- CeDeFi refers to the ideal mix between centralized and decentralized finance, offering the characteristics of DeFi protocols but centralized.
- CeDeFi allows users who are not experts in the crypto ecosystem to explore decentralized applications or other DeFi products without worrying about custody since they derogate responsibility from a regulated entity.
The cryptocurrency industry is in full growth and it is common for new concepts to emerge every day that are necessary to learn, one of these is CeDeFi.
For those who don’t know, CeFi represents the traditional financial system that is enabled by centralized entities or banks. while DeFi refers to a new finance system whose central axis is decentralization.
CeFi and DeFi are completely different worlds with benefits and weaknesses. Therefore, CeDeFi seeks to unite the best of both.
Learn what CeDeFi is
The term CeDeFi, or Centralized and Decentralized Finance, was first used by Binance CEO Changpeng Zhao when the company announced Binance Smart Chain, now BNB Smart Chain, in September 2020.
Then, CeDeFi refers to the ideal combination of centralized and decentralized finance, offering the characteristics of DeFi protocols but with the difference that it is centralized.
This implies that the protocols in the CeDeFi ecosystem are usually executed by a single entity or a small group of entities.
CeDeFi allows users to explore decentralized finance solutions like farming and yield tools, low transaction fees, decentralized exchange, but under a centralized governance structure.
This in turn implies that people must comply with the regulations of Know Your Customer. In fact, the CeDeFi ecosystem also addresses the growing concerns regarding regulation and compliance linked to the use of cryptocurrencies.
Why is this ecosystem born?
Even though the world of decentralized finance (DeFi) has significant potential, it also suffers from some key limitations.
In particular, participating in the DeFi ecosystem can be a long process with a steep learning curve. The truth is that the user interface is difficult to understand and self-custody is no easy task.
In DeFi, all security responsibility falls on the user who uses it, and to self-custody cryptocurrencies, they must understand concepts such as: private keys, gas rates, risks, cold wallet, hot wallet, among others. So, the typical profile of a DeFi user is someone with extensive knowledge of the crypto market, and the reality is that the user does not always have the time or dedication to learn all this in the beginning.
this is where it comes in CeDeFi, allowing this type of user to explore decentralized applications or other DeFi products such as decentralized exchanges (DEX), lending solutions or yield farming and make an investment in this ecosystem. All this while they do not care about custody and, moreover, they trust because they do it through a regulated entity.
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ANDSo, CeDeFi offers:
- Custody: They provide wallet custody services and, therefore, the user is no longer responsible for protecting their private keys. Obviously this has other implications such as the fact that the user loses authority over their cryptocurrencies.
- Service: In the DeFi ecosystem, everyone is a pseudonym and is alone in the world. Instead, a CeDeFi platform can provide users with some advice on any issues that may arise.
- Interoperability: CeDeFi platforms allow the user to interact with different blockchains and tokens without much friction. In the DeFi ecosystem, users generally have to use bridges to transfer tokens between blockchains.
- Access with Fiat: A disadvantage of the DeFi world is that, in order to gain access, a person must first acquire the cryptocurrencies on another platform. Instead, a CeDeFi allows the user to transfer fiat money directly to the platform, convert it into cryptocurrencies, and directly start exploring DeFi. Thus reducing the intermediaries involved.
Advantages of CeDeFi
- Greater security: A CeDeFi platform, being centralized, offers guaranteed custody services. This in turn implies that users must trust their data and information to the platform. However, this type of solution seeks to provide greater user privacy compared to a traditional centralized platform.
- Easy access to new opportunities in the crypto market: The combination of these two worlds extends the frontier of possibilities.
- It offers regulatory advantages: It complies with KYC and AML requirements offering greater trust and, therefore, allowing a greater entry of people, including institutional clients.
- Lower rates: By allowing users to transact with each other, they eliminate the need for intermediaries. This reduces operating costs.
- They are more flexible: They can be adapted to the needs of their clients.
Disadvantages of CeDeFi
- Despite the fact that CeDeFi facilitates people’s access to this market, the learning curve associated with DeFi protocols is still high due to its high complexity.
- CeDeFi is highly dependent on Ethereum since most of the protocols are on this blockchain.
- It is a sector in full development and, as such, there is still much to learn and many mistakes to make.
- CeDeFi is not exempt from the risks of scams. The entities behind these projects are supposed to be regulated, however, this is not always the case. That is why it is suggested to only use accredited protocols.
Get to know some CeDeFi projects
Below you will find some of the most popular examples of CeDeFi projects:
- BNB Smart Chain (BSC): Binance has been actively integrating decentralized finance into its centralized crypto exchange (CEX) for a while now. In particular, BNB Smart Chain allows people to create DeFi applications and smart contracts.
- Unizen: Interestingly, this protocol works on the BSC and is a crypto exchange that combines the functionality of CEX and DEX. To do this, it brings Binance Cloud, Uniswap and PancakeSwap to its ecosystem as can be seen in the image below
- TrueFi: On this platform, users can obtain a credit rating and, in addition, it offers an unsecured loan protocol built on Ethereum.
It should not be forgotten that this type of protocol is not without risks. In fact, considering that it is a new market, people should evaluate in detail before investing.
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