What is centralized finance for crypto?
Students will remember a previous lesson that discussed DeFi – decentralized finance. This course discusses the counterpart to DeFi: centralized finance, or CeFi. Almost everyone is familiar with these tools – banks, credit cards, and more are parts of daily life and they are all centralized financial institutions.
A lot of the crypto world still interacts with centralized financial institutions too.
What are CeFi examples?
Centralized lending companies from previous years like Celsius or BlockFi are some examples. Coinbase, Kraken, Binance, and other exchanges are also in the CeFi category. Many wallets that are custodial tools are also CeFi products.
What are CeFi risks?
The biggest problem is that centralized systems are always attractive to hackers. The latter intends to capitalize on the networks’ substantial liquidity. As a result, they use illicit computer technologies to breach information, allowing them to steal money from customers.
Because CeFi companies are intermediaries, however, some of the risks are easier to resolve because transactions can be reversed, frozen, or rejected.
A key risk also comes from the intermediaries though. Users must give up custody and control of their assets to use these products. Unlike DeFi, users cannot remain in control of their funds.
What is the future of CeFi?
Each approach – CeFi and DeFi – has benefits and drawbacks. Crypto is an ecosystem of self-sovereignty and custody. But CeFi products will never fully disappear. For some users, they are more convenient than DeFi and the risks are not a concern.
All users should have a decent idea about which option is right for them and make sure they understand whatever products they use before depositing significant amounts of money.