What is CeFi?
Centralized Finance is a system where a single entity has control over the finances of an organization or a company.
In the crypto industry, centralized finance refers to a model where a central authority- individual, group or company- manages finances and investments, with the aim to provide more stability and efficiency for investors.
This article will cover the possibly centralized applications, their services and characteristics compared to decentralized ones.
Features and services of CeFi applications
The most known centralized applications are
Centralized exchanges (CEXs);
Centralized platforms (classic databases where data are collected, governed by an intermediary). For example, Celsius, YouHodler and Nexo are included in this category.
Remember that when using centralized platforms, your funds are held in a custodial manner which means you are not the official holders of our assets.
To take advantage of the functions provided by its applications and buy cryptocurrencies providing a bank account or a credit/debit card, it is mandatory to complete certain security procedures:
KYC is acronymous of know your customer. This process consists in uploading an identity document inside that platform to be recognized and get the confirmation to access the services.
AML, anti-money laundering. It is the preventive action that financial institutions take to achieve compliance with legal requirements and to actively monitor and report suspicious transactions.
Usually, centralized exchanges and platforms offer different services like
Swap (or exchange) between fiat currencies, crypto and vice versa.
Borrowing/lending services. This process means a user “freezes” its tokens or funds to borrow other liquidity and make other financial movements.
Earning (similar to staking in DeFi platforms). The user makes a deposit of funds for 30, 60 or 90 days and obtains an earn or an interest on that block.
Benefits and disadvantages of centralized platforms
To explain the advantages and disadvantages of centralized finance, we cannot avoid making a comparison with the decentralized one.
First, a centralized system tends to be more efficient and organized than its counterpart, thanks to high liquidity and transaction speed. Not being decentralized, it is often less transparent due to total control over the flow of information than decentralized peer-to-peer systems.
Centralized platforms are more stable and secure because the risk of fraud or theft is lower, and they are more resilient to malicious operations. However, they are more susceptible to corruption and manipulation by the people in charge.
Centralized platforms are often monitored by third-party companies to verify that there are no suspicious transactions. They usually have insurance policies that can cover the damages of a hack - but they may not protect the entire capital of all investors.
As we know, history teaches us that cases of hacking to centralized platforms are numerous and often dramatic: the fact that these platforms concentrate a very high number of users and that cooperate with third-party companies makes hacker attacks more targeted and profitable.
If they fail to attack the platform directly, they can always attack users or third-party companies to achieve their goals.
Since all traders and investors use centralized platforms, it is a good practice to follow some basic rules to avoid getting involved in this type of attack:
Try to avoid keeping cryptocurrencies all in one place: especially if it is a high capital, it is preferable to spread as much as possible between cold and hot wallets - better if equipped with solutions that allow to isolate them completely from the network;
Always ensure that the devices you use to invest and trade do not have remote control activated;
You should never store your sensitive data on electronic devices (such as private keys).
It is essential to use a good antivirus: there are viruses that allow you to install software that activates remote control, thus giving the attackers complete control of our electronic devices.
As we have seen, the benefits and disadvantages are different; each user is free to choose the solution that best reflects his/her needs.
Whether you choose a fully centralized, decentralized or hybrid solution, it is essential to secure your funds by choosing the right wallet which is more appropriate to the operations to be carried out.