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What is CeDeFi?
What is CeDeFi? CeDeFi, or centralized decentralized finance, is one of the hottest buzzwords in the dynamic world of blockchain and cryptocurrency. So, what exactly does its seemingly oxymoronic name mean? In this article, we cover the key aspects of CeDeFi, including the reasons behind its rise, its fundamental features, and its potential advantages and disadvantages. Whether you are an existing crypto investor or a budding one, read on for a clear understanding of this new financial system that promises plenty of interesting opportunities.
Meaning of CeDeFi
Before truly understanding CeDeFi, one must know what CeFi (centralized finance) and DeFi (decentralized finance) mean. CeFi is a more traditional system, with a central authority processing financial operations. In the world of cryptocurrency, think of exchanges like Coinbase and Binance.US. There is regulatory protection, but investors have less control over their digital assets and, of course, less privacy.
We have a detailed article on DeFi crypto for readers unfamiliar with it. In short, DeFi involves peer-to-peer transactions backed by secure distributed ledgers. Users can trade crypto and digital assets without intermediaries and using smart contracts (self-executing algorithms).
As its name suggests, CeDeFi combines the best attributes of CeFi (e.g., regulation, liquidity) and DeFi (e.g., user sovereignty). Thus, the CeDeFi ecosystem promises DeFi technology with the safeguards and infrastructure one would typically have in conventional systems.
Why CeDeFi?
Over the last few years, DeFi has seen much traction as it has opened up finance applications from traditional systems. Particularly during the COVID-19 lockdown, when traditional financial systems found it hard to cope with the pressures, the DeFi market really took off. A wide range of instruments, including lending, borrowing, market making, insurance, derivatives, stablecoins, and more, were now available on DeFi applications.
However, despite this popularity growth, several factors keep DeFi far from mass adoption, especially adoption by large enterprises. DeFi apps do not have regulatory protection, custodial services, audits, or comprehensive transaction analysis. As it lacks regulation, the DeFi ecosystem is prone to theft and fraud, which also makes it unappealing to many individual investors.
Finally, large enterprises like decentralized exchanges account for most of the trading volume. If they keep away from the DeFi market, the liquidity pool available to DeFi participants is much smaller than on CeFi systems. Billions of dollars that could be plugged into the DeFi ecosystem are stuck in traditional systems.
CeDeFi solves many of the issues above by sacrificing some of the decentralization of DeFi for the security, compliance, and approachability of CeFi. While the fundamental principles of DeFi and CeFi may appear opposed to each other, the CeDeFi model shows that these can be complementary.
Pros and Cons
- Low transaction costs _ Because of the involvement of few middlemen and the incorporation of smart contracts, CeDeFi transactions are noticeably cheaper than on traditional systems. This is especially true for non-Ethereum-based networks, but most CeDeFi platforms indicate fees as low as DeFi platforms.
- Fast transaction speeds _ CeDeFi transactions don’t require third-party approvals, making them faster than transactions on traditional financial systems.
- Strong security _ Owing to its decentralized structure, CeDeFi is less prone to hacking than traditional finance systems. Users are also likely to have greater privacy than on centralized platforms.
- Low probability of fraud _ At the same time, all products on CeDeFi are vetted by the exchange, much like CeFi, lowering the risk of fraud that is fairly common in the DeFi ecosystem.
- Improved accessibility _ The above factors lower entry barriers for less experienced investors, who may have wanted to try out the choice available on DeFi systems but had kept away for various reasons. On the other hand, greater compliance and security also make CeDeFi appealing to enterprise-level players like Binance.
- Wide choice _ The combination of DeFi apps with centralized finance will mean access to more products and services than traditional financial systems, including cryptocurrencies, NFTs, yield farming tools, and liquidity aggregators.
- Relatively new _ CeDeFi is still an early-stage concept, and its complexity leads to a steep learning curve. There are also few user-friendly interfaces at present to derive the most value from CeDeFi protocols.
- High volatility _ Another consequence of its novelty is that CeDeFi protocols are still quite volatile. High volatility makes the system too risky for inexperienced investors.
- Heavy reliance on Ethereum _ Most CeDeFi protocols are built using the Ethereum blockchain. This over-reliance means that if Ethereum fails, CeDeFi is also impacted significantly. Fortunately, more blockchains have begun adopting CeDeFi protocols.
- Low regulation _ If some of the points in the previous section made it seem that CeDeFi protocols are completely scam-free, that’s not the case. Because of lower regulation than traditional systems, CeDeFi has experienced its fair share of scams. This requires investors to use trusted protocols and exercise due caution while investing.
CeDeFi Protocols
While CeDeFi is still in the early stages, several projects from crypto exchanges are already combining the CeFi and DeFi systems. In this section, we briefly look at the most well-known of these, which also give some idea of the range of projects possible with CeDeFi.
