CeFi: Banks Of The Future

In this article, I decided to give you a general overview of what CeFi is and how it works. Once you read it, you will know what is the feature that differentiates it from DeFi, what are its advantages and what risks it entails. In addition, you will find a small list with what are the 4 most popular CeFi platforms worldwide, so you can analyze them before making a possible investment.

You will read about:

• CeFi: a little introduction.
• Differences with DeFi
• Why use CeFi
• The Risks
• How to start using CeFi

Introduction

We are now all aware of the advent of blockchain and its innovative contribution to the entire world of finance. Given its distributed nature, this modern technology has become a veritable battleground, where countless companies are constantly churning out new and fascinating solutions.

This simplifies access to the field of finance for even the average user, putting the existence of traditional financial systems at serious risk. If we wanted to divide this battlefield into two, the protagonists that would emerge would be CeFi and Defi, also known as centralized finance and decentralized finance.

History

The history of CeFi can be traced back to the actual birth of the concepts of cryptocurrency, blockchain and fintech. It all started in 2008, a time when the financial crisis in the United States spread around the world, making any economic certainty and the trust people had in banks disappear.

So, in 2009, a man named Satoshi Nakamoto announced how he had managed to invent a totally different system compared to the traditional banking system, namely that of Bitcoin. Since then, it has been a succession of ideas and new projects that aimed to revolutionize the entire banking system. This set the stage for the development of blockchain, new tokens, and digital platforms such as CeFi and DeFi, whose goals are to make access to the financial system easier than the traditional system.

What's Cefi?

If we wanted to define centralized finance in one sentence, we could say that it "replicates the traditional financial industry." This means that CeFi allows its users to earn interest or get loans using their cryptocurrencies as a form of hedging.

Simply put, CeFi companies act as actual lenders, and take custody of their customers' funds/assets and use them to disburse interest. While this all seems very simple and straightforward, it should be noted that the client, by taking custody of their assets, is offloading their risks to the centralized finance companies.

Differences With Defi

Both CeFi and DeFi aim to make access to the financial market simple for everyone through the use of cryptocurrencies. Through digital currencies, in fact, it is possible to carry out transactions in a quick, fast and secure manner.

If one were to identify a crucial difference between the CeFi and the DeFi, one could say that it lies in the presence of a central entity. As the name centralized/decentralized finance already suggests, the former provides for a physical individual (company, corporation, corporation) that regulates the various processes, from user registration to the payment of the promised interests.

The second, on the other hand, represents a completely "permissionless" protocol, i.e., absent of any person or entity that wants to decide who can and cannot access the platform. In short, users rely totally on technology, which at times proves to be clearer and more transparent than physical entities.

How Does It Work?

The operation, as mentioned above, is very simple, which is why centralized finance platforms have grown exponentially over the years helping the average user manage and hold their cryptocurrencies. You can summarize how such systems work in 3 steps:

• the user deposits their cryptocurrencies within the CeFi protocol, just as if they were making a deposit to a bank
• the company will hold its digital currencies and use them for its own operations
• the customer receives daily, weekly, monthly or yearly interest based on the platform's regulations

You don't need to be an expert to understand that the operation is almost identical to that of a bank, except for the fact that here you operate with cryptocurrencies and digital coins.

Moreover, in most cases, CeFi protocols provide their customers with insurance that covers all, or part, of their funds. This, of course, has sparked a huge interest among those who were wary or uninformed about the cryptocurrency industry.

Why you should use CeFi?

True, you might think that a system like CeFi goes against all the main characteristics of cryptocurrencies, namely those of being financial instruments not controlled by any particular entity. However, harnessing the potential of centralized finance can be very convenient and lucrative.

In fact, offering much higher interest rates than traditional banks and fast and instant loans has allowed these platforms to depopulate worldwide. In addition, the companies also offer their users credit cards that often include fairly convenient cashback programs.

