What Is CeFi?

Introduction

When people talk about digital cryptocurrency, we may face cryptocurrency investment. The major players of cryptocurrency financial investment can be grouped into two broad categories, CeFi and DeFi, which stand for Centralised Finance and Decentralised Finance.

One of the core philosophies of cryptocurrency is decentralization, which means no agencies in the middle but people can complete transactions directly between each other. "DeFi" is designed based on this philosophy, utilize smark contract, people can lend, earn, save, trade without any agencies, for example, banks in the middle. However, with the features of smart contracts, it may come with certain risks, such as investors may lose money because of the bugs of codes, get cheated by malicious actors. Moreover, people need to know some knowledge of cryptocurrency technology before taking part in DeFi.

"CeFi", opposite concept to "DeFi", combines some attributes of DeFi, such as yield benefits, and some of the features and security of traditional financial services products. With CeFi, investors can earn interest or get loans through the middle agencies, such as exchanges. Middle agencies custody clients' assets and pay interests, in the meantime, investors transfer risk to the agencies.

How Does CeFi Lending Work?

With CeFi, users can borrow money from middle agencies by collateral cryptocurrency, it is the same with users using traditional assets as collateral to apply for a bank loan. Middle agencies use investor's savings to lend money to the borrowers, and charge interests from borrowers.

How Do Investors Earn Interest With CeFi?

Once an investor invests their cryptos in a centralized provider, the assets will be lent to borrowers by the centralized provider, while the borrowers pay the centralized provider an interest rate for borrowing, and that provider passes on some of the interest to the investor. This mode is similar to traditional banks' savings service.

What Are the Benefits of CeFi?

  • Get a loan through collateral cryptocurrency.
  • Borrow cryptocurrency to the middle agencies to earn interest. 
  • Require little or no paperwork, friendly to financial beginners.
  • CeFi middle agencies guarantee both safety and returns for their users

What Are the Risks of CeFi?

  • Investors may face a different level of risk by investing in different products provided by differing agencies.
  • Legal problem: most of the products are issued by private agencies, which are not eligible for government-backed insurance. If the agencies shut down, investors may lose all of the assets. 
  • Your principal may be locked up for a period of time.
  • Centralized platforms with high liquidity are always a target for hackers. Investors' assets may be stolen by hackers.

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