A new trading paradigm has emerged in the financial sector due to blockchain technology and the advent of cryptocurrency. Although their primary application was in digital currency trading, the original intention behind cryptocurrencies was to decentralize the financial trading system.
Crypto loans, crypto derivatives trading (like Bitcoin Futures), and tokenization of digital assets were all part of the new decentralized finance (DeFi) paradigm.
What is Centralized Finance?
Centralized finance is a way of handling money that lets people use centralized markets to earn interest and get cryptocurrency loans. You would give your chosen third-party organization the private keys to your crypto assets so that they can handle the transactions and orders you want to make. CeFi aims to speed up the transaction process to make fair deals faster and cheaper.
Blockchain technology is getting better, and cryptocurrencies are becoming more popular. This has changed the way people trade in the financial world. Cryptocurrencies were made to make the financial trading system less centralized, but they were only used for selling other cryptocurrencies.
Blockchain experts say CeFi is one of the few technologies to change things. It mixes some of the yield benefits of DeFi with the ease of use and dependability of regular financial services products. CeFi lets you get money, earn interest on your savings, spend with a cryptocurrency debit card, and do much more.
Application of Centralized Finance
CeFi can be used in the real world for things like
- BlockFi is a network for lending and financing Bitcoin and regular money. It is a controlled exchange.
- Celsius also gives people company platforms for lending, sending, and trading bitcoin.
- Fairlay, a market for trading and predicting cryptocurrencies, is based on the CeFi idea.
- You can borrow Bitcoins and send money to DAI with Ledn.
- Libra is an international banking platform that also lets you trade virtual currencies.
Benefits of Centralized Finance
There are many ways in which DeFi is more popular than CeFi. However, CeFi has some benefits over DeFi.
Different coins created on separate blockchain platforms can be traded through centralized financial systems. But DeFi systems are stricter and don’t allow these kinds of tokens because cross-chain changes are too complicated and time-consuming to do.
Most high-market-cap coins are traded on separate blockchains, a big plus for CeFi.
Availability of Customer Service
Cryptocurrency and blockchain technology are changing quickly, and buyers may struggle to keep up. When things are uncertain, well-established exchanges have good customer service teams that can help.
They also usually make it easy for users to find much information about crypto to help them learn. For example, Hodlnaut Resources has information on all parts of the DeFi ecosystem, such as interest accounts, loans, borrowing, and how to use coins.
Higher Interest Rates
They set the interest rates on CeFi sites, making them more stable because market forces do not affect them. On top of that, interest rates are usually a lot higher than on DeFi sites.
Flexible Flat Conversions
A centralized exchange is usually needed to change cryptocurrency for fiat cash. These exchanges make it easy for people new to buying crypto to change fiat currency to crypto and crypto to fiat currency.
DeFi doesn’t make this easy to do. In this way, CeFi is better than DeFi because it provides a smoother experience.
Risks Associated with Centralized Finance
There are many disadvantages in connection with CeFi:
Risk of Hacks
The main problem with centralized systems is that hackers are always interested in them. The second one wants to use the platforms’ high liquidity to their advantage. Because of this, they use illegal computer tricks to get into the data and steal money from customers.
When people use CeFi, they give up control of their belongings to the exchanges. During these conversations, they also give out personal details. If the business is hacked or attacked online, there is a real chance that you will lose money. There is a chance that your privacy will be broken, even if the money is safe.
There is a lack of transparency in CeFi devices because of how they work. In the DeFi area, platforms are controlled by technology and brilliant contracts, which make things clear.
Not Every Stablecoin Is The Same
Open-source technology can be viewed in USDC. It’s open to everyone. The USDC is backed by assets worth dollars and held in separate deals with financial firms that the US government regulates.
The market value of these assets is about the same as the USDC. USDC can also be bought on Coinbase and kept in any account that works with Ethereum. It’s free and easy to change USDC to US dollars. Coinbase and Circle made USDC possible by creating the CENTRE Consortium.
More Transaction Fees
This is because there are more intermediaries in a CeFi, so the transaction fees go up naturally. An important reason why people worldwide are going toward a decentralized network is this.
Examples of Centralized Finance
Below are three examples of some popular centralized finance:
Binance is one of the most well-known cryptocurrency platforms and has been used in more than 180 countries since it started in 2017. It focuses on selling alternative cryptocurrencies and lets you trade in over 500 of them, such as Bitcoin (BTC), Ethereum (ETH), Dogecoin (DOGE), and its cryptocurrency, Binance Coin (BNB).
Based in Singapore, a fintech company, Hodlnaut, helps individual investors and cryptocurrency fans with their money. Hodlnaut, which began in April 2019, is quickly becoming one of the most hopeful places in Asia to lend crypto. Hodlnaut’s goal is to make it easy for people who hold digital assets to get more returns. It does this by providing simple products and committed support.
The most popular Bitcoin exchange is Coinbase, with over 56 million verified users. A vast range of goods, such as an advanced trading platform and a wallet for small investors, are available. With the help of crypto, Coinbase is working to make the financial system more fair, open, efficient, and transparent.
Difference Between Decentralized Finance and Centralized Finance
The main difference between the two methods is how transactions are handled. Money companies that are regulated run the system. Decentralized banking, on the other hand, depends on technology. Binance, Coinbase, Libra, and several other well-known CeFi platforms have been accepting virtual currencies for a long time. The DeFi store uses a blockchain network that works a lot like Ethereum.
Because of this, when exchanges join CeFi, people move their uncertainty to the deals. It means that businesses are in charge of keeping customers’ money safe. In DeFi, these middlemen are removed. The way things work is based on the idea that intelligent contract methods will work.
Centralized finance makes it easier to move money from one cryptocurrency to another and to use cross-chain options. In case of an adverse event, like a hack, centralized finance can transfer money to help customers or stop trade if necessary.
On top of that, DeFi is viewed as more straightforward to use and less annoying because it doesn’t require personal information from customers and doesn’t store it. CeFi, on the other hand, can stop trade and limit what customers can do, but DeFi does not.
CeFi ensures that funds are safe and trades on those funds are fair. Crypto trading is open to people who trade in traditional currencies as well. Also, customer help is available on CeFi exchanges but not on DeFi services. CeFi works by building trust along the way. It promises that the money will be safe and that trades will be fair.
There are pros and cons to both of these methods. It depends on what the owner wants and needs. That being said, you should now have a good idea of which one is best for you after reading this blog.