Basic

What is Centralized Finance? An Introductory Guide to CeFi | SOMA.finance

A short guide to CeFi, including what CeFI is, what services are included and what the risks are.

Average Read Time:
2
minutes

Key Takeaways

  • 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 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.

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 organizations 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 its 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 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 CeFi 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. Its important that investors do their due diligence before using any service so that they fully understand all the risks involved. 
  • Crypto 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. 

IMPORTANT INFORMATION

This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice. The views expressed are those of the author and the comments, opinions and analyses are rendered as of the publication date and may change without notice. There is no guarantee that any forecasts or predictions made will come to pass. The information provided in this material is not intended as a complete analysis of all material facts or circumstances regarding any country, region or market. All investments involve risks, including possible loss of principal.

Risk management does not imply elimination of risks, and not all investments are suitable for all investors.The information and opinions contained in this material are derived from proprietary and non-proprietary sources deemed by SOMA.finance to be reliable, are not necessarily all inclusive and are not guaranteed as to accuracy. Data from third party sources has not independently verified, validated or audited. SOMA.finance accepts no liability whatsoever for any loss arising from use of this information; reliance upon the comments, opinions and analyses in the material is at the sole discretion of the user. ​

Any products, services and information in this material may not be available in all jurisdictions and are offered local laws and regulation permit. Please consult your own financial professional or legal advisor for further information on availability of products and services in your jurisdiction. Please also see the disclaimer which is found at the bottom of this website under the heading “Important Disclosures”.