Binance Smart Chain (BSC)
Binance, one of the largest crypto exchanges in the world, has been a leader in driving the growth of CeDeFi. In fact, it’s believed that the term “CeDeFi” was coined by Binance’s CEO while launching BSC in late 2020.
The BSC network aims to allow DeFi developers to integrate their apps with the Binance Chain. BSC later merged with the older Binance Smart Chain to form the BNB Chain, an open-source decentralization ecosystem. On offer are privacy protection, secure custodian services, linkage liquidity, and cross-chain services. The platform also has a seed fund to help new DeFi protocols to pass the due diligence needed to join the Binance ecosystem. The eventual aim is to build an interoperable virtual economy that makes various crypto assets on the Binance platform accessible across blockchain networks.
Unizen
Unizen is a digital asset exchange aggregator that allows traders to find cost-efficient trades on multiple platforms.
In partnership with a venture investment fund, Unizen launched a CeDeFi Alliance in 2022 to develop a hybrid system that combines CeFi organizations with DeFi protocols. In this system, users will be able to look for a wide range of crypto items while satisfying their desired KYC tolerance.
CoinZoom
CoinZoom is a US-based digital currency trading platform that supports 30-plus currencies like Bitcoin, Ethereum, and Ripple.
Dubbed the next-generation crypto exchange, it is a regulated exchange that operates on decentralized blockchain-based protocols. Its facility of traditional payment systems, such as debit cards, simplify crypto investing for inexperienced users. The exchange also has its own Ethereum-based token (ZOOM) that works on a few other platforms.
Nexo
The UK-based Nexo is a highly regulated digital credit line platform. Users can buy crypto assets, earn interest, borrow against them, and swap between over 300 pairs.
The platform’s DeFi infrastructure has been evolving fast after it joined Chainlink, the industry-standard decentralized blockchain oracle network. Nexo has begun adding decentralized assets to its lending offerings while providing on-chain audit trails, reliable exchange rates, and automated collateralization checks. The platform also invests in early-stage DeFi protocols and independent NFT distribution marketplaces.
SmartFi
SmartFi is a US-based cryptocurrency lending platform that lets users earn, trade, lend, and borrow. Through its on-chain hedge mechanism, users trade in a minable stablecoin that can be returned for a full refund of the purchase price.
The platform’s unique model, built on an independent blockchain, combines aspects of CeFi and DeFi. It can create derivatives of any asset and digitize, decentralize, and hedge it with exact correlations.
Final Thoughts
The DeFi cryptosystem has overcome certain limitations of traditional finance but has also given rise to specific issues of its own. It is fair to say that CeDeFi shows promise in being able to resolve some of the key challenges. While it’s too early to claim whether CeDeFi projects have fulfilled this promise, trends show strong potential. At the same time, this might also be a good time to take advantage of the DeFi market before a large number of regular and enterprise users come in thanks to CeDeFi.
What is CeDeFi in crypto?
Simply put, CeDeFi encompasses any way of modernizing conventional financial management through decentralized means. Blockchain technology certainly holds an appeal for financial institutions given its flexibility and the communities available to tap into.
What is an example of CeDeFi?
Midas Investments, Unizen, CoinZoom Nexo, and Binance are a few examples of CeDeFi platforms
What are the advantages of CeDeFi?
Exchange vetted projects and tokens: Projects and tokens that have been thoroughly evaluated by the exchange are available. This lowers the risk of fraud. Seamless deployment: DApp developers can swiftly integrate their applications and make use of cross-chain functionalities.
Is Coinbase a CeDeFi (centralized decentralized finance)?
Binance, Coinbase and Diem are among the popular CeFi platforms. However, due to CeFi’s expensive transaction fees brought on by third-party involvements, the lack of transparency and total ownership over your digital assets, DeFi (decentralized finance) became popular
What is the difference CeFi and DeFi? Advantages and Disadvantages.
CeFi has similarity to traditional forms of centralized finance, where banks and exchanges manage currency and transaction flows. DeFi (decentralized finance) enables peer-to-peer transactions without the need for a centralized exchange. CeFi and DeFi (decentralized finance) have some similarities, as well as advantages and disadvantages.
Is Binance CeDeFi (centralized and decentralized finance)? Binance Smart Chain.
The Binance Smart Chain includes the top 21 active validators chosen according to the number of Binance smart chain tokens they have staked. They do not earn a block reward and are limited in number. This makes the Binance Smart Chain a more centralized blockchain and an excellent example of CeDeFi.
How does CeDeFi ( centralized and decentralized finance) work?
Users get a comprehensive process of lending, borrowing, or staking if they transition to CeDeFi platforms. Furthermore, they can expect full transparency and control. Similar to non-custodial DeFi platforms, CeDeFi allows users to know how their other digital assets are managed and their risks and rewards.
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