What is CeFi? Understanding Centralised Finance

New ideas like CeFi, DeFi, and CeDeFi, in cryptocurrency have completely changed the financial industry.

In the cryptocurrency world, CeFi is short for centralised finance. CeFi platforms offer financial services like investments, loans, and savings accounts.*

NB Where you see the following symbol “*“, please note the standard risk warning at the bottom of the article.

What is CeFi?

CeFi is a financial system that uses cryptocurrency and blockchain technology to provide traditional financial services.

Unlike DeFi (Decentralised Finance), which operates in a decentralised manner, centralised finance platforms are centralised. This means there’s a single entity (like a company or group of developers) that controls the platform and user funds.

When you use a centralised finance platform (e.g., a centralised cryptocurrency exchange), you trust intermediaries to safeguard your assets and facilitate transactions.

CeFi platforms are often preferred by beginners due to their familiarity, user-friendly experience, and integration with fiat currencies.

Here are the features of CeFi

-It relies on trusted intermediaries (custodians) to manage user accounts and execute transactions.

-Platforms are subject to government regulations, which can vary by country.

Note the standard risk warning at the bottom of this article.

-Platforms use a level of protective measures such as cold storage, encryption, and multi-factor authentication. Some features being online mean there is a risk that it may be a victim of a cyberattack. Cold storage is often referred to as "cold wallets” (like Ledger or Trezor) and these are effective for long-term storage as they are offline and difficult to hack.

-They charge fees for services (e.g., trading fees, withdrawal fees).

-Platforms allow you to buy/sell cryptocurrencies using fiat currencies (e.g., Pounds, Australian dollars, euros).

-Platforms offer enhanced liquidity, making it convenient to trade various cryptocurrencies without significant price slippage. CeFi platforms support a wide range of coins.

-Customer Support: Platforms often offer customer support.

-Compliance: Completing KYC (Know Your Customer) processes ensures compliance with local regulations such as in the UK.

-Some CeFi platforms offer interest on deposited funds.

How does CeFi differ from DeFi?

CeFi operates in a centralised manner, where a single entity controls all financial transactions and decisions.

DeFi is a financial system that works without a central authority, operating in a decentralised way.

What is CeDeFi?

The centralised-decentralised finance system, or CeDeFi, combines the benefits of both CeFi and DeFi into one hybrid system.

Some CeDeFi platforms offer “earn” products which lets users earn interest on their cryptocurrency holdings.

These platforms provide centralised financial services within decentralised finance applications.

What are the Advantages of CeFi?

One of the advantages of CeFi is its user-friendly interface and consistent customer service. CeFi platforms, supported by big companies, have systems which aim to reduce instances and to prevent market manipulation and price swings.

They provide a much more positive customer experience than decentralised platforms.

Investors generally have a better user experience using CeFi platforms with additional protection features such as two-factor authentication and cold storage.*

Who operates in the CeFi ecosystem?

In centralised finance (CeFi), key players are centralised exchanges, and other financial institutions offering services such as lending and trading.

These platforms operate with centralised control and differ from their decentralised counterparts. An example is Crypto.com. They offer loans, where users can also use their crypto as collateral.

How does CeFi work?

CeFi relies on intermediaries (such as exchanges) to manage assets and facilitate transactions.

These centralised authorities offer services, act as custodians of funds, and ensure the stability and protection of the financial system.

CeFi platforms are usually heavily regulated by government authorities and regulatory bodies.

Strict rules, including anti-money laundering (AML) and know your customer (KYC) requirements, help prevent illicit activities.

Examples of CeFi services

Cryptocurrency exchanges like CoinJar, Binance, and Kraken operate as CeFi services. They maintain asset custody and control private keys associated with cryptocurrency wallets.

The Role of centralised exchanges

Centralised exchanges are crucial in the cryptocurrency market. They simplify the process of trading cryptocurrencies for users. Additionally, they help provide liquidity in the market. They also act as custodians of the cryptocurrencies held in their platform, ensuring their protection. This is a virtual platform and may be at risk of hacking.

However, critics often criticise centralised exchanges for their centralisation, which contradicts the decentralised nature of cryptocurrencies.

