What is Centralized DeFi (CeDeFi)?
Centralized DeFi (CeDeFi) represents a financial system that combines the features and benefits of centralized and decentralized finance. This is a type of hybrid financial protocol that can incorporate specified features from CeFi and DeFi sectors such as yield farming, leveraged trading, liquidity staking, and token swaps.
Another important feature of CeDeFi is the utilization of exclusively DeFi features in a regulated or centralized form.
CeDeFi brings the decentralized sector into the realm of regulated and certified space. In this manner, law enforcement agencies can detect and intercept any type of illegal transaction activity. Therefore, CeDeFi also refers to regulated entities that utilize decentralized governance structures in a regulated manner. Enterprises incorporate CeDeFi protocols as a cost reduction measure.
Origin of CeDeFi
Binance is one of the biggest crypto exchanges in terms of market cap. The firm launched a native blockchain in April 2018. The main focus of the new network was to provide a high throughput and process sizeable amounts of transactions per second.
This blockchain was called Binance Chain which was later renamed as BNB Network. This blockchain incorporated the Tendermint consensus mechanism with a focus on Binance DEX.
At the same time, DeFi protocols on Ethereum were printing considerable trading volumes in comparison to Binance DEX. To improve its active user count, Binance introduced smart contract compatibility and invited more developers to build new decentralized applications.
For this purpose, Binance forked Ethereum Geth to make Binance Smart Chain (BSC) in 2020. BSC supported smart contracts and introduced other features such as unique transaction verification, block time, and gas fee limits per block.
BSC incremented scalability and high TPS stead of decentralized. It introduced the concept of the Proof-of-Staked-Authority (PoSA) mechanism. In this manner, only verified validators were able to earn the verification task and earn staking rewards.
In this way, the number of validators working on Binance is reduced making it a more centralized protocol. Binance is working on implementing BEP 131 to bring more decentralization and increase the total number of validators from 21 to 41.
DeFi Vs CeFi Vs CeDeFi: Key Features
Know Your Customer
There are no KYC checks on DeFi protocols. CeFi requires investors to create a verified account and complete KYC confirmation. CeDeFi also has KYC models.
Custodial Requirements
DeFi offers non-custodial accounts meaning that investors own and have to secure their private keys. CeFi usually has custodial wallets where the platform manages private keys. CeDeFi protocols are non-custodial.
Governance
The governance of a DeFi platform is wholly decentralized since there is no centralized authority involved. CeFi protocols are centralized and CeDeFi protocols are also supervised by regulators.
Regulatory Compliance
DeFi protocols do not operate in accordance with regulatory requirements. CeFi programs comply with the regulatory requirements while CeDeFi also operates in the same manner.
Intermediaries
Smart contracts in DeFi take the place of third-party intermediaries. In CeFi, third party facilitators are involved and in CeDeFi intermediaries utilize smart contracts for transactions.
Smart contracts may contain bugs that hackers can use to intercept DeFi protocols. Platforms are susceptible to security breaches based on CeFi framework. Hackers may also breach CeDeFi protocols using smart contract exploits.
Advantages of CeDeFi
CeDeFi retains the unique features of decentralized finance and makes them accessible to investors with the added protection of regulated and audited products and services.
Instead of intermediaries, CeDeFi protocols use smart contracts to perform various functions, automation, and scalability.
The absence of intermediaries cuts down operating costs for investors and CeDeFi operators as they do not have to pay commission fees.
CeDeFi protocols are prompted for enterprise applications that can increase capital inflow and improve overall trading volume, demand, and liquidity.
CeDeFi structures grant greater control to individual investors in the form of non-custodial wallets.CeDeFi protocols have enhanced scalability features in this manner they have higher TPS rates.
Conclusion
CeDeFi protocols also have some setbacks such as new concepts with limited awareness and potential hack attempts. Nevertheless, both DeFi and CeFi protocols are going to retain their value on account of intrinsically exclusive features.
