I have seen a lot of people defending the cryptocurrency interest sites. But I have never seen them explaining how these sites make profits.
If you have a read of my post on the previous page where I quote their Terms of Service, it makes it clear where their profits come from. They either lend our your coins to unspecified third parties, or they invest them in high-risk options and vehicles. They collect profits from loan repayments or investment returns, and pass a small percentage of that on to you. It's a great set up for them, since they use none of their own capital, but they still take in profit. All the risk is assumed by the average user, who gets a measly couple of percent returns, while BlockFi (or whoever) keep the majority of the profits for themselves.
Investments can fail, with volatile assets such as cryptocurrency. And the chances of default for cryptocurrency loans are much higher than the same with fiat.
Correct. The risk is huge, the benefit is tiny, and mostly you are just making profits for the middleman.
What about daytraders? No way they are withdrawing all their coins to their hardware wallet or other type of wallet daily right after trading since they trade next day?
No, but they aren't keeping all of their coins on an exchange, only what they are actively trading. If you are day trading then storing the coins you are trading on a centralized exchange is a risk you have to accept, but most will withdraw the bulk of their funds which they are not actively trading to their own wallets.