Is this crypto lending company any good? Part 1
Key points to remember
- Even though the interest rates seem similar, there are many other factors to consider.
- Look for a clean record with no security breaches, mismanagement of funds, or regulatory issues.
- Look for ways to verify the assets the company claims to hold.
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This article is the first in a series of how-to guides looking at the CeFi lending landscape. Four of the leading crypto lending companies, Celsius, Nexo, Crypto.com and BlockFi, will be evaluated on two key criteria: security of funds and auditability.
Comparison of CeFi lenders
At a high level, the business model of these companies is simple. People deposit their crypto and receive interest (passive income). Then these companies profit by lending the crypto to someone else at a higher rate.
Usually someone else is an institutional investor, company, exchange, or DeFi protocol looking to borrow or use large amounts of crypto.
Therefore, depositing crypto on centralized lending platforms effectively means lending it out, with the actual technical process abstracted by the platforms in the background.
The result is to avoid the complexities of yield farming and DeFi in general and be able to keep things simple.
Of course, there is no free money without risk, especially not when it comes to “easy” APYs of more than 10% on stablecoins.
There are many factors to consider when considering a platform.
Company reputation, security of funds, auditability, fairness of loan liquidation process, fees and other costs, supported coins and additional offers such as credit cards.
This article will focus on two bases. Security and auditability.
How secure are the funds?
This is the first question everyone should ask themselves before depositing crypto anywhere, whether it is a centralized or decentralized platform. Better rates and lower costs mean nothing if your funds are at risk of being lost, frozen or stolen.
When it comes to CeFi lenders, you ideally want the company to have a clean record with no security breaches, mismanagement of funds, or regulatory issues.
So, let’s compare our sample of the top four CeFi lenders.
BlockFi has accidentally sent bitcoins to clients instead of stablecoinsconvicted of stealing sensitive user information, and failed to protect users from spam.
Crypto.com lost $34 million in crypto from the wallets of 483 users in a direct hack of the platform in January 2022.
Celsius lost $51 million in the BadgerDAO hack from last December.
Crypto.com and Celsius eventually issued full refunds to all affected users following the incidents.
Nexo is the only company of the four that, so far, has never had a public safety failure.
And it’s important to note that the Celsius incident is the result of a security breach in a third-party platform. Do not hack Celsius software. Given the novelty of the exploit, it is unlikely that it could have been stopped.
Celsius itself has never been compromised; the company is ISO security certified, operates a 24/7 security operations center and recently acquired one of the leading crypto custody and security companies, GK8. He also has a rich set of security featuresincluding safe list of addresses, biometric login, two-factor authentication and a 24-hour withdrawal freeze feature.
Another essential aspect of security of funds is insurance. Crypto.com is the only lender in the group to offer FDIC insurance on USD balances. This is only for US residents and up to $250,000. The company also has $750 million in third-party property damage or theft insurance.
Nexo is insured for $375 million through its third-party custodians, Ledger Vault and BitGo.
BlockFi has made no announcement regarding insurance. Celsius has planned a user funded insurance program for more than a year.
Is there publicly available proof of funds?
Being able to personally verify that a CeFi lender actually owns the assets they claim to have is one of the best ways to know that the company is trustworthy. This is a real concern – as shown by what happened to people who trusted Credit or Quadriga.
Similarly, Nexo has partnered with certified auditor and one of the leading accounting firms in the United States, Armanino, to provide a publicly available report. real-time certification of its assets.
BlockFi has posted a job offer for a Internal Audit Manager.
To sum up, only one of the four major CeFi lenders has not had a public safety failure so far. For the other three who did, it’s important to consider the nature of the incidents and how the companies handled them.
After accidentally sending free Bitcoins to users, BlockFi threatened legal action against those who refused to return it, which didn’t sit well with its customer base.
When Crypto.com was hacked for $34 million, it first minimized the exploit and did not admit that it was hacked. This too falsely publicly stated that all user funds are safe. When it finally admitted its failure, the company did not share security details about what happened and what it was doing to prevent a similar incident in the future.
When Celsius lost money in the BadgerDAO hack, he immediately acknowledged it, explained what happened, and pointed out that no user funds were ever affected.
Regarding auditability, Celsius and Nexo stand out with real-time proof of reserves or asset attestations. Crypto.com and BlockFi have not publicly provided proof of funds.
This article was sponsored by Celsius. Find out why 1.7 million people call Celsius home for crypto.