What is Centralised Finance (CeFi)?
What are the differences between CeFi (Centralised Finance) and DeFi?
What are the differences between CeFi (Centralised Finance) and DeFi?
With the growing popularity of cryptocurrency and crypto-related investments, there is an increasing demand for centralised and decentralised financial services from both individual investors, as well as businesses and organisations. These cryptocurrency-based financial services can range from trading, buying and selling, borrowing and lending, staking, and so on.
The crypto ecosystem is divided into two different categories, including CeFi (centralised finance) and DeFi (decentralised finance).
When it comes to comparing CeFi vs DeFi, ultimately, both these platforms support the adoption of cryptocurrencies. These crypto financial systems enable investors and businesses to start using cryptocurrencies for a variety of financial purposes, although the difference governance system of each comes with its own set of pros and cons.
The term CeFi stands for “Centralised Finance”. CeFi crypto is focused on creating investment opportunities through a point of central control, functioning as the crypto equivalent of traditional financial institutions.
CeFi often allows you to buy and sell crypto with fiat currencies, borrow and lend cryptocurrencies, earn interest and rewards, and more through a central platform. In centralised finance, all types of crypto trading orders pass through a central exchange. A central exchange serves as a third party, which holds and manages the crypto assets of its customers. The services offered by such an exchange include buying or selling, lending or borrowing of cryptocurrencies.
While a centralised exchange makes it easy for users to trade, get loans, buy cryptocurrencies, or earn interest on their holdings, they must deposit their assets with the centralised exchange they are using. Giving up control of your assets may sound daunting, but it’s similar to depositing your money with a bank (just with higher interest rates). In fact, depositing your cryptocurrencies with a secure CeFi exchange can actually add a layer of reassurance and protection to your assets.
For example, if you forget your password, you can reach out to customer service to restore your account. However, if you’re using a DeFi platform, forgetting your security key is equal to losing your funds.
Below are some prominent benefits of CeFi:
A centralised exchange can also enable an everyday investor, who may not be extremely familiar with the crypto ecosystem, to take advantage of DeFi investment opportunities. At Cabital, our investment team has developed a playbook of solid metrics and thresholds to decide on which DeFi projects to invest in, while requiring all investments to have the sign-off from the Risk Committee, which consists of experts in compliance, ALM (Asset and Liability Management), operations, finance, legal, tech and more.
So, what is DeFi, and why is it so complicated?
Decentralised finance or DeFi describes blockchain-based platforms that offer a wide range of financial products and services, where it’s decentralised, without a central institution facilitating transactions. Instead, everything is run on blockchain ledgers and smart contracts. Blockchain ledgers are a record of all transactions on the chain, while smart contracts define what happens with the funds based on predetermined conditions, ensuring the process remains decentralised.
Unlike CeFi which usually requires a Know-Your-Customer (KYC) process and checks to validate a user’s identity, and may be only available to specific regions, DeFi is an open and globally accessible financial system where anyone can engage in crypto transactions without any oversight from a central authority.
Here are some of the major benefits of DeFi.
Just like any other traditional banking or financial institution, centralised financial system also offers an opportunity for a crypto asset holder to earn yield. This works like a conventional savings account, where you deposit your assets and generate interest on these.
However, the interest rates offered on cryptocurrency are significantly higher than what banks offer on cash deposits, especially in the case of stablecoins like USDT. To maximise your yield on your digital assets, you may want to consider CeFi, where you can enjoy up to 12% APY on your crypto holdings.
Here’s a comparison table to give you an idea of the interest rates offered by different CeFi and DeFi platforms:
By depositing your funds into a CeFi exchange, you’re entrusting management of your assets to them. While this can sound daunting, there’s little to worry about, as centralised exchanges aim to protect the privacy and assets of their customers. Measures taken can include limiting exposure of private information, encryption to prevent information theft and multiple factors authentication, on top of policy and controls in daily operations.
Even decentralised finance platforms aren’t completely safe, as Poly Network lost more than $600 million worth of crypto due to an exploit by a hacker.
Centralised finance offers extended compatibility when it comes to trading various types of cryptocurrencies.
However, DeFi platforms can be more restrictive in nature and are less supportive of cross-chain services. The backend process of cross-chain swaps can be cumbersome and elaborate, which is a major drawback of DeFi system as many coins are designed to be decentralised and work independently, with their own blockchains. In order for a cross-chain swap, participants must submit their tokens to a Hash Time Locked Contract (HTLC), exchanging the hash keys to ensure that each has deposited the right amount. For the transaction to succeed, deposits must be made within a specified time, or else the deposits are returned.
On the other hand, you can easily trade and exchange most of the cryptocurrencies on CeFi platforms without any hassle, regardless of which blockchain platform they operate on.
Centralised exchanges enable fiat to crypto on-and-off-ramp for their users, letting users convert between fiat and cryptocurrency. This allows anyone to effortlessly convert fiat money to crypto assets through common payment methods like bank transfers. You’ll also be able to withdraw your earnings in fiat, by converting your crypto back into your fiat currency of choice.
If you’re looking to buy crypto, Cabital offers you a quick and secure solution. You can purchase crypto using EUR or GBP through fiat bank transfer using SEPA, Faster Payments, or Plaid. After depositing your funds, you can convert these to a cryptocurrency of your choice.
On top of aggregating rates from different exchanges, Cabital’s Buy and Sell feature offers one of the lowest conversion spreads. For example, while another platform might charge you 5-8% in conversion spreads to purchase cryptocurrency with a credit card, Cabital’s rates are as low as 0.02%.
You’ll also receive your funds quickly, with processing times as short as an hour.
You won’t have to worry about incurring transaction costs and transferring your digital assets to a staking platform. With Cabital, you can put your newly purchased cryptocurrency straight to work, earning yield of up to 12% APY on USDT.
All information is accurate at the time of writing (13 Jan 2022)
This article has been prepared by Cabital Fintech (LT) UAB (the “Company”) and is general background information about some of the Company’s activities at the date of this presentation.
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