Hybrid Finance in crypto
Updated: Apr 7
This is a comprehensive guide on what Hybrid Finance is in the blockchain industry in 2023.
In this article you'll learn:
What Hybrid Finance means
The correlation between Hybrid Finance and CeDeFi
Benefits, risks and examples of Hybrid Finance
Let's go through it.
What does Hybrid Finance mean in the blockchain industry?
Hybrid Finance (HyFi) combines different elements and aspects of two financial systems, centralized finance and decentralized finance, facilitating both characteristics. It will soon become the primary choice for fintech businesses worldwide.
What does CeDeFi mean in crypto?
The term CeDeFi is an acronym for “Centralized Decentralized Finance”, and it’s another way to indicate hybrid finance in the crypto industry.
It was initially coined by the CEO of Binance, Changpeng Zhao, or simply CZ when Binance launched its Binance Smart Chain (BSC) in 2020.
This abbreviation refers to protocols EVM compatible that offer the benefits of DeFi (with a market cap of $59B in the first half of August 2022) and the security of the centralized systems.
In a few words, CeDeFi merges the best advantages of DeFi (Decentralized Finance) and CeFi (Centralized Finance).
As we explained in the previous article about centralized exchanges (CEXs), the CeFi system suffers from many problems, e.g. access to everyone, efficiency in terms of time and cost, and many others.
DeFi was born to solve these problems, but it has created a new set of problems, including:
No KYC, AML, and CFT checks;
No consumer protection;
Unpredictable fees and higher transaction costs;
High slippage risks;
Unregulated grey areas;
Unreliability of on-chain algorithms.
Broadening horizons with a vision of innovation, Hybrid Finance always tries to bring onto the market new products and projects of blockchain and fintech.
For this reason, CeDeFi or HyFi protocols and applications should have at least these primary features like:
full support for KYC, AML, and CFT;
strong consumer protection mechanism;
support for data privacy and encrypted peer-to-peer connections;
low transaction fees.
CeDeFi lets you experiment with DeFi products like decentralized exchanges (DEX), liquidity aggregators, yield farming tools, lending protocols, and much more for a cheap transaction fee. Businesses can use CeDeFi to develop custom smart contracts and add many products and services to a single platform, resulting in faster transactions and lower risk. “CeDeFi lets you experiment with DeFi products like decentralized exchanges (DEX), liquidity aggregators, yield farming tools, lending protocols, and much more for a cheap transaction fee. Businesses can use CeDeFi to develop custom smart contracts and add many products and services to a single platform, resulting in faster transactions and lower risk.”
Source: Blockchain Council
Benefits of Hybrid Finance
HyFi offers many strong points:
Higher security and privacy levels thanks to DEX components, smart contracts and validators for the audit of the transactions;
Self custody over your funds;
Reduction of fees thanks to the CEX liquidities involved;
Higher Transparency over off-chain transactions made by Centralized entities.
Unizen is a smart CeDeFi ecosystem which combines CEXs and DEXs functionalities to meet the needs of retail and institutional traders. Unizen can find the most cost-efficient trades across many exchange modules to provide the best offers, reliable performance, and a secure environment for high-volume trading on a useful, user-friendly platform.
Yanda is a Hybrid Finance protocol built to bridge centralized and decentralized finance.
It enables a new generation of Hybrid Finance dApps to emerge, connecting CeFi and DeFi and storing data on-chain.
Moreover, Yanda creates validation and verification logic to monitor off-chain operations.
With Yanda, you can exchange assets between multiple networks, reducing slippage and costs, using the security of a CeFi environment because it saves data on-chain and checks their legitimacy and purpose through validator pools.
To better understand the Yanda protocol.
Hybrid Finance risks and challenges
While Hybrid Finance (HyFi) and CeDeFi offer many benefits, they also come with potential risks and challenges.
One of the most significant concerns is regulatory compliance, as the use of both CeFi and DeFi components creates a complex regulatory landscape that can be difficult to navigate.
It can also lead to uncertainties in terms of liability and accountability in case of fraudulent activities or other misconduct.
Additionally, security concerns are paramount as the use of centralized infrastructure in HyFi protocols can create a potential single point of failure that could result in significant losses.
As with any blockchain-based technology, the risk of smart contract vulnerabilities and hacking attempts is also a concern.
Therefore, it is essential for HyFi and CeDeFi projects to implement strong security measures, including robust authentication and encryption protocols, multi-signature controls, and regular security audits, to ensure the safety of users' funds and data.
From DeFi and CeFi to CeDeFi
The events related to FTX push the adoption back to DeFi, following the religion of "Not your keys, not your coins". Although this is true, DeFi still has a lot to improve, and CeFi too.
CeDeFi protocols have significant potential for growth, revolutionizing the way financial products are traded and modifying the fintech industry.