What is CeFi? Centralized Finance on the Blockchain

CeFi is a decentralized finance platform that enables financial institutions to create, manage and transfer digital assets.

DEFINITIONS

Crypto1earn

10/9/20223 min read

CeFi
CeFi

What is CeFi?

Definition

A centralized finance system, or CeFi, is similar to DeFi but simpler, easier, and more secure. A crypto debit card can be used to spend cryptocurrency and earn interest on savings.

"Decentralization" is one of the core concepts of crypto - it allows strangers anywhere in the world to transact without being mediated by any institution. Defining it as DeFi is the next step. With the latest Smart Contract platform, it is possible to lend, save, trade, and more - all without the involvement of any banks or payment processors. In other words, it offers the convenience of lending, saving, and trading instantly.

Since DeFi is a new technology, there are some risks. The implementation of DeFi protocols requires a fairly high level of technical knowledge and a high level of comfort with the fact that you may end up losing some or all of your investment if you are not proper coded, infected by malicious actors, or even make a mistake when you are using your system.

Centralized finance is CeFi, as you probably guessed. Essentially, CeFi is a group of products and services that aim to create crypto investment opportunities that offer some of the advantages of DeFi, but also some of the ease, security, and ease of use of traditional financial-services products (sometimes referred to as TradFi), though at a lower price. It is possible to borrow money and earn rewards with CeFi, which is a crypto debit card that you can use to spend and earn rewards.

How do you earn yield with CeFi?

CeFi creates the possibility of earning yield by using crypto-based accounts that include the same functionality as a traditional bank's savings account - but may be more profitable as they offer a higher rate of return on investments. You should make sure you understand the risks involved with crypto deposits since they're not protected by FDIC/SIPC insurance. CeFi lending with Coinbase is backed by a principal guarantee.

Where does the yield come from?

Your crypto holdings are put to work by a lending company and part or all of your crypto holdings are used to make money. Some of the interest these borrowers pay you is passed on to you by the centralized provider.

How does CeFi borrowing connect to CeFi lending/saving?

You can borrow money from CeFi by using your crypto holdings as collateral, similar to how you would use traditional assets as collateral in order to qualify for a bank loan while using cryptocurrency as collateral. You can earn a yield for holding crypto via CeFi by paying interest on the loans users make.

It is usually not necessary to fill out as much paper work as with bank loans when taking out a CeFi loan. There's no credit check on Coinbase loans up to $100,000 for US-based customers in most states.

What are some CeFi risks?
  • Your deposited crypto may be put to work in a variety of ways depending on the CeFi product and provider. You need to do your homework in order to understand how your crypto is being used, how the yield you're earning is generated, and what risks are involved in the activities that you're devoting your time to.

  • A traditional bank's deposit insurance doesn't protect crypto deposits, so be sure to keep that in mind. There's a principal guarantee on Coinbase's CeFi lending product, though.

  • There might be a period when your principal is locked up by some CeFi providers. You can access USDC whenever you want on Coinbase.

  • There isn't a common denominator when it comes to stablecoins. USDC, for example, is open-source. In order to maintain the integrity of USDC, dollar-denominated assets of at least the same fair value as the USDC in circulation are held in segregated account with institutions licensed by the US Financial Services Authority. There are many exchanges where you can buy USDC, and you can store it in any Ethereum wallet that supports exchanges like Coinbase and Paypal. A USDC transaction does not incur any fees. With the creation of the CENTRE Consortium, Coinbase and Circle invested their time and resources together to launch USDC as a result of their collaboration.