The crypto industry features many products – also referred to as protocols – that, like banks, are both interest-bearing (loans) and interest-paying (savings).
There is an increasing choice of passive crypto earning opportunity, but it would be incorrect to suggest that crypto earning protocols are identical to their counterparts in traditional finance.
Crypto is an attempt to fix the inherent problems of fractional banking, and it is important to understand the practical implications.
Cefi vs Defi
As mentioned above, traditional banking is centralised, with the central bank determining interest rates, and private banks following all kinds of rules that related central authorities create around things like money laundering and fraud.
Crypto banking offers two approaches which differ in the degree to which they are centralised.
CEFI or Centralised Finance – Offers savings and loans for cryptocurrencies, but within a traditional centralised framework, offering customer service within a recognised business structure. Cefi is passive, in that you don’t have to make decisions on a day-to-day basis.
Defi or Decentralised Finance – Offers a broader and more flexible range of financial products for cryptocurrencies, in a totally decentralised way via protocols not people. The protocols are managed by smart contract, so all interaction is essentially dictated by code and they crucially require active user management.
Clearly Defi is much riskier than Cefi, but to compensate the potential rewards can be greater. As this article is focused on passive opportunities to earn interest, that is where the focus will be. A later article explains how to earn via Defi.
The big difference in earning interest on crypto is that there is no central bank setting rates which instead reflect the demand for borrowing coins as well as the desire for CEFI providers to attract new customers.
This is really important to consider when thinking about earning passive crypto income because CEFI rates might change with too many depositors chasing interest and not enough demand for borrowing or simply because a provider decides to be more conservative in its acquisition of customers.
CEFI rates might change with too many depositors
chasing interest and not enough demand for borrowing
or simply because a provider decides to be more
conservative in its acquisition of customers.
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