The advent of blockchain-based cryptocurrencies marked the beginning of Decentralized Finance (DeFi). DeFi promotes cryptocurrency trading without intermediaries, unlike Centralized Finance (CeFi), where all transactions get routed through a centralized exchange. DeFi and CeFi differ in public verifiability, atomicity, custody, and transaction costs.
CeDeFi: Bridging the gap between DeFi and CeFi
Both types of finance solutions are currently independent of each other, but what if the users could enjoy the benefits of both DeFi and CeFi? Centralized and Decentralized Finance (CeDeFi) seeks to bridge the divide between DeFi and CeFi to offer users the best of both systems.
What is Centralized Finance (CeFi)?
Centralized Finance (CeFi) is a financial institution that allows investors to lend or borrow cryptocurrencies through a centralized, controllable exchange. CeFi functions like the banking industry, where investors earn interest when they lend their cryptocurrencies and use them as collateral when borrowing.
However, it has some drawbacks. The CeFi platforms are the custodians of the investors' cryptocurrencies. This means investors do not have complete control over how CeFi safeguards or handles cryptos to make money (much like banks). With CeFi, since a centralized exchange operates all crypto trading, investors do not have access to private keys or own their crypto. The users are also bound by the exchange's terms and conditions and are liable to pay gas fees. In addition, if the CeFi platform gets attacked or breached, investor data and cryptocurrency will likely be compromised.
What is Decentralized Finance (DeFi)?
Decentralized Finance (DeFi) is a decentralized crypto exchange comprising of a range of blockchain-based financial services and products in the public space. These are available through DApps or Decentralized Applications. DApps operate on a P2P or peer-to-peer basis, thus removing the need for any centralized authority to control the cryptocurrencies. DeFi gives users 100 percent control of their assets. DeFi is a permissionless exchange, making it easier for investors to use their cryptos in any manner they please.
Nevertheless, the dependability of DeFi is contingent upon its blockchain host. Thus, it inherits any instability that the host blockchain might have. DeFi transactions can take longer to complete. Further, DeFi is known to have issues in terms of security. In 2021, the losses caused by DeFi exploits were more than $12 billion.
CeDeFi: The best of both the worlds
Users love the access DeFi offers and the security of the centralized system that CeFi provides. CeDeFi brings the best features of both these platforms together. The term CeDeFi was coined by Changoeng Zhao, CEO of Binance, in 2020 while launching Binance Smart Chain.
CeDeFi is a combination of centralized and decentralized systems. CeDeFi provides the advantages of DeFi while combining the control and centralized operations of CeFi.
How it works
A limited number of companies maintain the CeDeFi protocols. The platform has the characteristics of DeFi protocols, like lending and borrowing, token exchanges, stablecoins, and more. It also imbibes CeFi protocols that are quicker and simpler to use. CeDeFi has an added layer of security compared to DeFi, as it is not dependent solely on the blockchain. It merges the advantages of both DeFi and CeFi and provides users with the best features from each system.
Benefits of CeDeFi
CeDeFi creates new tokens via smart contracts, allowing users to rely on any exclusive loan or borrowing platform and trade derivatives. CeDeFi is known to have the following:
Higher accessibility: Anyone with an Ethereum wallet can use CeDeFi.
More flexibility: CeDeFi allows for the development of various derivative products using centralized and decentralized protocols.
Fail-safe mechanism: CeDeFi protocols are powered by Ethereum and are resistant to single points of failure.
Interoperability: CeDeFi can communicate with a variety of Ethereum-based protocols.
Lower risks of fraud: Due to the availability of vetted and evaluated projects and tokens, the likelihood of fraud is minimal.
Easy deployments: DApp developers can use cross-chain functionalities by swiftly integrating their applications.
Drawbacks of CeDeFi
CeDeFi is relatively new to the industry, and its potential is still being explored. In order to ensure CeDeFi's success, the following issues must be resolved:
Even though it is gaining popularity, it might not still be ready for widespread adoption.
Its heavy reliance on Ethereum makes it susceptible to any flaws that Ethereum may develop. However, with the adoption of CeDeFi protocols by other blockchains, this risk is slowly coming down.
Due to a lack of strict regulation, CeDeFi is prone to scams. Thus, investors need to exercise caution and use trusted CeDeFi protocols from a trusted institution.
Though Binance introduced CeDeFi, many new projects are successfully embracing this new protocol. The proponents include Unizen, CoinZoom, Nexo, Bybit, and more. According to Gartner, by the end of 2022, DeFi will be eligible for enterprise adoption. With more clarity on regulatory guidance, the traditional centralized financial institutions would embrace maturing DeFi applications and integrate them with blended CeDeFi offerings. Like any technology, CeDeFi will also evolve in the coming years and encourage the usage of cryptocurrencies with its easy accessibility but centralized governance.