Savings and investment products

In CeFi, savings and investment products allow people to invest in cryptocurrencies and offer the opportunity to earn interest on their cryptocurrency assets.

Crypto savings accounts, staking, and yield farming are a few of the more well-liked savings and investment products in CeFi.

CeFi lending and borrowing

CeFi lending allows investors to earn interest on their cryptocurrency, similar to traditional savings accounts. Also, borrowing cryptocurrencies through CeFi can provide access to funds that may be difficult to obtain otherwise.

However, just like a bank, if a borrower doesn’t pay back a loan, their crypto they used as collateral is at risk, and they could lose it all. The platform has the right to liquidate their collateral if the loan isn’t paid.

Usually, the platform automatically sells a portion of the borrower’s collateral to cover the outstanding debt.

If the platform mismanages funds or goes bankrupt, borrowers and lenders are at risk.

For example, the now-defunct CeFi lending platform Celsius sank in 2022, thanks to poor risk management. Users suffered when the platform couldn’t meet withdrawal demands.

In another controversy, Gemini Earn was an interest-earning program offered by the Gemini cryptocurrency exchange.

It allowed customers to earn annual interest on various cryptocurrencies supported by Gemini. Users could earn up to 7.4% interest on their crypto holdings. However, in 2023, Genesis, the platform that Gemini Earn was associated with, collapsed.

Affected customers will probably get up to 70% of their money back after legal proceedings, but nothing is certain.

The future of CeFi: Trends and predictions

With the rise of cryptocurrencies, we are likely to see more regulation of CeFi in the future. And we can expect continued growth in the use of decentralised finance (DeFi) platforms. These platforms have the potential to disrupt the entire traditional financial industry.

We can also probably expect the integration of CeFi and DeFi. As the two systems continue to grow and evolve, we may see increased collaboration between centralised and decentralised finance. This could lead to the creation of hybrid systems that offer the benefits of both worlds.

Conclusion: Understanding centralised finance (CeFi) in crypto

CeFi is a bridge between the traditional financial system and the decentralised crypto ecosystem.

Regulatory compliance and customer support are CeFi’s strengths. Users trust the platform to handle their funds in a protective manner.

The performance of crypto can be highly volatile, value can drop as quickly as it can rise. Past performance is not a guide to the future.

Definitions

CeDeFi: This stands for "Centralised decentralised Finance," which combines centralised and decentralised elements in a financial system. It refers to a system that has elements of both traditional finance and decentralised finance.

CeFi: This stands for "centralised finance," which refers to the traditional financial system where financial transactions are managed by centralised institutions like banks and governments.

Cryptocurrency: This refers to digital or virtual currencies that use cryptography for protective measures and operate independently of a central bank. Bitcoin and Ethereum are examples of cryptocurrencies.

DeFi: This stands for "decentralised finance," which refers to a financial system that is not controlled by any centralised institution but operates on a decentralised blockchain network. It allows users to participate in financial activities like lending, borrowing, and trading without intermediaries.

Decentralised applications: These are computer applications that run on a decentralised blockchain network and operate independently of any centralised institution. They offer features like transparency, protection, and immutability.

ETFs and mutual funds: These are investment vehicles that pool money from multiple investors to buy securities like stocks, bonds, and commodities. The difference is that ETFs are traded on an exchange like a stock, while mutual funds are bought and sold at the end of the trading day at the net asset value.

Limit orders, stop-loss orders, and market orders: These are types of orders that investors can place to buy or sell assets like stocks or cryptocurrencies.

A limit order sets the maximum price for buying or minimum price for selling an asset, while a stop-loss order sets a price at which an asset should be sold to prevent further losses. A market order executes a trade at the current market price.

Staking and yield farming: These are methods of earning cryptocurrency rewards for holding and investing in cryptocurrencies. Staking involves holding and validating transactions on a blockchain network, while yield farming involves providing liquidity to a decentralised exchange.

TradFi: Traditional Finance (TradFi) refers to the mainstream financial system and the conventional institutions that operate within it. These institutions include retail, investment, and commercial banks, insurance companies, brokerages, and other regulated entities. TradFi services are heavily regulated by government authorities.*