Just a few years ago, we were exposed to the financial world’s revolution, as Bitcoin and other cryptocurrencies transformed the way we use and view money in general. They were created with the goal of transforming the venerable financial trading system into a decentralized system via the use of distributed ledger technology, which was launched in the early 2010s.
Two billion people on the planet do not have access to something as basic as a bank account, according to reliable data, since central banks determined that they were unsuitable to have a bank account in the first place. Given that billions of people are deemed unworthy of even the most basic of financial services, such as a bank account or a loan, the idea of decentralizing the centuries-old traditional financial system meant that those people would be able to gain access to services that were previously only available to those who could afford them.
As part of the conventional financial system’s decentralization, the system was able to eliminate any intermediaries, in this instance, centralized institutions, governing bodies, and other similar entities. It enabled users to conduct transactions with anybody, anywhere globally, without the need for a middleman. While cryptocurrencies brought the concept of a decentralized currency to the world of Finance, Decentralized Finance, or DeFi for short, introduced the concept of a whole new financial ecosystem.
A step further, Decentralized Finance (DeFi) introduced an ecosystem of smart-contract powered apps that enabled anyone with a smartphone and an internet connection to lend, save, borrow, trade, earn, and run their businesses without the need for third-party intermediaries such as banks or payment processors to get in the way of their operations.
DeFi, like Cryptocurrencies, is still in its early stages of development. They are still a relatively new technology, but they also carry an array of dangers and possibilities for growth that must be considered. Currently, DeFi solutions are difficult to understand owing to the absence of a user-friendly user interface and user experience (UI/UX) for their protocols.
Too many people have fallen prey to misconceptions regarding particular protocols, technologies, and applications that we’ve seen firsthand. As a result, surfing and utilizing DeFi may require a high degree of technical skill and an in-depth understanding of the subject matter. It’s also not very inviting to those who have just walked into the space. A significant danger exists that your asset or investment may be lost due to flaws in the code, criminal activity, or simply a single instance of negligence.
However, before DeFi, the standard for trading cryptocurrencies was through Centralized Finance (CeFi). CeFi, with a market capitalization of approximately $324 billion, outperforms DeFi, which has a market capitalization of close to $64 billion. While decentralized and centralized Finance seeks to accomplish the same objective, they differ in their approach to bringing cryptocurrency trading and possibilities to the general public and increasing trade volume.
What exactly is Centralized Finance,CeFi?
Prior to the introduction of DeFi, Centralized Finance was the industry standard for trading cryptocurrencies. It still has a significant amount of control over the crypto sector. Centralized Finance, often known as CeFi for short, is the centralized counterpart to Decentralized Finance. When it comes to centralized Finance (CeFi), all cryptocurrency trading orders are processed via a single exchange. Funds are administered by the particular company that is in charge of the central exchange.
Furthermore, the exchange specifies which currencies they offer for trading and how much you will be charged in fees if you choose to trade with them.
CeFi aspires to make trading more equitable, improve transaction processing, and increase the efficiency of buying and selling.
CeFi systems are considerably less complex and user-friendly because centralized cryptocurrency exchanges and lending platforms took many years to perfect. Centralized cryptocurrency exchanges have created user-friendly interfaces that provide excellent services on a secure platform, which DeFi platforms are still attempting to match in terms of functionality.
What are the several ways you may make money using CeFi? How do they function?
CeFi offers opportunities to earn interest via crypto-based accounts that are functionally comparable to traditional bank savings accounts but provide much higher rates. Because crypto deposits, unlike savings accounts, are not protected by government-backed FDIC or SPIC insurance, it is essential that you understand the dangers involved with making a cryptocurrency deposit.
Earning yield with CeFi is as simple as storing a portion of your bitcoin on one of the many various platforms that provide this service. It is similar to providing liquidity or staking in the DeFi context.
So, what happens to your assets?
