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What Is CeFi?

CeFi, also known as centralized finance, is a type of financial practice within the cryptocurrency sphere where users can earn interest and get loans on their digital assets such as Bitcoin, Ethereum, USDT, and so on, through a centralized platform. Centralized finance or simply CeFi deals with people conducting their financial transactions through a privately-owned institution. By trading, lending, or borrowing cryptocurrencies through these centralized parties, people can earn profit and interests and get loans.

Deeper Definition

Since the inception of Bitcoin, the world has been introduced to a whole new set of blockchain-based financial applications. CeFi, short for Centralized Finance, has been around since the time Bitcoin first emerged. Centralized finance creates the potential for earning yield via crypto-based accounts that are functionally similar to a traditional bank’s savings accounts — but may offer substantially higher returns.  Unlike traditional savings accounts, crypto deposits are not presently eligible for government-backed FDIC (Federal Deposit Insurance Corporation) or SIPC (Securities Investor Protection Corporation) insurance, so one needs to understand the risks entailed.

In CeFi, centralized companies and institutions store people’s funds in their custodial wallets. These crypto wallets store users’ private keys. In return, these services provide customers with different services. For instance, CeFi platforms can support crypto to fiat and fiat to crypto transactions. Cryptocurrency trading is currently one of the most common solutions enabled by centralized finance. With centralized finance, users trust the people behind a business to ethically manage funds and execute on services. Some examples of CeFi include Binance, Coinbase, Libra, Fairlay, Celsius, Nexo, BlockFi, etc.

The core idea behind centralized finance is to create crypto investment opportunities for users while offering them the security of traditional financial services products. For instance, CeFi makes it possible for you to lend your crypto holdings to others and earn interest. Essentially, CeFi extends the traditional financial model but upgrades to the next level with crypto. Centralized finance platforms must adhere to the KYC (know your customers) requirements of each jurisdiction where they operate.

CeFi Example

Coinbase is an example of a centralized finance platform. Coinbase is a cryptocurrency exchange that allows users to trade different currencies, borrow funds, lend funds, etc.

Another example of a centralized finance platform is BlockFi. The platform allows crypto owners to take USD loans while using their crypto assets as collateral.

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