Crypto has brought with it brand-new opportunities in the field of finance. Dubbed DeFi, these new possibilities combine decentralisation and smart contracts and allow you to save, lend, borrow and trade without any bank or third party. However, since the field is so new, it comes with its own complications. This is where CeFi comes in. Centralised Finance provides some of the benefits of DeFi with the security and ease of traditional finance options.
How Does CeFi Work?
CeFi works through offerings by various centralised firms in the field. Several popular crypto exchanges like Coinbase and Binance offer CeFi services.
To begin, users of CeFi platforms must open an account with such service providers. Once you deposit your crypto holdings into this account, you can engage with the CeFi platform. Your crypto holdings are then used to issue loans in crypto tokens to borrowers on the platform. The interest they pay on such loans is what enables you to earn from CeFi.
CeFi is a new field. This means that your money is not protected by the government. This makes it important to choose your platform wisely. However, most platforms offer conversion of your crypto deposit into fiat currencies. For example, Coinbase allowed deposits in USD Coin (USDC). USDC is backed by reserves of the fiat currency and offers conversion back into US dollars.
Read more: Difference Between USDT and USDC
Benefits of CeFi
While crypto usually operates on a decentralised basis, centralisation comes with its own benefits. Centralised exchanges can provide you with security in a new and unfamiliar market. They sometimes offer you a guarantee on the principal amount deposited by you.
This also leads to greater credibility for the platform. If a DeFi platform is hacked, no party can take accountability for the breach. However, CeFi platforms are developed by the firm behind them. Customers may find it easier to entrust their money to a platform when they know who to hold responsible for any breaches.
Converting your holdings to cash is harder in DeFi as all services are peer-to-peer. If you have large deposits, converting all of them into cash may take a long time. CeFi solves this problem by drawing from various sources of liquidity. Centralised exchanges make it much easier to withdraw your holdings into cash.
As long as you deposit crypto as collateral, you can secure loans with almost no paperwork. This makes the process hassle-free and enables users to borrow quickly without needing a credit check.
Many DeFi platforms do not allow for cross-chain exchanges. Due to the difficulty of completing these transactions, it becomes unfeasible for the platform to offer this service. However, CeFi has access to many other sources of liquidity as mentioned above. This enables them to offer cross-chain services with ease.
Read more: DeFi vs CeFi: Comparing The Features
How Do You Earn Yield With CeFi?
Yield generation with CeFi is similar to holding money in the savings account of a traditional bank. When you deposit money on a CeFi service, that money is lent out to borrowers. In turn, these borrowers repay the loan with interest. Part of this interest is collected by the exchange offering the service, while the rest is distributed among lenders.
Why Is CeFi Borrowing Related to CeFit Lending/Saving?
In a traditional bank, you cannot take loans without collateral. The collateral offers borrowers an incentive to repay the loan amount back to the bank. Similarly, CeFi services require you to deposit your crypto as collateral against any loans you take.
This provides a security measure for the platform and acts as a safety net for lenders if the borrower defaults on the loan.
What Are Some CeFi Risks?
Many CeFi Providers
Each CeFi service is separate from another and may operate on different principles. It is essential to do your own research and find the best provider for your investment.
When you sign up for a CeFi service, you must provide your name and other personal information connected to your account. In the case of a breach or hack, you may lose your money or have your personal details revealed.
No Government Guarantee
In case a traditional bank faces a crisis and loses money, your money may be insured by the government. This is not a possibility with CeFi services and your deposits are not protected by the government.
Since there are intermediaries in a CeFi service, the transaction costs are higher than those on decentralised platforms.
CeFi provides you with the opportunity of much higher returns than traditional savings accounts while also granting the benefits of centralised service providers. Centralised lending is a great way to start ones Crypto investment / trading journey. It is a new field that makes business and personal loans easier and quicker through crypto. It is crucial to carefully choose your service provider and check Cefi rates before deciding to invest.