Holding part or all of your cryptocurrencies on several platforms allows you to put some of your assets to work by lending some or all of your holdings to other platform users. These users, in this case borrowers, pay an interest rate to a centralized provider in exchange for borrowing money, which is subsequently passed on to you in the form of a percentage of the interest paid by the users. It is quite similar to this idea in DeFi, which is called liquidity pools.
When it comes to borrowing money against your cryptocurrency assets, CeFi makes it easy to do so. Using your cryptocurrency holdings as collateral for a loan is a straightforward process, just like you would with conventional currencies or assets when asking for a bank loan. Furthermore, unlike bank loans, which may be very discriminating in and of themselves, CeFi loans need very minimal documentation to be completed on your behalf. On certain centralized exchanges, users may borrow up to $100,000 without having their credit history checked.
The need for Stablecoins
Intense volatility characterizes cryptocurrencies, which is one of the reasons they haven’t achieved widespread adoption yet. However, although many cryptocurrency initiatives create and manage their ecosystems, they are all founded on blockchain technology, which is what provides the digital asset with its value in the first place.
Blockchain technology’s features of decentralization, immutability and other characteristics have led to the creation of more than 11,000 distinct cryptocurrencies in existence today. To address one of the most basic issues facing the cryptocurrency industry, which is its infamous volatility, the crypto ecosystem has developed a solution in the form of Stablecoins.
Stablecoins, in contrast to cryptocurrencies, have a set value. Stablecoins are digital currencies that are tied to physical assets in the real world. These assets may contain both precious metals like gold and fiat currencies such as the United States dollar. While they have many of the same characteristics as other cryptocurrencies, such as transparency, security, privacy, and accessibility, they do not share any of the dangers associated with them.
At the time of writing, the stablecoin market is estimated to be worth about $114 billion. Stablecoins were created to be used like that of cryptocurrencies.
How are Stablecoins important for CeFi
Because of the instability of cryptocurrency prices, many individuals have refrained from investing in the cryptocurrency market, as previously said. Stablecoins have significantly contributed to abolishing such concerns by eliminating the volatility element and maintaining a one-to-one value with other assets. Stablecoins, backed by fiat currency, has also served as a link between traditional currencies and cryptocurrencies.
Because of the rise in popularity of CeFi, stablecoins now have a far more comprehensive range of applications.
One of the primary reasons for the increasing use of stablecoins is the consistent return on investments provided to users, comparable to the conventional financial sector where fiat currencies are utilized.
As a bonus, CeFi platforms are providing consumers with yields in the region of 10-12 percent (and sometimes even more) consistently, which is in striking contrast to conventional investing techniques that are often providing returns of 0-percent or less (and sometimes less, or even negative yields).
Both decentralized and centralized Finance pursue the same objective. They want to popularize cryptocurrency trading and increase trade volume. However, the manner in which these two ecosystems accomplish their goals is distinct.
CeFi guarantees the protection of your money and the fair trading of such funds. Cryptocurrency trading is also available to investors using traditional currencies. Additionally, CeFi exchanges give customer assistance that DeFi providers do not. On the other hand, DeFi wishes to keep the area free of intrusion. It creates an environment in which investors may execute their plans without having to deal with an intermediary.
Stablecoins allow investors worldwide to earn interest on their crypto assets while mitigating market volatility’s negative impacts, especially on CeFi platforms. It should be no surprise that digital dollar stablecoins are becoming more significant assets in the commercial lending markets. The CeFi market allows investors to earn higher rates than conventional fixed-interest assets like savings accounts, money market funds, and bonds. Investors may digitize their funds to earn higher returns than the market average. The most straightforward and most secure method is to tokenize US dollars into a chosen stablecoin, which can then deposit funds into CeFi platform accounts.
When it comes to utility in financial applications stablecoins are becoming the consumer’s choice as a stable cryptocurrency. We are bullish towards the future of stablecoins, and we hope that our readers share the same view!