CeFi (Centralized Finance) refers to a financial system in which a centralized company or institution acts as a trusted intermediary to facilitate financial services and cryptocurrency transactions.

CeFi vs. DeFi

CeFi is essentially the bridge between the traditional financial system and the world of cryptocurrency. Services like centralized exchanges (CEXs) are a prime example of CeFi. When you use a CEX like Coinbase or Binance, you are entrusting your digital assets to that company. They take custody of your funds and manage the order books and transactions. This provides a user-friendly experience, access to customer support, and the ability to easily convert between fiat-currency and crypto.

This model stands in contrast to DeFi, where services are offered on the blockchain through automated smart-contracts and do not require a central intermediary. In a DeFi system, you maintain full control of your assets in a non-custodial wallet. While CeFi offers a more familiar and secure experience for beginners, it comes with a risk of centralized failure, as your assets are subject to the company's policies and security.

Why It Matters

CeFi plays a crucial role in the crypto ecosystem by providing a gateway for new users. It simplifies the process of buying, selling, and holding crypto, making it more accessible to a wider audience. However, the centralization that makes it easy to use also introduces risks that run counter to the core principles of decentralization.