CeFi, short for centralized finance, offers some of the yield benefits of DeFi with some of the ease of use and security of traditional financial-services and products. With CeFi, you can earn interest on savings, borrow money, spend with a crypto debit card, and more.
With the rapid and ever-growing dynamic of the crypto ecosystem, new services are being created to do a whole lot more with cryptocurrency.
One of the biggest developments is in crypto-banking services. The crypto banking system could be broadly split into CeFi and Defi. The major differences between these two are their potential returns, who manages your funds, and the security provider.
The core idea behind CeFi is to create crypto investment opportunities that offer some of the yield benefits of DeFi with some of the ease of use and security of traditional financial-services products (sometimes referred to as TradFi). With CeFi, you can borrow money, buy and sell crypto, spend and earn rewards with a crypto debit card, and more.
The process of centralization refers to the concentration of decision-making and planning processes in an organization, to just one source or location: the head office. The head office retains the decision-making authority, while the subordinate offices receive orders from the head office.
In CeFi, all crypto trading orders are routed through a central exchange. The money is managed by individuals in charge of this exchange. This implies that without a private key, you don’t have access to your wallet. Furthermore, the exchange selects which currencies are available for trading and how many users must pay a fee to trade on their platforms.
Just like the commercial banking system where deposits are made and monies are kept safe by the bank to yield interest, CeFi creates opportunities for yield via crypto-based accounts with much higher yields than the traditional banks. However, unlike saving accounts, crypto deposits are not liable for government-based FIDIC or SIPC insurance. Therefore, you need to be aware of the dangers before getting involved.
When using a cryptocurrency exchange like Binance or Kraken, for example, users send funds to the exchange to be managed within an internal account, outside the user’s custody which makes it vulnerable to threats.
Onboarding customers into the CeFi ecosystem is quite convenient and can offer a better customer experience. CeFi allows and supports the trading of coins issued on independent blockchain platforms.
CeFi takes familiar elements of retail banking, providing services like:
- Earning interest in your crypto
- Borrowing crypto
- Customer service
- Monitoring services via an app
- Security, CeFi providers look after your funds
- Having a card to spend crypto with
However, there are a few differences between CEFi and traditional banking:
- Your funds aren’t insured
- Different terminology
- Interest is earned in a token issued by the CeFi provider
- You can only borrow using crypto that you already own as collateral
- Account creation is easier, but you still need a means of identification
Security of Funds
When opening a traditional bank account, your funds are protected up to a fixed amount. So if you are a victim of fraud or bank error, you could get your money back, due to government regulations and banks insuring funds themselves and maintaining a reserve.
Crypto is a new form of internet money with no trusted intermediary such as a bank, therefore the typical services that a bank offers are unavailable. Meaning there is no backup even when your CeFi provider gets hacked or goes bust – although their terms and conditions do make this clear.
Risks Associated With CeFi:
- Higher transaction fees: as there is an increase in the number of intermediaries present in CeFi, the transaction fees automatically increase, which is the real downside of CeFi compared to Defi
- Malicious hacker attacks: customers in CeFi cede custody of their money to the exchanges and also give out their personal information in these interactions. There is a high risk of losing cash if the exchange is attacked in a cyber assault, for example. Even if the money is secured, your privacy will be jeopardized
- Lack of transparency: the nature of CeFi platforms does not allow for transparency. DeFi areas, on the other hand, are regulated by technology which provides transparency.
Examples of CeFi Exchanges:
With over 56 million verified users, Coinbase is the leading mainstream cryptocurrency exchange. The crypto trading platform offers a huge variety of products, which includes an advanced trading platform and a wallet for retail investors. Coinbase is on a journey to create a more fair, accessible, efficient, and transparent financial system enabled by crypto.
Founded in 2017, Binance has grown to become one of the most popular cryptocurrency exchanges and is available in more than 180 countries. It has a strong focus on altcoin trading and offers trading in more than 500 cryptocurrencies and virtual tokens which includes Bitcoin (BTC), Ethereum (ETH), Dogecoin (DOGE), and its own Binance Coin (BNB).
Hodlnaut is a Singapore-based, fintech start-up that provides financial services to individual investors and cryptocurrency enthusiasts. Started in April 2019, Hodlnaut is quickly rising to become one of the most promising crypto lending platforms in Asia. Through its straightforward product offerings and dedicated support, Hodlnaut is on a mission to help hodlers easily earn more yield on their digital assets.
Centralized Finance (CeFi) vs Decentralized Finance (Defi)
Both CeFi and Defi platforms advocate for the adoption of blockchain and digital currencies and have the same end goal. That is, to assist people in using crypto for various financial needs and services; what sets them apart is their approach to attaining this goal.
CeFi provides higher interest rates and increases trust and flexibility with customer service, flexibility in fiat conversions, and cross-chain services. While DeFi increases privacy and security by removing the need for third parties. Both use contrasting methods to reach the same objective. Each system has its own pros and cons and plays an essential part in cryptocurrency. The future is bright for both CeFi and Defi, and you could always diversify your portfolio by using both services instead of settling on one. You must now determine what your current priorities are and do your research before making your next steps.