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What is Centralized Finance? CeFi Introductory Guide
A short guide to CeFi, including what centralized finance is, what services are included and what the risks are.
- CeFi, short for Centralized Finance, is a term used to refer to the concept of having a centralized authority manage the funds in an ecosystem.
- With CeFi, users can utilize their crypto and digital assets in their daily lives and earn rewards at the same time.
- It is important to do research before using any CeFi services. Each CeFi provider is different in how they operate and put deposited funds to use.
So, what is CeFi? CeFi is short for Centralized Finance and is a term used to refer to the concept of having a centralized authority manage the funds in an ecosystem.
As it relates to cryptocurrencies, CeFi offers access to some of the yield benefits that can be found in DeFi while also offering the ease of use and security that is found in the traditional financial system.
Even though many in the crypto ecosystem value what DeFi has to offer, it can oftentimes be difficult to use and comes with a higher level of risk that many investors are not comfortable taking.
With CeFi, users can borrow money, buy or sell crypto, and access tools like crypto debit cards that allow them to utilize their crypto in their daily lives and earn rewards at the same time.
Earning a yield with CeFi
The mix of crypto-based accounts with centralized financial systems offers yield opportunities that function like a traditional savings account but with significantly better returns. It should be noted by all investors that cryptocurrency deposits aren’t currently eligible for government-backed FDIC or SIPC insurance, so it's important to understand all risks involved before participating.
The most common ways people currently interact with CeFi is by lending crypto assets on centralized exchanges like Coinbase or Binance, or through various centralized lending applications like Celsius or BlockFi.
CeFi Borrowing
As with traditional financial services, on top of lending, CeFi also offers access to borrowing against crypto assets in the same way that traditional assets are used as collateral for a bank loan.
It's basically the flip side of the lending sector, where the interest users pay to borrow funds is the source of yield for those who are holding and lending their funds on CeFi.
The benefits of taking centralized finance loans vs. traditional bank loans include the limited amount of paperwork required and a lower barrier to entry due to the elimination of things like credit checks.
CeFi Risks
- Each CeFi provider is different in how they operate and put deposited funds to use. It's important that investors do their due diligence before using any service so that they fully understand all the risks involved.
- Crypto CeFi deposits aren't eligible for government-backed insurance
- Lock-up periods are sometimes required
- It's important to verify the terms of service and method of yield payment prior to depositing.
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