What is Cefi?
The field of finance has benefited immensely from the introduction of blockchain technology and crypto. The combination of blockchain technology and finance is dubbed Defi. Defi combines the concepts of smart contracts and decentralization to enable users to lend, borrow, save, and trade without a third party or a bank. However, Defi comes with its own challenges. This is where Cefi comes in. Cefi has the benefits of Defi with the security options in traditional finance.
How does Cefi work?
Cefi involves offerings from many centralized establishments in the field. Many popular exchanges like Binance and Coinbase also offer Cefi services.
First, Cefi users must open an account with Cefi service providers. Users can engage with Cefi platforms once they deposit their crypto holdings into the account. These crypto holdings are used to issue crypto loans to borrowers on the Cefi platform. The interest paid by borrowers on such loans enables users to earn from Cefi.
Cefi being a new field means your money is not protected by the government. Because of this security loophole, it is vital to choose a platform wisely. Most Cefi platforms do offer services to convert your crypto tokens into fiat currencies. For example, users could deposit their USD Coin (USDC) in Coinbase. USDC offers conversions back into USD and is backed by reserves of US dollars.
Benefits of Cefi
Crypto usually operates on a decentralized basis, but a centralized system has advantages. In a new and unfamiliar market, centralized systems can provide users with security. Some centralized platforms offer users a guarantee on the principal amount deposited by them.
This guarantee leads to greater credibility for the centralized platform. No party takes responsibility if a defi platform is hacked, whereas Cefi platforms are developed by firms behind them. It is easy for users to trust their money to an organization when they know who is responsible if any breach occurs.
It is harder to convert your crypto holdings to cash on Defi platforms as all services are peer-to-peer. It takes a long time if a user wants to convert large deposits into cash. Cefi platforms draw from various liquidity sources, so users can easily convert their crypto deposits to fiat currencies.
Users can secure a loan with almost zero paperwork once they deposit crypto as collateral. Users can borrow quickly without a credit check, making the process hassle-free.
Cross-chain exchanges are not allowed on many Defi platforms. These services are unfeasible for Defi platforms as it is a difficult task to complete these transactions. However, Cefi platforms can draw from various liquidity sources. This feature enables Cefi platforms to offer cross-chain services easily.
Earning yield with Cefi
Earning yield using Cefi platforms is similar to holding money in the savings account of a traditional financial institution. Money is lent out to borrowers when users deposit crypto on a Cefi platform. Users earn through borrowers repaying the loan with interest. The Cefi exchange offering this service takes a part of the interest.
Why is Cefi borrowing related to Cefit lending and saving?
Users cannot take loans from a traditional bank without collateral. Collateral is vital to banks as it is an incentive for borrowers to repay the loan on time. Similarly, Cefi platforms use your crypto deposit as collateral against any loan you might take.
If the borrower defaults on the loan, this collateral provides a security measure for the Cefi platform.
What are some Cefi risks?
Too many Cefi providers
Each Cefi platform may operate on different standards and principles. Users need to perform their due diligence and choose the best cefi provider for their investment.
Users must provide their name and other personal data connected to their account when they sign up for a Cefi service. Users can have their details revealed or lose money in the event of a hack.
No government guarantee
Your money may be insured by the government in case a traditional bank loses money in a crisis. This security is not offered by Cefi services, and your deposit is not protected by any central authority.
Transaction fees are higher than on Defi platforms as intermediaries are involved in a Cefi service.
Users can gain the benefits of centralized service providers while earning higher returns than traditional saving accounts through Cefi. Cefi lending offers a great way to start your crypto trading and investment journey. Cefi is an innovation that offers easy personal and business loans through crypto. Users must do their due diligence before choosing their Cefi service provider and check Cefi rates before investing in these platforms.
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