How to earn CeFi yield?

How to earn CeFi yield?

May 5, 2022
 min read

CeFi (centralized finance) interest accounts offer better yields than traditional banks and easier onramps than DeFi protocols. 

By Peter

CeFi (centralized finance) platforms offer better yields than traditional banks and easier onramps than DeFi protocols.

CeFi platforms include crypto exchanges and interest platforms. Since we covered exchanges in our cryptocurrency guide, we’ll focus on CeFi interest platforms in this guide.

How does CeFi work?

CeFi platforms are centralized in that they manage your crypto assets and wallet keys for you. In other words, you need to share your personal identity to use them.

Like a bank, these platforms make money by lending out your assets at higher rates than they pay you. However, CeFi platforms typically offer much better rates than banks (e.g., 10%+ APY for stablecoins vs. 0.5% APY from a traditional bank). They can offer these rates because:

  1. Borrowers need to provide additional collateral to the CeFi platform to take out your tokens (e.g., provide 1 ETH or ~$4,000 as collateral to borrow $1,000 in USDC). The platform can then lend out this collateral to others to earn yield.
  2. CeFi platforms have fewer expenses than banks (e.g., no retail locations) and are willing to give users more share of their earnings to grow faster.

Popular CeFi platforms include:

  1. Celsius: Offers up to 17% APY for 14 cryptocurrencies. Pays interest weekly (rates).
  2. Nexo: Offers up to 12% APY for 17 cryptocurrencies. Pays interest daily (rates).
  3. BlockFi: Offers up to 9.5% APY for 10+ cryptocurrencies. Pays interest monthly (rates). 
  4. Gemini: Offers up to 8% APY for 20+ cryptocurrencies. Pays interest daily (rates).

Are CeFi platforms safe?

Here’s the case for investing in CeFi interest platforms:

  1. They offer much better rates than traditional savings accounts. As of December 2021, the best bank savings accounts pay 0.5% interest, but US inflation is 6%. Therefore, you’re losing money at a rate of -5.5% if you put it in a bank savings account. 
  2. They have millions of users and billions of assets under management. These accounts try to manage risk by only lending out your crypto to trusted borrowers.

However, you are taking on more risk with a crypto interest platform vs. bank savings:

  1. They are not FDIC insured. Instead, they provide insurance by asking borrowers to provide collateral for the assets that they’re borrowing.
  2. They have regulatory scrutiny. Coinbase’s crypto interest product was blocked, and US states have issued cease and desist orders for BlockFi’s accounts. It’s very possible for yields to decline as regulatory scrutiny increases.
  3. They typically don’t let you withdraw crypto instantly. For example, it could take a few days or weeks to withdraw your crypto from a CeFi interest platform.

How much you want to put in these platforms depends on your risk tolerance. 

CeFi through arbitrage

Haru Invest is a CeFi platform that offers yield through investment arbitrage instead of lending out your assets. From the Haru team:

Haru Invest uses high-frequency algorithmic system trading, and the strategies we use focus on taking advantage of market inefficiencies. A straightforward example of this would be a basic arbitrage strategy exploiting gaps between two spot markets. We buy and sell simultaneously from two exchanges if there is a big enough gap between the two spot markets. 

As of December 2021, Haru currently offers 10%+ APY on non-stablecoin assets like Bitcoin and Ethereum if you lock up your tokens for a few months. This yield is amazing but make sure you do your research on the risks.

Now that we understand how CeFi yields work, let’s explore how you can swap tokens with DeFi.

Up next: How to swap tokens?
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How does CeFi work?

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