In many ways, 2019 was an important year. Similar to how BTC’s explosively lateral move of late 2017 had everyone and their grandmother talking about bitcoin, 2019’s growth in the decentralized finance (DeFi) space awoke us from our cold, crypto winter slumber––reigniting interest in the potential of financial decentralization.
The Tether controversy kicked off this trend last April, reminding us that just because some projects may operate under a decentralized guise doesn’t mean that they are, in fact, decentralized. The Libra congressional hearings reopened that discussion and saw Mark Zuckerberg doing a lot of… well, this. The final straw was most likely the recent uptick in public distrust of banks and corporations. Thus, DeFi takes center stage.
What is DeFi?
DeFi is the notion that virtually any financial service can be recreated through decentralized means––payments, lending and borrowing, custodial services, interest income, wealth management, collateralized loans, and more. Think of DeFi as a more practical, inclusive, and improved upon version of the original Satoshi Nakamoto vision. Its main objective is to integrate both the cryptocurrency and financial worlds into one, using blockchain technology. This creates a more welcoming environment for the institutional investors and mainstream audiences cryptocurrency may have enthralled back in late 2017, but most likely lost due to 2018’s crypto winter.
The total locked amount of Ether in DeFi markets has surpassed $1 billion, and the largest share of those funds belong to lending dApps and platforms. These projects supply users with the ability to lend out cryptocurrency and earn a passive income through interest charged. You’re also able to borrow if you provide collateral via cryptocurrency or stablecoins. Not only do these DeFi platforms encourage traders to hold their assets, but it also gives skeptics a more available and lower risk entry into the hype.
So, while all you hodlers out there hodl idle portfolios, check out our list of the best interest-centric passive income dApps––and borrowing/lending dApps––that are the most significant, groundbreaking, and applicable.
An interest and loan-based DeFi dApp, Celsius allows end-users to borrow against their portfolio instantly. Because users can stake their portfolio as collateral for Celsius’ loan feature, and because the entire process is autonomous and automated, there are no credit checks. There are also no termination fees, no prepayment fees, and no transaction fees. However, they do require KYC and some personal identification information from users wishing to employ their loan features.
A major attraction to Celsius is the ability to receive crypto-to-fiat loans instantly, which comes with significant tax breaks since users don’t have to liquidate their assets to receive funds. 80% of Celsius’ revenues are shared with depositors, rather than shareholders, through weekly compounded interest payments of up to 10%, on an annualized basis. Unlike some of the other DeFi platforms, many of which do not have an app, Celsius offers a sound variety of cryptocurrencies and stablecoins––all of which feature competitive interest rates.
Serial entrepreneur and CEO Alex Mashinsky’s experience in the tech space may have much to do with Celsius Network’s success. He says of institutional banks,
“… one industry in specific that did not get disrupted is the financial industry. They are more concentrated today than ever. Their job is to give you as little as possible––if not nothing. It’s a lose-lose for us, [and] a win-win for them.”
Their CEO is charismatic, their UI is sleek, and every feature offered comes in app form. They even equip their landing page with a loan calculator!
In the words of Compound Finance,
“The majority of cryptocurrencies sit idle on exchanges and in wallets, without yielding interest. We’re on a mission to change that.”
For the average hodler, cryptocurrency portfolios only accrue what the market allows, but never earn any real interest alone. This “hodl problem” and other disadvantages can create a considerably negative environment for crypto holders, and might even discourage holding digital assets altogether. Forget mainstream adoption; even crypto-loyals are left feeling inconvenienced and annoyed by these obstacles. The Compound Finance whitepaper notes,
“Blockchain assets have a negative yield, resulting from significant storage costs and risks (both on-exchange and off-exchange), without natural interest rates to offset those costs. This contributes to volatility, as holding is disincentivized.”
Luckily, Compound Finance has a solution. Built for developers, Compound’s protocol is an open-source code that allows for algorithmic, automated interest rates ranging from 2-8% on Ether, as well as DAI and a variety of other stablecoins. The protocol is considered to be the crypto-version of a money market fund and is compatible with Ethereum wallets like Metamask, Coinbase, and Ledger. Lenders and borrowers are matched automatically through the Ethereum-based protocol, eradicating the need for third parties.
