Crypto for Experts CeFi

What is CeFi? Centralized Finance on the Blockchain

Through the advent and growth of cryptocurrencies in the financial and technological world, new innovative ways of trading have emerged. The blockchain ecosystem, which is the basis of crypto has expanded extensively with centralized and decentralized finance (DeFi) providing groundbreaking features like crypto loans, tradeable crypto derivatives and tokenized digital assets.

Centralized finance (CeFi) exchanges have become a popular middleman choice for users who want seamless activity of their crypto transactions. Here, we will discuss everything you need to know about CeFi, and how CeFi differs from DeFi.

What is CeFi (Centralized Finance)?

Centralized finance offers users of centralized exchanges the possibility to earn interest and obtain loans via their cryptocurrencies by safe-guarding your private keys. This way the performance, trust and cost-efficiency of transactional services are optimized. CeFi, in essence, is the mix of yield advantages which DeFi produces with reliable and simplified typical financial service products. CeFi allows you to earn savings interest, obtain funds, spend with a cryptocurrency debit card, and much more.

Decentralization is one of the most important elements of cryptocurrencies, allowing the exchange of value between individuals without the involvement of any intermediary. DeFi expands this idea further with the use of smart-contract-powered applications which help the individual to exchange, lend, save, earn, etc., without the need of a centralized entity. This is unquestionably quite exciting, however such unregulated freedom comes with its associated risks. Operating DeFi protocols properly requires a high degree of technical expertise as well as willingness to risk some or all of your capital due to malicious actors, flawed code or simple human failure.

CeFi, on the other hand, is regulated and monitored by a central authority, not allowing all DeFi features to function, however it still combines many advantages of DeFi-specific investment options with the simplicity of use and security of regular investment instruments (often called TradFi). So what are the various features of CeFi?

Features of CeFi

Centralized Exchange (CEX)

Participants in centralized exchanges enjoy a more user-friendly interface, more integration with the regulated financial world and quality customer support service. In return they do not mind disclosing private credentials or entrusting hard-earned capital to these organizations. CEX exchanges maintain a typical user’s transfers and payments within an internal account outside the individual’s custody. This, however, could expose the user’s funds to attacks if the exchange platform security protocols are breached.

Higher Interest Rates

CeFi networks typically set higher interest rates than DeFi networks, as they are more stable and are not influenced by market pressures.

Flexibility of Fiat Conversion

Exchanging cryptocurrency for fiat and vice versa requires the involvement of a centralized organization. Therefore on-boarding customers onto CeFi platforms is usually more seamless and in general improves their customer satisfaction.

Availability of Customer Service

Competent customer support divisions not only provide users with a stress-free support service but also access to information on cryptocurrencies in order to educate them further as blockchain technology is constantly evolving.

Applications of CeFi

Some of the most popular real-world CeFi apps include:

  • BlockFi – a borrowing and financing network for Bitcoin and fiat currencies.
  • Celsius – a business-orientated Bitcoin lending, remittance, and trading platform.
  • Fairlay – a crypto forecasting marketplace and exchange.
  • Ledn – a Bitcoin borrowing and lending network for DAI.
  • Libra – a global infrastructure platform with a digital currency layer to trade on.
  • Binance – one of the most popular cryptocurrency exchanges to date, Binance was created in 2017 and is now covering over 180 countries. It has over 500 cryptocurrencies and virtual tokens to trade, including Bitcoin (BTC), Ethereum (ETH), Ripple (XRP), Tether (USDT), Dogecoin (DOGE), and its native token Binance Coin (BNB).
  • Hodlnaut – a promising Singaporean fintech company that caters to individual investors and cryptocurrency enthusiasts. Having launched in 2022, it is swiftly becoming one of Asia’s most exciting lending platforms where HODLers can obtain greater yield on their digital assets with simple product options and personal assistance.
  • Coinbase – with over global user base of over 56 million traders, the cryptocurrency platfoprm giant is one of the most popular crypto exchanges. It offers a wide range of services which aim to make the crypto and finance worlds more equitable, accessible, efficient, and transparent.

How do you earn yield with CeFi?

Generating income through CeFi crypto-based accounts works similarly as a typical bank saving account, however with much higher rates. The exception here are crypto saving funds which are not eligible for government-backed FDIC or SIPC coverage. Coinbase, on the other hand, offers a principle assurance on the USDC their users invest for CeFi borrowing generating an annual income of 4%.

Where does the yield come from?

When investors offer their cryptocurrencies on an exchange in return for an annual income percentage, other users who lend them pay a rate of interest to the centralized source for financing, and that supplier pays a percentage of that amount to the investors.

CeFi allows users to borrow crypto by countering conventional assets as collateral. CeFi loans often require minimal or no documentation, whereas in the case of Coinbase users, residents in the Unites States may borrow up to $100,000 without the need for a credit check.

What are some CeFi risks?

  • CeFi services and providers are strongly distinctive, that is why is important that users conduct research and understand how their cryptocurrencies are being used, how the return they’re earning is produced and if there are any threats involved.
  • Transaction fees are relatively high compared to decentralized platforms.
  • Hackers tend to love breaching centralized systems stealing customer money and information.
  • CeFi users are required to give up ownership of their belongings to the exchanges where they also reveal personal details. If hacked, their funds and data can be exposed.
  • Government-backed insurance does not cover crypto investments.
  • In certain conditions certain CeFi operators may temporary freeze a user’s account.
  • Stable coins are built on an open-source technology that anybody can examine and are not all made equal. The USDC launch was made possible through a partnership among both Coinbase and Circle through the establishment of the CENTRE Consortium.

What is Decentralized Finance?

Decentralized exchanges (DEX) are controlled by automated programs built on blockchain networks and are not involved in transactions. Decentralized finance aims to create a more equitable and accessible financial system for anyone willing to engage. The users have total power over their cash and private keys and do not need to provide any identity verification to the DEX. The decentralized banking industry offers lending, yield farming, crypto borrowing, asset holding, as well as other operations in the DeFi space, such as using decentralized applications (dApps).

Conclusion

CeFi ensures the security, ease of use and fairness of payments, all the while providing competent customer assistance. The system is governed by regulated money exchanges. Furthermore, centralized finance facilitates currency-to-crypto transactions and cross-chain alternatives.

Meanwhile, DeFi is solely dependent on blockchain technology without the need for any intermediaries. It is a more accessible option for unbanked individuals and is non-intrusive since there is perform user KYC. Furthermore, individuals can have a full scope of features offered by the DeFi space without external restrictions.

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