Cryptocurrency is causing a huge paradigm shift in how the world interacts with money, financial services, and the economy in general.
El Salvador has designated Bitcoin as a legal tender, some other countries are working on launching central bank digital currencies (CBDCs), and cryptocurrencies have now become a constant fixture in conversations around monetary policy.
The first two modes of participating in the crypto economy were through centralized finance platforms (CeFi) and decentralized finance platforms (DeFi).
Using CeFi means that you are trusting a third-party person(s); while using DeFi means you are trusting smart contracts.
Now, CeDeFi (Centralized Decentralized Finance) has emerged as another route to participating in the crypto economy and this post explores the emergence of CeDeFi as the next step in the evolution of the crypto industry.
The post especially focuses on the finance and economics perspectives of CeDeFi and it provides insights into how CeDeFi fits crypto into the global financial and economic areas.
From CeFi to Defi, and now, CeDeFi
The first mode of engagement with crypto is through Centralized Finances (CeFi) platforms such as Binance. CeFi platforms provide a framework for the cryptocurrency industry to take on a definite form.
However, many people started complaining that the centralized nature of CeFi contradicts the very essence of cryptocurrencies as a means of exchange free of central powers.
CeFi platforms serve as gatekeepers, they have KYC requirements, and they could potentially hold too much power in what is supposed to be a decentralized economy.
The angst with CeFi led to the emergence of Decentralized Finance (DeFi) platforms such as Uniswap. DeFi is permissionless and it returns control, agency, and self-determination to crypto users.
The downside of DeFi, however, is that it has become a motley crowd of useful and useless tokens, not many people have the technical know-how or financial education to engage with DeFi, and DeFi projects often lack intuitive user interfaces and experiences.
The problems with DeFi led to the development of the third mode of participating in the cryptocurrency industry through Centralized Decentralized Finance (CeDeFi) platforms such as Unizen.
CeDeFi platforms cherry-pick the best features and functionalities of CeFi and DeFi, to provide users with the perfect mix of decentralization, protection, risk management, and accessibility.
CeDeFi as a new economics paradigm
CeDeFi, being an amalgamation of CeFi and DeFi addresses some of the underlying challenges of the DeFi ecosystem, by taking some of the key benefits of CeFi to protect the financial and economic interests of users.
In September 2021, Ryan Selkis, founder and CEO of crypto intelligence company, Messari, drew some parallels between the 2017 ICO craze and the current DeFi rush.
He predicts that a bust in the DeFi sector might be around the corner as “we’re nearing the apex of Ponzi economics, rug pulls, and ‘yield’ hopping, and ETH fees are going to eat too heavily into non-whale profits.
Ryan’s prediction is not without merit when you consider the fact that CipherTrace 2020 Cryptocurrency Crime and Anti-Money Laundering Report noted that “half of all 2020 crypto hacks were of DeFi protocols” In 2021 already, investors in the DeFi sector have lost almost $700 million to rug pulls in the first 7 months.
CeDeFi embodies the rapid iteration, evolution, and growth philosophy at the core of the cryptocurrency industry. In the words of James Taylor, CBDO at Unizen, “we cannot turn off the existing financial system just because it is centralized. Nor can we can’t turn a blind eye to Decentralised innovation. CeDeFi is the tipping point for mass adoption of crypto assets and unizen is working with the key players to make it a reality.”
Below are some of the key ways CeDeFi platforms like Unizen are set to unlock new opportunities to integrate cryptocurrencies with the global financial and economic sector.
- Bringing the rest of the global economy into crypto
Today, the overwhelming majority of money in the global financial system is still in fiat and fiat equivalents. Hence, even though the global economy is now mostly digital; thanks to technological innovation, the global economy still relies on fiat money that is still fundamentally analog.
To get the bulk of the global economy on board with crypto, the role of fiat gateways cannot be overemphasized; and fiat getaways are where the “Ce”, in CeDeFi makes its mark.
DeFi for all its great features is still niche, requires some level of technical savvy, and has a steep learning curve for people who are not crypto natives. The total number of DeFi users is a little over 3.3 million people, with most of the top DeFi platforms (except for Uniswap) having only a few hundred thousand users, while the bulk of DeFi platforms only have a few thousand users.
CeDeFi could attract more people into the crypto space by leveraging the ease, security, and regulatory protections of CeFi to the idea of DeFi. Unizen, in particular, brings the best part of CeFi AML /CTF/KYC, compliant reporting, custodianship, and accountability and combines it with the best of DeFi.
- Managing FUD and FOMO
CeDeFi is an alternate financial system that provides a better mechanism for cryptocurrency investors and traders to manage FUD and FOMO and their portfolios. The simple fact that DeFi is permissionless – such that anybody can create a new DeFi project in a matter of minutes by using token and smart contract generators is a worrisome trend. The worst part is that not much thought is given to the economic stability or security that would minimize the incidences of rug pulls.
The bigger problem, however, is the lack of investor education causing many users to keep on piling into these projects as their prices have continued to race ahead of any inherently tangible value.
CeDeFi enables the listing of vetted tokens or projects because the centralized element of the CeDeFi platform forces the promoters to have skin in the game and to take personal and corporate responsibility for conducting due diligence on the assets that will be provided to the public on their platforms.
Unizen sets a good example of how CeDeFi platforms can help manage FUD and FOMO by providing smart social indicators to keep track of asset sentiment. It also delivers consistent utility yield to counterbalance bull and bear speculative cycles. The exchange also has community-run channels where the active community support each other and share insights for managing FOMO and FUD in the markets.
- Support for cross-chain interoperability:
The cryptocurrency industry is highly fragmented with Bitcoin on one level, Ethereum on the next level, and 3rd-generation blockchains such as Cardano, Polkadot, and Solana fighting for a bigger slice of the pie. The challenge with the fragmentation is that the cryptocurrency industry can’t quite put up a united formidable front in the quest to transition the world to decentralized solutions.
CeDeFi accelerates the development of cross-chain interoperability by serving as a melting pot of different projects from different blockchains. For instance, multi-asset staking on Unizen rewards stakers with tokens from multiple different projects and blockchains.
The staking payouts in multiple tokens, in turn, encourage the users to become acquainted with new projects that they might not have explored with single-asset staking on CeFi or DeFi platform.
Whereas you can only earn 1X tokens for staking on a CeFI or DeFi platform, with CeDeFi, you potentially earn nX amount of tokens, where “n” is multiple tokens or yields that you can earn simultaneously as rewards for staking.
Cross-chain interoperability, in turn, benefits the broader crypto industry by facilitating a smoother transfer of information exchange, easier smart contract execution, more opportunities to forge alliances and partnerships, and an overall user-friendly experience.
CeFi platforms have a similar structure to the traditional financial services companies except that they offer crypto and crypto-related financial products and services. DeFi platforms offer crypto and crypto-related financial products and services but without a centralized intermediary.
CeDeFi blends centralized financial services and decentralized financial products in regulatory-compliant offerings to further derisk the adoption of cryptocurrencies for both retail and institutional users. CeDeFi could further improve the usability of crypto assets by bringing benefits of financial regulations in centralized traditional systems to the emerging world of DeFi while providing users with access to innovative and attractive financial products.