What's more, these systems manage to further decrease the risk of hacking by third-party individuals. Unlike DeFi, the companies keep their clients' deposits on cold wallets protected by professional agents.

Again, the fact that the companies behind the DeFi are always regulated and authorized under the institutional laws is an added value that has prompted many users to register on the various platforms despite the KYC requirement, which can be a tedious process for some.

However, it is the process of document verification that prevents the creation of multi-accounts and fake accounts. Moreover, KYC helps users decrease the risk of profile theft resulting in loss of funds.

What are the risks?

It would be wrong to say that in a system that seems so safe and perfect there are no dangers. As in any investment, in fact, CeFi has its weak points, and any one of them could represent a risk, even if minimal.

The most dangerous risks, but also the most obvious ones, are possibly those of fraud and bankruptcy.

In the first case we are talking about fictitious companies that, promising their users very convenient interests, could take advantage of the naivety of people. All the companies would need to do is to pay interest for a certain period of time and, once they have accumulated a large sum of money, they would immediately make all their clients' funds disappear.

Fortunately, at the end of the article you'll find a list of the best CeFi protocols, so you won't be investing in unsafe platforms.

In case of bankruptcy, however, no one can obviously do anything about it, just as in the case of a bank failure. However, platforms are allowed to lower interest rates to recover any losses, and can even bring them down to zero. Also, the case of bankruptcy is unlikely due to the expertise of the brokers the various entities have, and users still have insurance covering their funds.

One feature of CeFi that can be criticized, however, is that it does not provide its users with detailed reports or statistics on the investments made by the firms. Clients, in fact, don't know what markets the companies operate in, and they don't have any documents showing the transactions that are made with their funds. This, in particular, is a factor that leads many people to prefer DeFi to CeFi, as it is clearer and more transparent.

Last but not least, there is the question of possession of private keys. Unlike DeFi, where you are in possession of your own private keys, CeFi provides that the wallets of customers are entrusted to third party custodians. This, as you can easily guess, means that in case the custodial is an ill-intentioned person, very unpleasant situations may occur.

How to start?

To start using CeFi, you don't have to be a programmer or a computer engineer, as you just need to understand how the mechanism works and use the right platforms. First, you need to have cryptocurrencies available. There isn't much of a distinction between altcoin and stablecoin, except for the fact that the former have a little less interest than the latter, as they are much more volatile.

In case you don't have any digital currency, you can use exchanges like BINANCE to buy them. Once you have purchased your cryptocurrencies, all you need to do is use the "send" button (in some cases called "send" or "withdraw" depending on the exchange), copy the address of the same coin from your CeFi platform and paste it on the exchange.

Taking a more practical example, let's assume we want to buy Bitcoins on Binance and transfer them to the CeFi Celsius Network. The steps are as follows:

• Enter on Binance and purchase Bitcoins using the method shown in our guide
• Enter Celsius and select Bitcoin
• You will find an address made up of letters and numbers, press the "copy" button
• Now go back to Binance, click on Bitcoin and use the "withdraw" command
• You will find a box that says "adress", where you have to paste the address copied previously
• Once you make sure that the address is correct, you can continue with the withdrawal and wait for the confirmation of the transaction
• Once the transaction is complete, you'll find your Bitcoins on CeFi and can enjoy the interest offered by the platform.

If you don't want to deal with the (somewhat complex) interface of Binance, it is advisable to take advantage of the mobile app by switching to the Lite version, which is certainly much simpler and more intuitive. Just click on the button in the upper left corner and click on the command "Binance Lite".

Which platforms are the best?

Now that you have a general picture of what CeFi is and how it works, it's only fair to provide you with a list of the most popular and reliable platforms out there so that you don't fall for any scams that would make you lose confidence in these systems. Also, you can compare them with other DeFi protocols and choose the one that best suits your preferences.

