For the last two months, the whole cryptocurrency industry has been strongly influenced by passive investment and lending narratives. Given the huge interest of traders and large organizations, these trends are likely to continue for a long time.
However, these ideas are far from being innovative — crypto lending platforms have existed for many years. Companies such as Celsius, Crypto.com, Nexo, and Coinloan have been providing credit services for the last few years. Although they are more decentralized than banks, such platforms still do not fully reflect the capabilities of DeFi.
What is DeFi?
DeFi is an acronym for decentralized finance. There is a very thin line between what is DeFi and centralized crypto service.
The former usually refers to fully peer-to-peer financial systems, from lending to flash loans and identification tools. DeFi also encourages you to trust only the project protocol code. No intermediaries (in this case a crypto company) or personal information is required at all.
Over the past couple of months, DeFi projects and their tokens have gained incredible popularity and success. Compound tokens CMP have grown by 500 percent three days after launch, while Kyber Network pools have posted $15 million in ETH-equivalent within hours of launch.
According to DeFi trackers, only nine of the top 40 projects are based on blocks other than Ethereum. Seven of them work on Binance Chain, NEO, or their own network, EOS and Tron have only one project.
The dominance of Ethereum is easy to explain. ConsenSys, a venture capital investor in the Ethereum project, promotes it as a protocol that opens up opportunities for liquidity and growth, improves financial security and transparency, and supports an integrated and standardized economic system.
In total, 2.8 billion dollars are in DeFi projects. Ninety-five percent of this amount is in Ethereum projects. The Compound project alone has only $699 million, which allows it to be a leader among all DeFi projects.
First of all, this is Compound, the brightest example of DeFi to date. This very project tended Maker’s three-year domination over the DeFi sector.
Compound is a non-custodial service. It allows investors, crypto funds, and any other organization to borrow tokens from CMP by lending the cryptocurrency as collateral.
MakerDAO offers a rate of 0.9% to holders. This varies from platform to platform — for example, DAI on dYdX pays just over 9 percent a year.
Balancer, Synthetix, and Aave offer non-custodial variable rate services. This creates more attractive, “risk-free” strategies for making profits.
CeFi is an acronym for centralized finance. This type of firm usually includes Crypto.com, Nexo, Cred, Coinloan, and many others. They operate similarly to neo-Banks, requiring mandatory KYC procedures before providing their services to clients.
Cred has clients in 183 countries. The firm is a licensed lender and uses patented technology to provide business and retail loans. Its clients can earn revenues from more than 30 cryptocurrencies as well as fiat currencies through its partner network.
Founded in San Francisco, BitGo pays up to 10 percent on all deposits. BitGo provides asset custody services, and the firm also issues credit cards.
Nexo, Coinloan, and other similar companies pay between 9–11 percent. The highest interest rate on loans is Crypto.com. The information on the site shows 12 percent on three-months’ worth of stablecoin deposits, and as much as 18 percent if they are CRO tokens.
Even though CeFi and DeFi are not the newest crypto development sectors, risks are always present in such projects, and investors must act with great precautions.
For CeFi projects, these are problems inherent to traditional banks. Holders trust their assets to Gemini, Coinbase Custody, or BitGo. All firms have strict checks and security measures, but no system can be fully protected from hackers.
DeFi projects are associated with code problems and lack of solutions to market risks. So in April, the owners of Maker lost $4 million in the minutes when ETH prices sank by 20 percent. Maker did not have any technical or software problems, only a lack of control over a particular asset security problem.
Another example occurred a month later — hackers stole Balancer’s $500,000 after using a loophole in the code.
Also, there is always the possibility that terrorists or criminals will use the services to carry out their illegal activities. This may run counter to the idea of free and equal access to financial services for everyone and pose a complex ethical challenge.
At the moment, it is difficult to determine which sector is better: both DeFi and CeFi, as they both have advantages and disadvantages.
Those who familiar to the code of cryptocurrency projects may prefer DeFi projects. CeFi may be more appealing to a broader audience looking for a simple, intuitive UX interface and ways to make money from their cryptocurrency savings.
However, one thing is certain: both sides have opened up a new paradigm in finance, setting the tone for the coming years by taking advantage of the truly open and accessible financial market.