Can DeFi and CeFi Co-Exist?
With over $20 billion lost in DeFi due to vulnerabilities and improper auditing techniques, a lot of questions have been raised. Some are about the latest centralized and decentralized finance (CeDeFi) trend and how it can enhance the decentralized finance system (DeFi) that has gone mainstream by over 20% since 2020.
Big game players and organizations have taken a huge step to implement this proposition. They’ve provided a more flexible option for developers to build scalable products using blockchain technology. However, this move will prove to be a game-changer.
Prior to now, most governments have been lackadaisical about the concept of blockchains, crypto, and DeFi because of its limited adoption of KYC and AML policies. But the question on people’s minds is, will the collaboration of CeFi and DeFi bring a whole new world and innovation to the blockchain financial ecosystem?
CeDeFi is a fusion between centralized and decentralized finance. It allows the trade of evaluated projects or tokens under the umbrella of reputable centralized exchanges. In a practical sense, CeDeFi is the technological trend powering the emergence of new generation smart exchange ecosystems that solves the existing problems of DeFi solutions.
For instance, Unizen, which is one of the leading CeDeFi solutions on the Binance Smart Chain network, combines effective decision-making tools, and the positive advantages of CeFi and DeFi to provide users with a better trading experience.
It onboards various leading audited products and exchanges onto its platform, leading to reduced fees, execution time, and risks. Generally, CeDeFi can also cover up the limits of DeFi when it comes to choosing single projects. Read this article by Unizen for more input.
However, it allows users to use the CeFi mechanism in order to earn multiple yields or tokens simultaneously. To have a better understanding of what decentralized and centralized finance or CeDeFi is, it is important to have an overview of the concepts that gave rise to it:
Decentralized finance, or DeFi, is associated with the blockchain ecosystem and entails the use of blockchain technology to fuel permissionless financial protocols. Decentralized finance offers flexibility to developers to create hassle-free, financially related innovations and provide digital solutions.
Centralized Finance, CeFi, however, refers to the popular central banking system that acts per the state and government’s stipulated law and regulations. Transactions are monitored and tracked, and at the slight suspicion of hanky-panky, the regulators can terminate the transactions without the concerned parties’ prior consent.
There have been some drawbacks following the massive adoption of DeFi, with over $100 billion of the total value locked (TVL) in capital and funding. These drawbacks have raised public concerns, with calls to regulate the activities of DeFi projects and contracts.
This brought about a collaboration between the two contrasting concepts of DeFi and CeFi to produce CeDeFi. Now, CeDeFi brings the beneficial features of the CeFi system into the already preeminent DeFi ecosystem.
By doing this, DeFi may experience a level of regulation as well as scalability while maintaining its protocols and allowing for innovations using blockchain.
Benefits of CeDeFi
The benefits of CeDeFi cannot be said without first understanding why it is beneficial to the digital world. To understand this, it is good first to know the problems in DeFi that should bring about a collaboration with CeFi.
Decentralized finance uses blockchain to deploy contracts to developers and organizations with innovative ideas to solve the impending problems in the blockchain financial ecosystem. However, there have been vulnerabilities with DeFi projects that have led to massive loss of investors’ funds.
Also, anonymity in blockchain makes it nearly impossible to track how these funds flow and dictate the culprits behind these hacks. Secondly, DeFi projects, most times, encounter problems with regulations from various local authorities and states.
This is common with crypto exchanges that may not be able to operate in so many countries due to regulations and AML policies. It has also given DeFi an image to look like a bubble most times because of the rising skepticism in the ecosystem.
With that said, we can now see how easy it will be to spot how beneficial the collaboration between DeFi and CeFi would be. Here’s a breakdown of the benefits of CeDeFi.
With the implementation of CeDeFi projects, regulators will be able to keep a lot in check legally. Through AML and KYC, big firms will have a limited number of problems involving signing contracts because they know who is behind any project.
