Decentralized finance (DeFi) shifts away from the limitations of the traditional financial system and centralized cryptocurrency exchanges. But for all its novelty, it still can’t achieve mass adoption because it lacks the governance and liquidity of centralized solutions. CeDeFi, or centralized decentralized finance, aims to solve this problem by bridging institutional-grade custodianship with innovative blockchain technology.
The concept of CeDeFi is a bit tricky. It may seem that the core principles of DeFi go against centralized authority, but, in fact, these models can complement each other. To help you figure things out, we’ll explain how CeDeFi platforms work and why centralization is becoming a major trend in the crypto market.
What is CeDeFi?
Centralized decentralized finance (CeDeFi) is a hybrid of centralized and decentralized financial systems. Gartner defines CeDeFi as mature DeFi applications embraced by traditional centralized financial companies. However, a more accurate definition would be a combination of decentralized financial (DeFi) technology with centralized financial (CeFi) infrastructure and regulatory safeguards.
Still not clear enough? To make sense of this concept, we should explain the difference between centralized and decentralized finance in the crypto market.
DeFi and CeFi
DeFi is a set of blockchain-based technologies based on secure distributed ledgers that allow conducting peer-to-peer (P2P) financial transactions. The users can exchange cryptocurrencies and digital assets without third-party intermediaries, as they’re replaced with self-executing algorithms called smart contracts. Basically, DeFi replaces the traditional finance model with a borderless and composable system without any central authority.
DeFi in its current form is a long way from being mass adopted. We can highlight three main reasons:
- Non-compliant network. DeFi apps lack custodial services, regulatory protection, adequate audit, and institutional-grade transaction analysis, making them appealing to larger enterprises.
- Security vulnerabilities. The absence of regulations makes the ecosystem more prone to mishaps and hacks. According to Elliptic’s report, DeFi exploits in 2021 surpassed $12 billion (with theft and fraud making up $10.5 billion of that sum).
- Small liquidity pool. Even the most prominent decentralized exchange — Uniswap — facilitated just over $1 billion in daily volume in 2022. Compare that to the trading volumes of centralized crypto exchanges like Binance ($21 billion) or a NASDAQ stock exchange (up to $400 billion).
CeFi refers to cryptocurrency exchanges like Binance and Gemini, where the central authority processes all financial operations. Centralized platforms provide additional regulatory protection, but users have less control over their cryptocurrency, as the service holds their assets and owns private keys.
Merging CeFi companies with DeFi solutions may be the interim solution. This model introduces a degree of authority and extra liquidity to decentralized crypto exchanges while keeping the user’s sovereignty largely untouched.
Advantages of the CeDeFi ecosystem
Here are the ways CeDeFi financial system can improve decentralized and centralized cryptocurrency systems.
- Increased liquidity. Integration with centralized cryptocurrency exchanges or traditional finance with over $100 trillion market capitalization will undoubtedly help scale DeFi infrastructures.
- Facilitated access to cryptocurrency. Combining DeFi apps with centralized finance will result in more trading opportunities. Users may explore more cryptocurrencies, non-fungible tokens (NFTs), liquidity aggregators, lending protocols, and yield farming tools to generate more returns.
- Institutional-grade governance. CeDeFi platforms provide audit features to help large organizations reconcile multiple databases, manage complex supply chains, and verify the origins of transactions.
- Enhanced security. Adding custodial services ensures platforms work only with secure blockchain networks, reducing the likelihood of scams. Users will still have more privacy than in traditional centralized platforms. For example, traders may verify their identity using independent self-sovereign identity (SSI) systems instead of providing personal documents.
- Optimized transaction costs. CeDeFi exchanges automate most transaction processes with smart contracts and zero involvement of traditional financial institutions. This means the transaction fees are likely to be as negligible as those on most DeFi platforms.
The larger financial organizations are already adopting cryptocurrencies and other digital assets into their applications. Gartner’s 2021 research shows that 20% of enterprises will use digital currencies for payment, a store of value, and to access high-yield investments in DeFi by 2024. Considering how CeDeFi solves the main limitations of decentralized crypto, it could actually accelerate this adoption.
5 popular CeDeFi exchange platforms
Many cryptocurrency exchanges are already combining centralized and decentralized cryptocurrency systems. Let’s go over the most popular platforms.
