Quick Look At What Is CeDeFi? Will We See It In The Future?

Quick Look At What Is CeDeFi? Will We See It In The Future?

With fintech services rising, the acronyms within the industry are growing too. You might have heard about DeFi, SocialFi, and many other such terms. But now, what exactly is CeDeFi? Let’s have a quick look at it within this blog.

What is CeDeFi?

CeDeFi is the abbreviation for ‘Centralized Decentralized Finance’, which refers to a union of CeFi and DeFi. It combines the best of both worlds, creating a financial system that delivers the best features and attributes of CeFi and DeFi. 

What exactly does CeDeFi offer?

Like DeFi protocols, CeDeFi offers all the same features of allowing the users access to all sorts of DeFi products such as liquidity aggregators, decentralised exchanges (DEXs), yield farming tools, and lending protocols. But additionally, it lets the users still leverage the advantages of CeFi systems.

And like CeFi, any CeDeFi project will lean towards centralization. That means it will be governed by a single or a small group of entities. 

The above explanation of the CeDeFi ecosystem entails that it is a hybrid version of decentralised and centralised models which aims at delivering the following benefits to the user: 

  • Improve traditional business processes
  • Allow faster transactions 
  • Deliver improved security
  • Permit larger transaction volume
  • Incur lower transaction costs

Examples of CeDeFi protocols 

Synthetix, MakerDAO, and Compound are some of the most prevalent examples of CeDeFi protocols. As a matter of fact, these all are built over the Ethereum blockchain platform

If you’re still in a fix and not able to understand what is CeDeFi; let’s understand CeFi and DeFi individually. 

What is CeFi? 

What is CeFi?-Systango

Centralized Finance (CeFi) is a controlled exchange that enables users to borrow or lend cryptocurrency within a structured financial system. 

You might be aware of how conventional banks work; any CeFi project also works on the same lines. The only difference is that the CeFi project deals in cryptocurrency while the banks deal in fiat currency. 

Within a CeFi system, users tend to use cryptocurrencies as collateral to borrow money or earn interest on it while lending it to someone else. So, this CeFi platform serves as a custodian of a crypto user’s digital assets.

Coinbase, Binance and Diem are the most used CeFi platforms. In fact, currently, CeFi platforms have a larger market share than DeFi.  

But CeFi does have multiple issues that must be addressed, which include the following:

  • Lack of transparency
  • Expensive transaction fees
  • Absence of complete ownership 

The above drawbacks are the reason why crypto leaders, blockchain developers and users are looking up to DeFi projects. 

What is DeFi? 

What is DeFi?-Systango

Decentralised Finance (DeFi) refers to a whole range of financial services and products that are being developed on blockchain. It has a constantly evolving infrastructure which aims at using emerging technologies and removes any involvement of third parties. 

The applications that work on DeFi are referred to as decentralised applications i.e. dApps. They are trending since they operate on a peer-to-peer basis, avoiding any need for centralized authorities such as credit card companies, banks, or any broker. 

Citing an example, on any platform that runs on centralized finance, all the exchanges will be handled by a central authority, which means the user won’t have any access to private keys or really own their crypto. Furthermore, these are also dependent on centralised exchanges’ terms and conditions, which might affect the prices and gas fees.

On the other hand, DeFi users relish the complete ownership of their digital assets. The blockchain-based system allows them to buy, sell, store and trade their funds smoothly and securely. 

So, if you have to debate, you must note that both DeFi and CeFi come with their own pros and cons. DeFi is permissionless and would not ask for a KYC process, whereas CeFi will make it easier for users to convert fiat currency into crypto, which isn’t possible in DeFi. 

Differences Between DeFi, CeFi, and CeDeFi-Systango

History of CeDeFi

In September 2020, during the launch of Binance Smart Chain, Binance’s CEO, Changpeng Zhao coined the term ‘CeDeFi’. 

With the Ethereum blockchain’s immense popularity, Binance planned to create another blockchain to compete with Ethereum and its DeFi ecosystem. That is when BNB Smart Chain was introduced as a fork of Ethereum with high transaction throughput and low fees. 

Although CeDeFi tends to sacrifice censorship resistance and decentralization, its popularity is still significant. Midas Investments, Unizen, CoinZoom Nexo, and Binance are a few examples of CeDeFi platforms. 

Advantages of CeDeFi 

  • Faster Transactions: CeDeFi platforms bring scalability into the main picture, which leads to faster transactions per second. 
  • No intermediaries: Users on the CeDeFi platform interact with smart contracts. 
  • Lower Costs: Since the involvement of intermediaries is decreased, the overall costs get reduced as well.
  • Regulatory Compliance: These platforms mostly abide by AML, KYC, and CFT regulations.
  • Institutional Crypto Adoption: With regulatory compliance in place, CeDeFi can promote institutional crypto adoption.
  • Improved Asset Control: Delivers more control over digital assets than CeFi platforms. 

Future of CeDeFi 

CeDeFi might not emerge as the future choice of users. 

DeFi assists users with the idea of removing centralization completely. The absence of KYC requirements in DeFi increases the level of privacy a user might enjoy within a dApp. It is important to keep this in mind when the importance of privacy is becoming increasingly significant in the digital space. 

Moreover, since KYC isn’t required, users can access financial products easily with permissionless functionality. 

In the long run, the security issues associated with CeDeFi will also play a major role in limiting the growth of CeDeFi. And with blockchain development evolving with every passing day, the scalability issues with DeFi might fade away as well.

Mayank Khare

November 18, 2022

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