Decentralizing the CeFi: principles, functionalities and operation of the CeDeFi
Despite market volatility, the global adoption of crypto has grown significantly over the past few years. This is mainly because the usefulness of crypto and blockchain has expanded beyond conventional commerce. Both centralized and decentralized platforms have offered unique projects that enable passive income and staking opportunities for the crypto community, increasing the utility of digital assets.
Yet after popular platforms such as Celcius crashed during the bear market and other major platforms raised their fees to unprecedented levels, centralized services – or CeFi – have come under intense scrutiny. These recent events have shown that CeFi platforms massively lack trust and transparency, creating unpredictable risks for the entire crypto community.
So the question arises, how can we make crypto financial services more sustainable? Is it really time to go beyond CeFi?
Understanding CeFi Risks
In this booming sector of crypto financial services, users have always tended to turn to centralized platforms or CeFi. Why? Because CeFi platforms offer a certain stability that DeFi cannot match. Fixed interest and repayment rates, seamless onboarding process, and cross-chain services are just some of the features that compel crypto users to choose CeFi platforms for services like trading, borrowing, lending and staking.
However, the underlying risks of CeFi have become evident this summer. Major platforms like Celcius have declared bankruptcy and suspended all user withdrawals, while BlockFi increased deposit rates and free withdrawals suspended. Centralized platforms can control your assets and change their characteristics without any precautions to combat losses in a bear market. So entrusting your digital assets to centralized third parties can have crippling consequences, especially when the market goes sideways.
Users should also consider the risk of bankruptcy, which is a critical threat in the crypto space. As the markets can be extremely volatile, financial services in this sector can experience massive losses overnight. This prospect creates significant problems for CeFi’s business model. On these platforms, only a small part of the total assets are insured. So if these centralized companies go bankrupt, all user funds can be lost, as we saw in the Celcius crash.
There is also the risk of having your accounts frozen at any time. When you use centralized services, you completely entrust your crypto wallets to a third party, who can freeze your funds in the event of an incident, such as security breaches, money laundering problems or even the liquidity of the platform. form. This is a significant disadvantage of these platforms compared to non-custodial DeFi services, where users can trade, lend, stake or borrow without fear of arbitrary shutdowns.
Finally, there’s the concern that CeFi fees aren’t always transparent. Many large centralized platforms hide or bundle additional fees with transaction fees. Thus, transactions often become more expensive than expected.
Introducing CeDeFi – the best of both worlds
Despite CeFi’s critical risks, its positive characteristics such as ease of access and financial cycle stability are key to increasing the adoption and utility of crypto. Yet how can the crypto community overcome the daunting risks of centralized services while retaining their benefits? The answer is via CeDeFi – a combined model that accumulates the positive characteristics of both CeFi and DeFi services.
CeDeFi bridges the gap between centralized and decentralized models. It combines the accessibility and understanding of CeFi, with the transparency and high return prospects of DeFi.
By switching to CeDeFi platforms, users can enjoy a complete process of lending, borrowing, or staking their digital assets, while enjoying full transparency and control over their funds. Like non-custodial DeFi platforms, CeDeFi allows users to know how their assets are managed while keeping them informed of the associated risks and rewards. This innovative approach can create a more exciting scope for users and at the same time minimize risks.
How does CeDeFi work?
To better understand the basic mechanism of CeDeFi, we can look at the case of Midas Investment, which uses this hybrid model. The platform uses DeFi algorithms as building blocks to maintain fund transparency and provide viable risk projections. The CeFi layer is applied on top of these algorithms to keep the conventional yield generation process intact.
Keeping the centralized layer intact allows Midas to deliver a seamless user experience. This innovative model has enabled Midas Investments to raise nearly US$6 million after its release to over 1,500 users, showing great user interest in the new CeDeFi space.
The hybrid CeDeFi model allows users to efficiently navigate around potential crypto market risks and access attractive financial services without sacrificing transparency and accessibility. Such solutions introduce flexible investment opportunities for the entire crypto community, where users can choose the strategy that is closest to their investment philosophies. Thus, investors can maintain resilient portfolios even through different market cycles, whether bullish or bearish.
Going forward, CeDeFi has the potential to replace conventional centralized and decentralized services in the crypto space and promote greater adoption of cryptocurrencies as utility assets. However, the persistent risks of breaches and scams remain high in this sector. Thus, users should always be cautious and only use the services that are well accepted by the whole industry.
About the Author: Yakov Levin is CEO and Founder of Midas Investments, a crypto investment platform. He has over five years of experience delivering technically complex projects focused on blockchain, crypto, fintech, DeFi and CeDeFi. He is based in Tel Aviv.