfortable with Nexo's more comprehensive and clearly explained insurance and audit policies. An investor wanting to lend BTC, ETH, XRP, XLM, or other non-stable cryptos obviously wouldn't be able to use Nexo due to lack of supported coins; for those investors, Celsius might be the better answer. At least for the time being, I will stick with DeFi lending protocols, but I have enjoyed broadening my horizons and exploring some of the benefits of CeFi. The best part of cryptos is that there are so many choices and different investors can come to their own conclusions about what is best for their specific circumstances.

References:

https://support.celsius.network/hc/en-us

https://nexo.io/why-nexo

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https://unsplash.com/@anvision

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