What is CeDeFi, and why does it matter?
What is CeDeFi?
CeDeFi is a union of CeFi and DeFi, combining the best features and attributes of the two financial systems.
For a while now, financial systems have been split into centralized finance (CeFi) and decentralized finance (DeFi). CeFi is a traditional, bank-enabled finance system, while DeFi is based on cryptocurrencies and smart contracts.
However, a new system, "CeDeFi," a combination of centralized and decentralized finance, has emerged and is gaining traction. So, what is CeDeFi, and how does it work?
CeDeFi offers the same features as DeFi protocols while being centralized, allowing people to access DeFi products like decentralized exchanges (DEXs), liquidity aggregators, yield farming tools and lending protocols — yet still leveraging the advantages of CeFi systems.
Unlike DeFi, which is permissionless and available for use by anyone, CeDeFi projects lean more toward centralization. They are often governed by a single or small group of entities, which allows them more control (similar to a CeFi).
Overall, the CeDeFi ecosystem, which is a hybrid of the centralized and decentralized models, aims to improve the traditional cryptocurrency model to allow for faster transactions, improved security, a larger transaction volume and comparatively lower fees than traditional systems.
Do any CeDeFi protocols exist?
Some of the most popular examples of CeDeFi protocols include the MakerDAO, Synthetix and Compound, which offer DeFi-like capabilities. A custodial crypto-investment platform like Midas.Investments is another example.
MakerDAO, Synthetix and Compound are all built on top of the Ethereum blockchain. Midas.Investments updated its platform in August 2022 to incorporate CeDeFi strategies. According to the Midas team, the new approach aims to mirror DeFi by creating smart contracts to handle asset management under various lending protocols. These include lending, borrowing and soft leverage, ideally allowing an influx of capital into the DeFi space.
As with many CeDeFi endeavors, Midas aims to provide its clients with DeFi options tailored to their risk profile while allowing access to hedged instruments from CeFi. To better understand CeDeFi, let’s first understand CeFi and DeFi.
What is CeFi?
CeFi is a structured financial institution that lets consumers borrow or lend cryptocurrency through a controlled exchange.
It functions similarly to the conventional banking industry. Users use their cryptocurrency as collateral when borrowing money or earn interest on it when lending. The CeFi platform serves as the “custodian” of your digital assets. You relinquish control of your cryptocurrency when the CeFi platform “safeguards” it to make money. If the platform is hacked, your assets could be at risk.
CeFi has a larger market share than DeFi because CeFi platforms are more widely used. 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 became popular.
What is DeFi?
DeFi refers to a broad range of financial products and services built on blockchain technologies in the public blockchain space. It functions outside of traditional centralized systems like banks and credit cards.
These are accessible through decentralized applications (DApps), which operate on a peer-to-peer basis, removing the need for centralized authorities like banks, credit card companies or brokers. With DeFi, anyone can access alternative financial systems like lending and borrowing.
In CeFi, a centralized exchange handles all crypto trading, meaning users don’t have access to private keys or really own their crypto. They are also subject to the exchange's terms and conditions, prices and gas fees.
In contrast, DeFi users have complete control of their funds since no centralized authority handles transactions. Instead, a blockchain-based protocol allows users to buy, sell, store and trade their funds as they please. Both DeFi and CeFi have their pros and cons. CeFi makes it easier to convert fiat to crypto, unlike DeFi. But DeFi is permissionless and does not require a KYC process.
Who introduced CeDeFi to the crypto market?
Binance plays a huge part in the rise of CeDeFi — it was Binance’s CEO, Changpeng Zhao, who coined the term “CeDeFi,” in September 2020, during the launch of Binance Smart Chain.
Considering that Ethereum's popularity is attributable to smart contracts functionality, Binance also realized it had to create another blockchain network to compete with Ethereum and its DeFi ecosystem. As a result, Binance rebranded its existing blockchain network to BNB Smart Chain, a fork of Ethereum with optimizations for low fees and high transaction throughput.
