What is CEFI (Centralized finance)?

CeFi is a method used in the cryptocurrency market that uses a central exchange to manage the buying, selling, and trading of cryptocurrency tokens. The way that conventional stock brokerages and investment firms manage the trading of fiat currency and equity in public stock markets is analogous to how CeFi handles the cryptocurrency market. CeFi is less strictly regulated globally than fiat currency equity trading, despite restrictions existing in Western markets such as the U.S. and Europe. Know Your Customer (KYC) compliance is frequently necessary for CeFi, as it verifies a user's identity before allowing them to utilize a centralized exchange. KYC aims to aid in the prevention of tax evasion, money laundering, and terrorist funding by verifying the identity of the user.

Under the CeFi concept, a central exchange that handles transaction execution holds custody of the assets. The private keys for cryptocurrency wallets, which provide access to cryptocurrency tokens on a blockchain, are kept by the CeFi exchange as part of asset management. A portion of the responsibility for the timely, safe, and secure completion of transactions as well as for appropriately informing users of all that occurs falls on the central exchange. To carry out transactions, such as purchasing, selling, trading, and token conversion, the central exchange in the CeFi model may impose handling and transaction fees. Cross-chain bridge operations, which allow users to convert between different cryptocurrency tokens, are another frequent activity of CeFi exchanges. Given that CeFi exchanges allow users to buy cryptocurrency tokens with fiat money, for a lot of customers, a CeFi-based strategy also serves as their initial port of entry into the cryptocurrency market. Other features that can be linked to the CeFi model include the capacity to provide loans directly and to perform transactions on margin.

Why do we need CeFi?

CeFi operates distinct settlement layers, so it provides a connection between two payment networks that would not otherwise have a way to communicate. Because CeFi services operate similarly to on/off ramps on motorways, the flow of monies in and out of them is frequently referred to as "on and off-ramping." CeFi acts as a portal to decentralized financial services (DeFi), including yield creation, lending, and crypto borrowing. These decentralized systems handle all transactions through a blockchain, eliminating the need for a single point of administration or control.

Features of CeFi

Centralized Exchange (CEX)
Users transfer money to the exchange via a conventional cryptocurrency exchange to handle it inside an internal account. Although money is held on the exchange, it is kept out of users' control and is subject to risks if the exchange's security protocols are compromised. Centralized exchanges have thus been the focus of numerous security incidents. Because they believe central exchanges to be reliable, users of the centralized exchange have no problem disclosing personal information or entrusting these businesses with their money. Large exchanges also have entire departments with customer care personnel ready to help customers. Excellent customer service enhances the consumer's sense of comfort and solidifies their belief that their money is in capable hands.

The Flexibility of Fiat Conversion
When converting cash to bitcoin and vice versa, centralized services offer greater flexibility than decentralized services. A centralized organization is typically needed for Bitcoin to fiat conversion; however, DeFi services do not provide money in a very flexible manner. In the Centralised Finance (CeFi) environment, customer onboarding can improve customer experience and be highly convenient.

Cross-chain services
CeFi services facilitate the trading of LTC, XRP, BTC, and other coins that are issued on different blockchain platforms. The difficulty and delay of cross-chain swapping prevent DeFi services from handling these currencies. This issue can be avoided by CeFi by securing money custody from multiple chains. This is a major benefit for CeFi because many of the most valuable and traded coins are autonomous blockchains that disregard interoperability regulations.

CeFi vs. DeFi, TradFi

DeFi uses blockchain networks and smart contracts to carry out transactions, whereas CeFi uses a centralized middleman. This makes it possible for anyone to exchange assets directly, without the need for middlemen, between people anywhere in the world. Decentralized applications, or dApps, give everyone with an Internet connection—including the underprivileged and unbanked—access to financial services. By providing personal wallets and trading accounts, wherein individuals are the only ones with access to their private keys, they also provide all users greater control over their assets.

DeFi's goal is to have open-source, anonymous technologies that don't ask for personal information from users and boost economic transparency. DeFi services give customers access to lending, borrowing, asset holding, crypto yield farming, and more without imposing user limitations that CeFi providers can implement. Nonetheless, DeFi is a novel technology-driven methodology that necessitates a comparatively elevated level of technical proficiency. Human mistakes, malevolent attackers, and defective protocol or smart contract coding are other potential hazards.

The goal of centralized finance is to bring together the benefits of DeFi with the dependability and user-friendliness of TradFi services. In addition to paying interest on savings accounts, lending and borrowing money, spending cryptocurrency using debit or credit cards, trading cryptocurrencies and tokenized assets, and more, CeFi also looks after the security of its users' money. To convert fiat money into cryptocurrency, a centralized organization is needed. Whereas DeFi solutions lack this functionality, CeFi providers can carry out this conversion. CeFi providers can also directly offer loans and perform transactions on margin.