[TREND] BlockFi is Bring it Up, Will CeFi and DeFi Combine together?

Source: DigitalDaily, Hyun Young Park

The “Ce-fi (Centralized Finance)” market is drawing attention again as US cryptocurrency finance company BlockFi recently received an enterprise value of $3 billion (3.4 trillion KRW). There is also a prediction that CeFi, which has been a concept compared to De-fi (decentralized finance), will coexist or combine with DeFi.

CeFi stands for Centralized Finance, which means a centralized financial system. Unlike DeFi, which is driven by smart contracts on the blockchain, it is a financial service with a central manager. It is also called crypto finance because it uses virtual assets. This includes not only virtual asset finance companies, but also lending and deposit services provided by exchanges.

◆CeFi vs DeFI, Pros and Cons

In the meantime, CeFi and DeFi have often been compared. Unlike CeFi, where the service provider determines the scope of information disclosure, DeFi has the advantage of being able to transparently check the amount of deposit and transaction details on the blockchain.

On the other hand, CeFi is advantageous in terms of user experience (UX). It is pointed out that the DeFi service is difficult for general investors to use due to UX, such as requiring users to create a wallet and link it to the service. In contrast, CeFi, which has a management company, has many services that are easy to use. Therefore, the market size is bigger than DeFi.

In terms of safety, both areas have advantages and disadvantages. DeFi’s information is transparently disclosed, but there is a risk, such as a technical flaw in the smart contract, it can be hacked. In the meantime, there have been many incidents of hacking the DeFi service. Accordingly, major DeFi services are periodically undergoing smart contract security audits.

There is a risk of choosing a reliable company because CeFi has a problem of information imbalance between users and companies. Therefore, major companies disclose some information, such as the total amount of deposit, to users, and large companies provide services more stable than DeFi.

◆“Combination” will be the mainstream instead of comparison… And the emergence of related services

As each CeFi and DeFi have their strengths and weaknesses, services that combine the two fields are also appearing one after another.

James Jung, CEO of Delio says, “The centralized element can be found in DeFi, and the decentralized element can be found even in centralized financial services. “You have to combine the advantages of each of the systems.”

For example, there is a decentralized element in the CeFi service. Delio, which provides a crypto lending service, remotely locks bitcoins in a user’s wallet to set collateral and prevents Delio from accessing the collateral. This is a decentralized factor, which is a case of using the DeFi model for a part of the service although it is a CeFi company.

In some cases, the DeFi service is also centralized, that is, the CeFi element is combined. Yearn Finance, a virtual asset management platform, and DeFi service, is a prime example. In the Vault, a product within the Yearn Finance service, there is a “Guardian” that can lock or block certain accounts in the event of an abnormal phenomenon such as hacking. It means that there is some kind of manager in DeFi service operated in a decentralized way.

The services like these are expected to increase. Changpeng Zhao, CEO of Binance, the world’s largest exchange, also announced plans to combine CeFi and DeFi at the “The World of DeFi” event last year.

Binance provides CeFi services, but De-Fi services can be developed based on the decentralized blockchain platform ‘Binance Smart Chain’. Accordingly, CEO Zhao announced a plan to connect CeFi and DeFi by allowing crypto to be exchanged between exchange services and smart chain-based services.

There is also a prediction that the two sectors will be combined due to the Ethereum transaction fee (gas fee). Most of the DeFi services are based on the Ethereum blockchain, because the Ethereum gas fee is steadily increasing. Attempts to reduce gas fees can be made by allowing smart contracts on the blockchain to be used only for essential parts.

CEO James Jung says, “Gas fee is the biggest concern of DeFi service and an important factor in determining the success or failure of the business.”

[Written by Hyun Young Park, DigitalDaily, hyun@ddaily.co.kr]


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