What is CeDeFi? How Does CeDeFi Work and Why Does it Matter?

Cefi Key takeaways:

• CeDeFi is a combination of centralized finance and decentralized finance.

• It bridges the gap between decentralized and centralized models by combining the former’s transparency and a high-yield prospect with the latter’s accessibility and comprehension.

• The term “CeDeFi” was coined by Binance CEO Changpeng “CZ” Zhao when the Binance Smart chain was launched.

Despite the volatile market environment,crypto cryptocurrency adoption has skyrocketed in recent years. This is largely due to the utility of blockchain technology extending beyond just conventional trading. The utility of digital assets has further increased as centralized and decentralized platforms have launched unique projects that provide income and staking opportunities. And now, CeDeFi is here to bring a major change.

However, as Celsius and other popular platforms collapsed due to the bear market, while others increased their fees, the whole concept of centralized finance, or CeFi, has come under scrutiny. Despite the risks, the positive features such as ease of accessibility and a stable financial cycle are important for growing the utility and adoption of cryptocurrency. The answer is CeDeFi, a combined model combining the positive aspects of CeFi and DeFi.

Explaining CeFi and DeFi

Before we explain the concept of CeDeFi, it is very important that we properly understand the two individual financial systems – CeFi and DeFi.

CeFi refers to any structured financial institution that facilitates the borrowing and lending of cryptocurrencies by consumers through a controlled exchange. It functions in the same way as the traditional banking industry, where users can use their crypto as collateral when borrowing money or earn interest on it when lending.

In this case, the CeFi platform becomes the custodian of the user’s digital assets, which gives rise to a security risk through hacking. However, CeFi has a bigger market share compared to DeFi, and Binance, Coinbase, and Diem are among the most popular CeFi projects. However, CeFi projects are still plagued by problems such as expensive fees, a lack of transparency, and total ownership.

Decentralized finance, or DFI, refers to a variety of financial products and services that use blockchain technology and operate independently of traditional centralized institutions such as banks and credit cards. DeFi platforms operate on a peer-to-peer basis and are accessible through decentralized applications.

DeFi users have complete control over their funds thanks to a blockchain-based protocol that allows users to buy, sell, store, and trade their funds.

What is CeDeFi?

Simply put, CeDeFi is the combination of CeFi and DeFi, which combines the best attributes of both of these financial systems. Traditionally, financial systems are categorized into two groups: CeFi, which is the traditional, bank-enabled finance system, and DeFi, which is based on cryptocurrencies and smart contract technology.

By combining both of these concepts, CeDeFi leverages the advantages of centralized systems while allowing people to access yield farming tools, lending protocols, liquidity aggregators, decentralized exchanges, and other DeFi products. Compared to DeFi, CeDeFi projects lean more towards centralization. Often, a single or small group of entities governs CeDeFi projects.

The hybridization of centralized and decentralized models through CeDeFi aims to improve the traditional cryptocurrency model, allowing for larger transaction volumes, lower fees, improved security, and faster transactions.

The introduction of CeDeFi can be attributed to Binance, which released another blockchain network to compete with Ethereum. Binance rebranded its existing blockchain to “BNB Smart Chains,” which modifies Ethereum’s blockchain with optimized low fees and high transaction throughput. While it was at first criticized by decentralization advocates, BNB Chain grew thanks to its ability to fund projects quickly.

How does CeDeFi work?

To better explain the core mechanism behind CeDeFi, we take the example of Midas Investment, one of the projects that utilize the CeDeFi model. Midas Investment uses DeFi algorithms to keep funds transparent and provide viable risk projections to users. The CeFi layer is responsible for keeping the conventional yield generation process intact. Keeping the centralized layer intact allows it to offer a seamless user experience.

The CeDeFi model allows users to avoid the risks of the crypto market and access attractive financial services without compromising on transparency. Solutions like these offer flexible investment opportunities for the entire crypto community, allowing users to choose the strategy closest to their investment philosophies. Even bearish or bullish market cycles cannot prevent users from maintaining resilient portfolios.

Binance Smart Chain and CeDeFi

CeDeFi was born when Binance forked Geth (Ethereum Go client) and created Binance Smart Chain in September 2020. This new blockchain ran parallel to the BNB Beacon Chain with smart contract support. It also had a different gas limit per block, block time, and a different consensus mechanism compared to Ethereum.

While it compromised decentralization to attain scalability and high transaction throughput. By adopting the Proof-of-Staked-Authority (PoSA) model, it doesn’t allow anyone to start validating transactions on the network.

The Binance Smart Chain includes the top 21 active validators chosen according to the number of BNB tokens they have staked. They do not earn a block reward and are limited in number. This makes the BNB Smart Chain a more centralized blockchain and an excellent example of CeDeFi.

What are the advantages of using CeDeFi?

As mentioned before, CeDeFi enables users to trade CeDeFi cryptocurrency assets without requiring a centralized exchange.

• One of the major advantages of CeDeFi is lower fees, as transactions cost lower than those on comparable platforms. For instance, Binance CeDeFi has lower fees and faster transactions by allowing the process in mere seconds. This is different from Ethereum, which has very high gas fees and network congestion issues. Another advantage is security, as hackers find it harder to break into the CeDeFi network compared to traditional banking systems.
• CeDeFi is also incredibly accessible to the public as anyone with an Ethereum wallet can use CeDeFi protocols. This system decreases entry barriers for less experienced users. It enables them to explore more about DeFi and access verified trade options.
• CeDeFi platforms are more flexible than conventional financial systems as they can be altered to meet every user’s needs. For instance, Midas Investment diversifies portfolio risk by exposing investors to assets without them having to buy separate cryptos. This strategy is called the automated yield portfolio strategy and undergoes monthly rebalancing at no extra cost to the users.
• There are regulatory challenges present in the DeFi domain. But centralized finance companies can link the traditional financial sector and the decentralized finance space.
• 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 assets are managed and their risks and rewards. This approach can create more scope for users in this space while minimizing the risks.

Final Words

CeDeFi is all set to transform the current financial landscape. The arrival of projects such as the Binance smart chain brings several changes in the future with CeDeFi. It has already started gaining the attention of users seeking democratic control over financial transactions. However, users must remain cautious due to the ongoing risks of breaches and scams in this sector.