1. BNB Chain (Binance)
Binance is actively integrating decentralized finance into its centralized exchange. In 2020, it launched the Binance Smart Chain (BSC) network that helps users build DeFi apps and smart contracts compatible with the Binance Chain. BSC and Binance Chain later merged into a unified open-sourced decentralization ecosystem called BNB Chain that offers comprehensive cross-chain service, linkage liquidity, privacy protection, and secure custodian services.
As a part of the Token Canal initiative, Binance launched wrapped tokens that allow trading of unsupported assets on decentralized platforms. The platform also establishes seed funds to encourage emerging DeFi projects to pass the security audits and due diligence necessary to join its ecosystem.
Notably, the BNB Chain aims to build an interoperable virtual economy by implementing MetaFi standards. It could make cryptocurrencies, NFTs, and other derivatives on Binance’s platform accessible across blockchain networks.
Unizen’s CeDeFi crypto exchange aggregates trades from multiple DeFi and CeFi platforms. It provides traders with a secure trading environment and lets them find cost-efficient offers on Binance, Sifchain, and Uniswap.
But there’s more to this company. In 2022, Unizen partnered with Jun Capital venture investment fund to launch a CeDeFi Alliance. In the future, they seek to establish a hybrid financial system that combines DeFi projects with global CeFi organizations.
Nexo is a heavily regulated digital credit line platform with an evolving DeFi infrastructure. It recently joined the Chainlink decentralized blockchain oracle network to add decentralized assets to its lending offerings. The network provides users with on-chain audit trails for lending operations, reliable exchange rates for interest payments, and performs automated collateralization checks.
Like Binance, this company strives to bridge the gap between digital and traditional finance. To achieve this, it invests in early-stage decentralized protocols, independent NFT distribution marketplaces, virtual worlds, and MetaFi projects.
CoinZoom’s regulated exchange operates on decentralized blockchain-based protocols. It also simplifies crypto investing for regular users by implementing traditional payment systems. For example, users can instantly send cryptocurrencies to other people without commissions using Visa debit cards.
Additionally, the company has issued its own decentralized Ethereum-based token called ZOOM. In addition to CoinZoom’s exchange, this cryptocurrency works with other platforms networks, primarily the Algorand blockchain and Dash payment network.
SmartFi is a CeDeFi cryptocurrency lending service that integrates with traditional financial institutions. It offers an on-chain hedge mechanism that ties its tokens (SmartFi USD) to the value traded on the network. In other words, traders get a minable stablecoin that they can return for a full refund of the purchase price in fiat currency.
This financial model beats bank interest rates while being advertised as more reliable than yield farming, staking, and liquidity mining. The company raised over $10 million in the first weeks after its release in late 2021 and maintains a stable market value despite market fluctuations.
CeDeFi is on the road to becoming mainstream. Gartner’s analysts predict that with adequate regulatory guidance, 2022 may be the year it becomes ready for mass enterprise adoption.
Launching your CeDeFi system with minimal costs
Building a blockchain infrastructure for a crypto exchange from scratch is too expensive and time-consuming for most companies. You would need to develop a consensus model and smart contracts, invest in a decentralized network, and establish uniformity across the network.
Thankfully, the blockchain is a highly composable technology. You can compile and reprogram existing cryptocurrencies to create new financial instruments. Or, you can build a CeDeFi app by developing the front end (application layer) and connecting it to existing blockchain networks.
You should also know that the cryptocurrency industry lacks standardization. Crypto tokens, NFTs, and DeFi apps are built on top of the blockchain networks. So, your digital assets may or may not work with popular exchanges based on the programming language you used during development.
With all that in mind, you might want to partner with an experienced company. A blockchain-focused provider development can deliver DeFi solutions within weeks and ensure it works across popular blockchains.
To sum up
DeFi services can remove many limitations of traditional finance, but they introduce many problems of their own. And that’s what makes CeDeFi such a strong trend in crypto. In exchange for some governance, it solves the main challenges of decentralized apps, namely the lack of compliance, security, and liquidity. Now is a good time to consider taking advantage of the DeFi market before it finally becomes accessible to regular users and attractive to financial institutions. And Unicsoft is happy to share its expertise in blockchain technologies to support your business ideas.