CeFi Crypto: All About Centralized Finance

Sep 14, 2022
12:09
2 min reading

Choise.com team

Table of Contents:

How To Earn With CeFi
Features of CeFi
What are the risks of CeFi?

CeFi (short of Centralized Finance) is a traditional financial approach, where the users can earn interest and get loans through centralized cryptocurrency exchanges.

On the opposite side stands DeFi (Decentralized Finance) – an approach where the token holder has full control of their assets and uses decentralized exchanges for any operations with money.

How to Earn With CeFi

You can lend out some money to exchanges (centralized exchanges or CEXs) and they will pay you interest partially. Or you can exchange your tokens for other cryptocurrency (including stablecoins) or to fiat currencies, such as a US dollar. You can buy and sell it all directly or just store it in a wallet associated with the exchange (or transfer the money to your own private wallet).

How It Works?

Centralized exchanges (CEXs) operate similarly to banks and other financial institutions: you can deposit some money and get the returns or exchange it for another token. CEXs are usually controlled by a certain entity and require little to no paperwork compared to real-world financial organizations.

Watch video about Centralized Finance

Features of CeFi

The main advantages of using centralized exchanges are listed below:

Reliability. Centralized exchanges must follow the financial regulations of their location, so they must meet certain criteria for security, as well as customer safety and experience.
Speed. The CEXs are usually fast by design.
High trading volume. Since centralized exchanges are popular and have multiple liquidity providers, they have larger amounts of money in circulation.
Impressive levels of customer experience. Many centralized exchanges are designed with user experience in mind. They usually offer clean and intuitive interfaces and provide technical support around the clock, backed by their dedicated teams.

As you can see, centralized exchanges have come a long way since they first emerged in the beginning of the 2010’s (early days of cryptocurrencies). They now offer many different possibilities and features both for beginners and experienced traders alike.

You can buy, sell, exchange, store crypto and use additional tools. You can expect a great level of user experience and attentive customer support teams. Sometimes, they can even rival banks.

What Are the Risks of CeFi?

There are same underlying risks associated with CeFi, such as:

Understanding the way the exchanges work requires some knowledge. To understand how exactly they will provide the yield, it is important to know something about the processes. Sometimes exchanges operate differently, so it is better to learn about them.

Privacy and security related risks. Despite usually having additional layers of security, the centralized nature of CEXs makes them even more vulnerable to hacker attacks and security leaks. And not all exchanges are safe by design. So you should make your own investigation and always check what exchanges you can trust.

The risks of losing your funds. Related to the safety and security risks listed above. Centralized exchanges are sometimes controlled by an entity that is not always trustworthy and vulnerable to attacks.

Having less control. An obvious side effect of the centralized nature of CEXs: your holdings are not under your control.

As is the case with everything in the world of CeFi, reputation of the exchanges and doing your own research are extremely important. Know what you do, learn who you can trust and read about the way how a certain exchange operates. If you have doubts and are experienced in the world of cryptocurrency, you can always go to decentralized exchanges instead.