Celsius Network, founded in 2018, is a CeFi platform that offers interest delivered in weekly payments. Interest varies based on the type of cryptocurrency you choose to deposit, and can range from 2-3% up to a maximum of 5-7% for coins like Bitcoin, Ethereum, and Litecoin, and from 8% up to 12% for stablecoins like Tether (USDT). Some tokens like Synthetix have interest rates that can even reach 20% annually.

You can also choose to receive interest in the same coin that you deposited, or receive it in Celsius Token, the official currency of Celsius Network.

Nexo is among the first crypto lending companies internationally, it is guaranteed funds covered by BITGO Custody, a leading company in the industry. The special thing about Nexo, as well as the reason why many of the users are attracted to this platform, is that it pays interest to its customers every single day. This means that you can withdraw your funds at any time, without having to pay any kind of commission. The interest is slightly lower than that of Celsius Network, but you can still get a 5% annual compound interest on coins like Bitcoin and Ethereum.

BlockFi is a centralized platform that allows users to take advantage of interest on deposits in Bitcoin, Litecoin, Ethereum, Dollars and Gemini Dollars. In addition, you can get loans by locking your coins as collateral. The system is widely used by US users as it complies with all US federal laws. The interest is variable and also goes up or down based on market trends, and is paid on a monthly basis.

Crypto.com is a company that was founded in Hong Kong with the aim of lending funds to its users, offering cheaper interest rates than Eastern banks. On stablecoins you can receive 12% on your deposits, which is the highest on the market. However, this is only allowed in case you decide to lock your funds for 3 months. The app also has an internal exchange where you can exchange your digital coins. Moreover, it is planned to land a credit card with an attached cashback program, which is really arousing a lot of interest among users.

Conclusions

Thus, we have seen what CeFi is and how it works. These types of platforms, being very intuitive and really interesting from a remunerative point of view, have easily managed to grow exponentially.

Obviously, as we have seen above, even these systems can involve risks that, even if minimal, can make you lose large sums of money.

Like any investment, you need to study the various platforms well, and try to differentiate as much as possible in order to minimize risks and capital losses.

Also, you need to have a clear concept of what CeFi and Defi are, so you can decide to use one or the other according to your needs.

As usual, delving deeper and keeping up to date can only help you grow your portfolio and bring risk to a minimum.

*This is not financial advice, so if you want to invest, just invest what you're ready to lose eventually. As said above, CeFi is rather safe, but as happen for banks, they could collapse too!

**This article was translated manually and with a translator software from my original post on theledger.it, so I'll attach the link to my article here.

If you want to improve your Italian and learn more about crypto arguments, just check out our blog by clicking on the link below :)

Learn more

• https://theledger.it/approfondimenti/i-prodotti-sintetici-arrivano-in-blockchain/
• https://theledger.it/recensioni/compound-il-progetto-defi-dei-servizi-bancari/
• https://theledger.it/approfondimenti/rating-protocolli-defi-defi-safety/
• https://theledger.it/news/regolamentazioni/stablecoin-e-interpretive-letter-1174-le-banche-americane-potranno-utilizzare-la-blockchain-per-le-transazioni/
• https://theledger.it/recensioni/binance-lexchange-di-criptovalute-perfetto-per-i-traders/

Bibliography

• https://swissborg.com/blog/defi-vs-cefi#:~:text=These%20are%20CeFi%20and%20DeFi%2C%20or%20Centralised%20Finance%20and%20Decentralised%20Finance.&text=CeFi%20mimics%20the%20legacy%20financial,as%20a%20form%20of%20collateral
• https://www.ledger.com/defi-vs-cefi-how-defi-measures-up
• https://cryptonomist.ch/2020/01/26/cefi-crypto-banche/#:~:text=Come%20le%20tradizionali%20banche%2C%20queste,servizi%20tramite%20procedure%20KYC%2FAML.
• https://investire.biz/articoli/analisi-previsioni-ricerche/bitcoin-e-criptovalute/criptovalute-migliori-piattaforme-cefi-cosa-sono-quali-utilizzare-nexo-blockfi-celsius-costi-interessi

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