While it sacrifices decentralization and censorship resistance — it still seems to be paying off. Although it was criticized by decentralization advocates, BNB Chain grew exponentially from September 2020, thanks to its ability to fund projects quickly, leading to the rise of CeDeFi.
In addition to Binance, investors can establish hedged yield streams through existing digital tactics using Midas's hybrid CeDeFi investing platform for dependable passive income. Moreover, Midas claims to have a massive network of backend procedures in a volatile cryptocurrency market that seek to hedge and protect the front-end investment options offered to individuals.
Integration with a highly secure Fireblocks cryptocurrency custody and transfer technology has protected the Midas digital ecosystem. For stored custody assets, FireBlocks provides commercial-grade digital protection.
What are the advantages of CeDeFi?
Among the advantages of CeDeFi are lower fees, better security, accessibility, speed and lower cost.
CeDeFi's innovative approach to decentralized banking enables users to trade CeDeFi crypto assets without requiring a centralized exchange. This implies that users may transact directly with one another, removing the need for an intermediary.
Among CeDeFi’s major advantages is lower fees. CeDeFi transactions cost lower than those on comparable platforms since there are fewer middlemen involved, especially on networks that are not Ethereum-based.
Ethereum has very high gas fees, for instance, with DEX transactions running into hundreds of dollars. It also often causes network congestion issues, leading to delays. Binance CeDeFi, on the other hand, has much lower fees and accelerates transactions by allowing users to accept fees in a few seconds.
Another notable advantage is improved security. Hackers will find it far harder to break into the CeDeFi network than they will with traditional banking systems because of the network's decentralized structure.
In addition, CeDeFi is incredibly accessible as anyone who has an Ethereum wallet can make use of the CeDeFi protocols. It lowers entry barriers for less experienced users and enables them to explore more about DeFi by presenting verified trade options vetted by multiple criteria, including KYC, fees and more.
Financial transactions conducted through CeDeFi can also be handled considerably faster than those performed through traditional financial systems. This is because CeDeFi doesn't need to wait for approval from a third party, which can often take several days to weeks.
CeDeFi technologies are also more flexible than conventional financial systems, allowing them to be altered to meet the needs of each user. For instance, the automated yield portfolio (YAP) strategy by Midas diversifies portfolio risk by exposing investors to a variety of assets without the burden of buying separate crypto assets. Most significantly, YAPs go through monthly rebalancing at no extra expense to investors to maximize profits.
By securing profits from better-performing assets while reinvesting in the underperforming assets, this rebalancing enables Midas to take advantage of market fluctuations in the hope of providing steady portfolio growth over the long term.
Furthermore, as projects and tokens are evaluated and audited thoroughly by CeDeFi exchanges, safer transactions are possible. CeDeFi provides more privacy than conventional payment systems because its decentralized network makes it harder for outside parties to track user transactions.
What are the disadvantages of CeDeFi?
Currently, CeDeFi’s main downside is the high learning curve associated with its protocols because of their complexity. The concept is still young, and more intuitive and user-friendly interfaces are bound to emerge over time.
CeDeFi also relies heavily on Ethereum, given that most CeDeFi protocols are still built on the Ethereum blockchain. If Ethereum fails, CeDeFi will likely fail as well. However, this risk is mitigated by the fact that other blockchains are beginning to adopt CeDeFi protocols.
Another disadvantage of CeDeFi is that it’s still relatively new and unproven. While the sector has seen tremendous growth in the past year, it’s still in its early stages. As such, CeDeFi protocols are subject to high volatility and therefore may not yet be ready for mass adoption.
Finally, CeDeFi is not without its fair share of scams. Due to the lack of regulation, there have been several scams in the CeDeFi space. Therefore, it is essential to be vigilant, use only reputable CeDeFi protocols and view CeDeFi as a possible solution for integrating DeFi products and applications into mainstream financial systems.
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