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CeDeFi 101: Combining The Benefits of DeFi And CeFi

CeDeFi 101: Combining The Benefits of DeFi And CeFi


26 Oct 2022

In the last few years, centralized finance (CeFi) and decentralized finance (DeFi) have become key cryptocurrency industry sectors.

The former encompasses all companies offering crypto services via a centralized manner to achieve increased efficiency and convenience. In contrast, the latter projects are governed by their communities through DAOs, leverage smart contracts to eliminate middlemen and decentralize their platforms, as well as move transactions on-chain for transparency.

But did you know a brand new sector aims to combine the benefits of DeFi and CeFi? It is called centralized decentralized finance (CeDeFi), an exciting topic we will explore today.

Let's get started!

CeFi vs DeFi: What Is The Difference Between The Two?

Let's look at the essential mechanism behind CeFi and DeFi and the core differences between the two concepts.

It's safe to say that centralized finance (CeFi) is one of the oldest and most successful sectors of the broader crypto industry. Similar to traditional finance (TradFi) firms, CeFi solutions use conventional ways to operate their business.

Each centralized finance project is managed by a company that fully controls its ecosystem and products, serves as a trusted intermediary between different participants, and has to comply with regulatory laws.

CeFi services are custodial solutions that use centralized tools and processes to operate their platforms and require KYC checks from most of their customers. At the same time, their customer support teams, vast ecosystems, and deeper integration with the TradFi infrastructure enable them to make their processes more efficient and offer users a great level of convenience.

On the other hand, decentralized finance (DeFi) has grown as one of the largest crypto sectors in the last three years. As part of a movement to democratize finance and make it more accessible, DeFi protocols sacrifice a level of efficiency and convenience to operate in a decentralized manner. They replace companies with community-governed decentralized autonomous organizations (DAOs), centralized processes with smart contracts, custodial storage with non-custodial wallets, and off-chain transfers with on-chain transactions.

Furthermore, DeFi projects are extremely composable, meaning that multiple protocols can be built upon a single decentralized finance platform to expand its use cases, create and capture more value, and solve known issues. While DeFi and TradFi can work together, the integration between the two infrastructures is much less deep than in the case of CeFi.

The on-chain nature of decentralized finance means that every transaction involves a gas fee, which can jump to very high levels if the underlying blockchain experiences a heavy load. Also, DeFi projects require no KYC checks from users at the moment, but that may change in the future with new regulatory laws targeting the sector.

What Is CeDeFi And How Does it Work?

CeFi services leverage a centralized architecture to operate more efficiently and make their platforms more user-friendly. DeFi protocols sacrifice a level of these two qualities to decentralize their ecosystems, democratize financial products, and make their offerings more accessible.

The question now is: what is CeDeFi, and what problems does it solve?

Centralized decentralized finance (CeDeFi) is a suite of new crypto solutions that aim to retain most of the benefits of both CeFi and DeFi services by combining the elements of the two.

In the simplest terms, a CeDeFi project involves a centralized interface that works with numerous DeFi protocols. In addition to decentralized finance solutions, CeDeFi platforms often support thousands of digital assets across multiple blockchains, as well as integration with the TradFi infrastructure.

For these reasons, users enjoy the same convenience as on CeFi solutions with access to TradFi payment methods such as debit cards or bank transfers and customer support assistance. Simultaneously, they can gain direct exposure to a wide range of pre-vetted DeFi protocols using a single interface. By running a centralized layer on top of decentralized protocols, some CeDeFi platforms have introduced mechanisms that allow users to save on gas fees and access optimal market rates through aggregators.

Considering the $2.2 billion of funds stolen from DeFi protocols last year and the recent CeFi black swan events like Celsius' bankruptcy, CeDeFi seems to offer users a fine balance in security. These platforms aim to reduce DeFi risks by handpicking protocols based on different factors and via TradFi monitoring tools. At the same time, they use smart contracts and on-chain transactions for investment strategies so users can transparently see every information about their funds on the blockchain.

Compared to DeFi, there are still some sacrifices in terms of decentralization. In addition to being managed and governed by centralized companies, users must deposit funds into custodial wallets on CeDeFi platforms.

Furthermore, while CeDeFi project teams handpick the protocols they integrate their ecosystems with, investors still face DeFi-related risks like smart contract vulnerabilities, bridge exploits, and fraud as their funds are used with strategies that rely on these protocols.

CeDeFi: The Merge of Two Large Market Sectors

As one of the newest sectors of the broader crypto market, CeDeFi seeks to bridge an important gap between DeFi and CeFi.

Consequently, users can benefit from the same level of convenience as with CeFi services via an easy-to-use interface where they can gain exposure to numerous pre-vetted DeFi protocols across multiple blockchains. At the same time, they can leverage CeDeFi to gain access to optimized rates and fees, balanced security, and increased transparency via on-chain transactions.

CeDeFi projects have to make their own sacrifices to offer these advantages to their users. Examples include increased centralization, custodial wallets, and exposure to systemic DeFi risks.

The question now is whether CeDeFi's benefits outweigh its downsides from the perspective of crypto users. We will find out in the next few months!

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