Borrowers can access their assets in any location to borrow against, and Compound makes it easy to integrate their protocol into your Ethereum wallet by just a click of the app button on their landing page.
BlockFi says, why liquidate when you don’t have to? A non-bank lending platform, the BlockFi website offers compound interest and the ability to trade crypto pairs BTC, ETH, LTC, USDC, and GUSD. It’s backed by lenders like Coinbase, Valar, Galaxy Digital, and more. However, it is somewhat regulated, and shares similarities between traditional credit systems. If you’re uncomfortable with KYC and anti-money laundering checks, as well as a third-party that processes loan requests, BlockFi may not be for you. Another downside is that their platform has no app at the time of writing, so you’re bound to your laptop or desktop if you’d like to access your portfolio or their lending services.
Offering a “crypto-as-collateral” approach, the asset lent is actual USD, rather than cryptocurrency, making it one of the more practical lending solutions in the DeFi space. BlockFi also brings compound interest into the discussion and is one of the few that provides this service; however, their interest is provided monthly rather than daily like their competitor Nexo.
With Gemini as its custodian service, up to 8.6% annually can be earned with BTC, ETC, LTC, USDC, and GUSD on BlockFi’s platform. Trusted and easy to use, BlockFi guarantees no asset locking, and the ability to earn compound interest as well as withdraw funds across dozens of available countries. Also, it’s loaning feature plays it safe for borrowers by allowing only up to 50% of the collateral’s worth, rather than the full 100%––minimizing risks.
Similar to BlockFi, Nexo offers automated crypto-to-fiat loans, all without having to liquidate assets. But Nexo takes it a step further by offering crypto-to-crypto loans, as well as an innovative instant credit line that features a physical “credit card” that borrowers can use in their daily life. No credit checks and no minimum payments, the card itself is linked directly to digital assets held in your Nexo wallet. The credit line is approved in real-time and even offers push notifications to alert you of your activity. You can even create virtual cards for safety and anonymity.
Nexo recently announced reduced interest rates for instant credit lines, claiming to now be the lowest interest rate in the DeFi space, with credit lines starting at 5.9%. Nexo also offers a no hidden fee guarantee, promising no surcharges at point of sale or foreign exchange upcharges.
The ability to earn interest on 20+ crypto assets brings Nexo to the forefront of the DeFi discussion, making it a stand out option for a variety of audiences.
The self-proclaimed “world’s first crypto bank,” Dharma’s wallet is secure, and interest rates are competitive. Using an ethereum address, users can deposit into Dharma’s non-custodial smart wallet that generates interest automatically. Their sleek and appealing website and app are undoubtedly easy on the eyes; their message clear and concise. This allows for a more seamless and attractive user experience, which may be enough to sway skeptics and broader audiences.
Ether is the primary cryptocurrency accepted on the platform, and interest rates for their chosen stablecoins (USDC and DAI) can be quite high (up to 14%).
One possible drawback to DharmaLever’s platform is that they’re the only platform that locks your digital assets for up to 90 days, making it impossible to withdraw funds whenever you want. Only as a U.S. citizen can you withdraw funds instantly––with zero fees, of course.
Recently ditching the old platform to offer fixed rates using the Compound Finance protocol, The block crypto cites this relationship as “among the most notable business recalibrations of the decentralized finance space to date.” Rather than allowing users access to the protocol via their platform, they’ve chosen to act as an intermediary of sorts.
The future looks bright for DeFi, but we’ve still got a long way to go. The DeFi community needs now more than ever a way to include a more ubiquitous and diverse audience. We lie just on the apex of 2020, and it’s anyone’s guess where the not-yet-thought-of financial features of future DeFi projects will take us. Because the cryptocurrency space has opened up doors for just about anyone who knows how to write code, virtually any idea can be brought to conception with relative ease. Until then, all we can really do is speculate. So, in the meantime, happy lending and borrowing!