All You Need to Know About Centralized Finance (CeFi)

Fredrick Awino
23.09.2022
1265 Views

Decentralization is one of the important concepts in cryptocurrency. It allows transactions among strangers to take place anywhere across the world without having a third party. Centralized finance is different, it provides some of the benefits of DeFi with security and ease of use of the traditional financial services. Through CeFi, an investor can spend with a crypto debit card, borrow money, and earn interest on savings.

WARNING: Investing in crypto, or other markets, can be of a high risk for your savings. Do not invest money you cannot afford to lose, because there is a risk for losing all of your money when investing in crypto, stocks, CFDs or other investments options. For example 77% of retail CFD accounts lose money.

Ways of Earning Through CeFi

At CeFi, all the crypto-earning products need the users to stake digital assets in earning interest. Staking is almost the same as depositing. There are two forms of staking hard and soft staking. The two have distinct features as well as benefits.

In hard staking, the funds are locked for a certain period of time. Besides, the interest rates are proportionate to the given time. For instance, the longer you stake your cryptos, the more interest you earn on the initial investment. One’s interest is compounded and then paid daily on a taken or asset.

For soft staking, you may withdraw your funds at any time. The compounding interest is also paid daily in the token or asset staked. As a trader, you have the option of switching between the two options.

Features of CeFi

The first feature of CeFi is Centralized Exchange (CEX). Using CEX gives you the opportunity of handling a portfolio in an internal account. Besides, it helps you in avoiding blockchain transaction fees. Because the funds are in the exchange, then one does not have to worry about management being part of it.

Another feature is seamless customer support. In every CEX, there is an internal account that manages the funds of the users. Additionally, the top CeFi firms take care of the user’s data as well as assistance to the customers. This is done through a great customer support team and it increases the level of trust.

Furthermore, interoperability in centralized finance enhances easy lending. It also enables payment-based services, borrowing, and trading. It is done using the funds in custody from varied multiple chains.

Services for cross-chain swaps are another important feature. CeFi enables crypto trading based on independent blockchain platforms. Even though DeFi falls short due to the delays and complexity in conducting cross-chain swaps, centralized finance gets the custody of assets from different chains.

The last feature is flexible conversion. CeFi has made the process of conversion so easy. It converts fiat currency to cryptocurrency very easily. The ease offered by the platform results in a high number of customers. For instance, Coinbase has about 89 million global users.

Top CeFi Exchanges

The CeFi exchanges support crypto trading services. Apart from that, it offers other services including margin trading, borrowing, and lending. Some of the top CeFi exchanges include Coinbase, Binance, and Hodlnaut.

Hodlnaut

Hodlnaut offers financial services to crypto enthusiasts as well as individual investors. Although it was launched in 2019, it is highly rising in being one of the top crypto lending platforms mainly in Asia. It also works towards ensuring that the hod-lers get high yields easily on their digital assets.

Coinbase

For your information, Coinbase is a great CeFi exchange with over 56 million verified users across the globe. Besides this exchange provides different services including a wallet for retail investors as well as an advanced trading platform. Besides, the company is working towards ensuring that it has a transparent, accessible, and efficient financial system. This system is enabled by cryptocurrency.

Binance

Binance crypto exchange was founded in 2017. Over the years, it has grown into a popular crypto exchange. Moreover, it is accessible in over 180 nations across the globe. Furthermore, it has a great focus on altcoin trading. Apart from that, it provides trading in over 500 virtual coins and cryptocurrencies. Some of its top cryptos are Binance Coin, Bitcoin, Dogecoin, and Ethereum.

The Differences Between CeFi and DeFi

CeFi and DeFi are different in terms of accessibility. While CeFi is open to everyone, in DeFi, permissionless protocols offer access to financial services. This is done through blockchain to the individuals who are in regions that do not have strong economies. Also, these regions do not have enough stored wealth or good credit.

Responsibility and personal control are other ways in which they differ. In DeFi there are no third parties. It is you as a trader who decides what happens with your money. Besides, you may access your funds at any time. There are no limitations on the time in which you should access them. On the other hand, in CeFi, you do not have control over the way you access services. You also do not have control over the way your savings are used and fees.

Furthermore, DeFi and CeFi differ in terms of security and trust. In CeFi, there is a central authority that is in charge of everything. Therefore, in case it is compromised, your funds and personal information may be vulnerable. However, in DeFi, you are the one in charge of managing everything.

Liquidity provisioning further explains the way DeFi and CeFi differ. In DeFi, there is a possibility of generating profits through locking funds in a smart contract. The aim of this is to bring liquidity and be used by the other platform users. Also, as there are no intermediaries, the fees that the platform charges go towards Annual percentage yield rewards. On the other hand, in CeFi, the fees go to the company directly.

As much as CeFi and DeFi are different, they have some things in common. For instance, the two offer a way of accessing financial services including interest-bearing accounts and loans. Also, in both, a trader may earn revenue from the users’ fees.

The Advantages of CeFi

CeFi provides easy to use and intuitive interface. Due to this, it is easy even for beginners to be able to transact through the platform. The interface is not that complicated. It means that the newcomers can highly benefit without much difficulty as well as the old customers.

The involvement of centralized exchanges is good for CeFi users. The reason is that the exchanges are responsible for bearing the risk to keep holdings secure and putting them to good use. Besides, because blockchain technology is intensive and fast developing, most investors find it very challenging to trade well. Therefore, the crypto exchanges come in. The platforms also have 24/7 customer service.

Another advantage of CeFi is fiat conversions. The centralized exchanges do make it easy for traders to convert fiat currency to crypto. It can also turn crypto into fiat currency. Because of this, they are very friendly to new users.

CeFi also provides cross-chain services. As a trader, it allows you to trade BTC, XRP, LTC as well as others that independent blockchain platforms produce. Unfortunately, DeFi services do not support such coins. This is because of the complexity and latency in the execution of cross-chain exchanges. This is very advantageous as most of the highest and most highly traded market cap currencies are on a separate blockchain. These blockchains do not implement interoperability standards.

The Limitations of CeFi

All the available stablecoins are not equal. For instance, USDC is mainly based on open source code. Additionally, anyone may scrutinize them. USDC is also backed with dollar-dominated assets of the same value as USDC that is in circulation. USDC can be bought in crypto exchanges including Coinbase and Binance.

Furthermore, there is inadequate transparency in CeFi as compared to DeFi. At Defi, it is regulated using technology. An example of such a technology is transparency which enhances transparency to the investors.

In CeFi, there is no control over funds. The platform has a central authority that controls the platform. Just like banks, these institutions may use their freedom in establishing risky financial products and then sell them.

Another limitation is that because of third parties, CeFi has higher transaction fees. This is because of third parties. Due to the intermediaries, transaction fees are unavoidable. This is among the top reasons most investors shift towards the decentralized platform.

 

Author Fredrick Awino