How DeFi Yield Is Now Powering CeFi Earn Programs

In the last bull run, the promise of 10% APY on stablecoins was everywhere. The rates promoted by centralized finance firms (CeFi) like Celsius, BlockFi, and FTX helped onboard a new wave of crypto users. Unfortunately, the companies behind these unsustainable returns were highly centralized and opaque about their decision-making processes and the strategies used to generate these returns.

As we saw, these CeFi platforms imploded, leaving institutional and retail users to pay the price. Proponents of decentralization were proven right in their belief that financial systems that require trust in central intermediaries, whether TradFi or crypto-savvy intermediaries carry a tremendous amount of risk.

During this CeFi crisis, there was one area of crypto that worked precisely as intended: decentralized finance (DeFi). Protocols such as MakerDAO, Aave, and Compound had no issues while adhering to explicit, code-governed transaction guidelines.

Despite the impressive performance of DeFi protocols through this bear market, DeFi’s reach remains limited. Unfortunately, DeFi, in its current state, is only usable and beneficial for a select group of highly skilled crypto users. Due to DeFi's steep learning curve and hefty collateral requirements, it falls short as an alternative to traditional finance and CeFi platforms for most potential users.

To overcome these obstacles, the DeFi mullet model (“fintech in the front, DeFi in the back”) is an opportunity to help gain wider adoption of DeFi. Finding a way to combine the user experience of a TradFi app combined with the transparency of a DeFi protocol is the ultimate goal. At Index Coop, we’re taking a proactive role in making this a reality.

The DeFi Mullet

The DeFi Mullet is a metaphor (coined by Ryan Sean Adams from Bankless) drawn from the distinctive mullet hairstyle, which is short in the front and long in the back. In the context of finance, the term refers to a strategy that combines fintech/CeFi applications and DeFi protocols.

The "front" of the DeFi mullet represents fintech and CeFi applications. Fintech and CeFi companies, such as PayPal, Venmo, Coinbase, and Gemini, have a track record of creating smooth, easy-to-use products. These applications build upon money transfer networks to facilitate electronic transactions. The fintech/CeFi front end of the DeFi mullet strategy leverages this user-friendly aspect, making it easier for individuals and businesses to interact with financial services.

The "back" of the DeFi mullet represents DeFi protocols. DeFi refers to using blockchain technology to remove intermediaries from financial transactions, resulting in a decentralized network that offers services such as lending, borrowing, and trading. This back end of the DeFi mullet strategy provides the benefits of transparency, decentralization, and potential cost-efficiency that come with DeFi.

In a DeFi mullet product, fintech and CeFi apps build user-friendly services on top of blockchains and DeFi protocols. An example is Index Coop’s icETH and Matrixport’s Earn program, which allows customers to earn ETH-denominated yield on their deposits​​.

The DeFi mullet strategy also involves principles of transparency, accountability, and decentralized governance. Any centralization in the product should be accompanied by radical transparency and on-chain accountability. For instance, any centralized actors in the system should constantly prove their good behavior on-chain.

A DeFi Mullet Example: Matrixport & icETH

Recently, Matrixport listed Index Coop’s icETH and incorporated it into their Earn offering. By partnering with Index Coop, Matixport can now offer better returns to its customers than it could generate on its own. There are some other potential benefits of this partnership.

‍Increased Yield Potential
‍One of the primary advantages of integrating DeFi protocols into Matrixport's offerings is the potential for increased yield. DeFi protocols frequently provide a higher return on assets when compared to traditional financial or centralized crypto platforms. This integration could equip Matrixport to deliver competitive returns to its clients.
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‍Product Diversification
‍Leveraging DeFi protocols allows Matrixport to extend its product and service range, bringing in financial products and services that weren't previously available in a centralized framework, such as yield farming or liquidity provisioning. This diversified range of offerings can attract various customer segments, offering them a richer and more flexible experience.
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‍Enhancing Customer Retention and Acquisition
‍Introducing these additional services and higher yields can serve as an attractive proposition for new customers while helping to retain the existing ones. This would consequently lead to an increase in the total value locked on Matrixport's platform, strengthening its position in the market.
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‍Risk Diversification
‍By utilizing DeFi protocols, Matrixport can diversify its risk exposure. If a DeFi protocol undergoes thorough auditing and is deemed secure, the risks associated with lending could be significantly mitigated. This security measure can offer customers the assurance they need when venturing into new platforms.
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‍Enhanced Credibility
‍Actively engaging with the DeFi space might significantly enhance Matrixport's credibility and reputation, especially among cryptocurrency enthusiasts who value decentralization. This added credibility could solidify Matrixport's place in the market and help to attract more users.

Potential benefits for users include:

‍Higher Returns
‍Matrixport users could enjoy higher returns on their ETH holdings than what they could earn in a traditional bank account or some other centralized crypto platforms.

‍Simplified Access to DeFi
‍Users can benefit from the high-yield opportunities of DeFi without the complexity of directly interacting with the DeFi protocol. Matrixport's user-friendly interface simplifies the process, making DeFi more accessible.

‍Reduced Risk
‍DeFi can be risky due to the vulnerability of smart contracts. However, Matrixport's decision to partner with specific DeFi protocols could serve as a form of vetting, providing users some assurance about the protocol's security.

‍Convenience
‍With Matrixport's integrated services, users can manage both their traditional, centralized assets and their DeFi holdings all in one place. This level of convenience can significantly enhance the user experience.

‍Transparency
‍Finally, since DeFi protocols operate on public blockchains, all transactions are transparent. This level of transparency can provide assurance to users about the safety and security of their crypto, building trust in Matrixport's services.

The Future

At Index Coop, we envision a future where DeFi becomes a cornerstone of both centralized finance (CeFi) and fintech applications due to its vast potential. DeFi's most significant advantage lies in its power to democratize access to financial services.

A considerable segment of the global population remains unbanked due to their remote locations and lack of traditional banking services. DeFi can bridge this gap by delivering financial services to anyone with an internet connection, heralding a new era of financial inclusion.

Furthermore, DeFi stands to revolutionize the financial landscape by fostering efficiency, speed, and innovation. Traditional financial systems, laden with intermediaries, often suffer from slow transactions and high costs. DeFi's ability to bypass these middlemen could lead to quicker and more cost-effective transactions.

Coupled with its capacity to spur innovative products and services like yield farming, liquidity mining, and flash loans, DeFi is poised to reshape the finance sector. Additionally, the transparency and security offered by DeFi platforms, thanks to blockchain technology and their decentralized nature, further bolster DeFi's potential as the future of finance.