Since KYC and AML protocols were introduced as a result of international and local money laundering and tax evasions, it has become easier for the government to track transactions and remit taxes from profiting citizens.
There will also be massive adoptions of DeFi protocols and contracts because of the government’s involvement, which will spark trust among people. And soon, with regulatory guidance, the public will make great use of these innovations.
However, regulations covering the vital legal aspects of the DeFi ecosystem would be a lot more beneficial if the core values of DeFi and blockchain technology are not tampered with.
Scalability is one of the crucial objectives of DeFi projects. The goal is to be able to stand the test of time while incorporating more features into the projects.
With CeFi managing issues related to funds management and regulations, and DeFi focusing on building innovative projects using blockchain technology, CeDeFi projects will increase productivity in the blockchain ecosystem.
Although DeFi is gradually taking over the world financial system with over $80 billion in total value locked (TVL), CeFi is still the biggest game player. A symbiotic collaboration between the two systems will see the DeFi grow without restrictions. Combining the experiences in CeFi and how it can manage the state’s financial systems will be beneficial to the DeFi ecosystem.
Millions of dollars are lost in DeFi due to security glitches emanating from hacks, bugs, and token or smart contract design problems. A merger between the two systems will reduce this risk with the involvement of auditing techniques applied in the CeFi system.
With auditing, there will be critical examinations and evaluation of DeFi projects to see that potential problems are abated on time before full contract and adoption. This will provide a more secure environment for running more DeFi projects.
Problems of CeDeFi
Although CeDeFi was introduced to solve the problems associated with decentralized finance by introducing the important aspects of the centralized financial system. A potential problem that will arise is the non-implementation of the protocols as promised.
Also, crypto enthusiasts have criticized CeDeFi protocols, claiming that organizations may try to hijack and monopolize the system by swallowing up existing protocols from other blockchains such as Ethereum.
Asides from this, there is a huge future for CeDeFi projects. Looking at some existing examples of CeDeFi projects will give full scope and understanding of the potential future of CeDeFi.
Future of CeDeFi
The future of CeDeFi cuts across:
- Centralized decentralization of DEX
- Incentivized funding of blockchain protocols and contracts
- Speed of transactions
- Low cost of confirming transactions on the blockchain
Organizations looking to adopt CeDeFi will have to follow these core values to win the masses and developers to adopt the protocol. Yield farming is an example of the CeDeFi protocol that developers and organizations are adopting. It is an investment proposition for crypto enthusiasts and holders using CeDeFi protocols.
DeFi developers can capitalize on the Binance Smart Chain protocol to build scalable decentralized products and applications (dApps) while reducing the problems faced with Ethereum’s smart contract, such as unregulated gas fees.
Over the years, we expect to see the rise of blockchain companies with formidable digital asset exchange services for both CeFi and DeFi enthusiasts. For instance, Unizen offers trades with less spillage, better results, and higher asset availability than its average DeFi contemporary. It further offers users AI-driven sentiment indicators to show the market sentiment during trades.
Now, this is the kind of innovations CeDeFi will be introducing to the blockchain market with fewer regulatory issues that the market is known for. But while the trend grows, the major concern among enthusiasts remains that industry leader Binance could monopolize the trend and kill Ethereum’s blockchain vision.
However, Binance also seeks to integrate Ethereum’s Virtual Machine (EVM) in its system as a means to abate this public opinion. Not only that, EVM will help disburse smart contracts easily, and through this integration, reduce cost and increase transactions’ speeds.
Proof of Stake Authority or Validators will see that transactions are securely approved and at greater speeds than usual. Binance Smart Chain will also ensure that PoSA protocols are effectively employed in DeFi applications and software.
Funding is another incentive used by Binance to fuel the massive adoption of CeDeFi. Binance will provide over $100 million in funding to facilitate productivity in the DeFi ecosystem to use CeDeFi protocols in building dApps.
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