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What Is Centralized Finance (CeFi)?
Beginner
2025-07-15 | 10m
Centralized finance (CeFi) has been our traditional way of performing transactions since human civilization, centralized finance is simply the reliance on central authorities or third parties to process our financial transactions. It is marked by central institutions and the existence of central regulating bodies of money flow and asset ownership. Brokerages, banks, and central crypto exchanges like CoinCatch itself are some of these examples. Normally, an individual would keep his assets in such institutions that own them and make them tradable.
In the context of cryptocurrency, centralized finance (CeFi) are exchanges that manage cryptocurrency transactions and activities by acting as a central authority and regulator. All cryptocurrency trading orders are filled up automatedly via Order book in a Centralized Exchange (CEX) in CeFi. CeFi ensures there is liquidity in cryptocurrency tokens or cryptocurrency coins for smooth trading, any cryptocurrency without much transaction volume is delisted from CEX. Centralized exchanges make decisions on which cryptocurrency to list or delist from their exchanges and also the trading fees. CeFi is known to be custodial, CEX controls a user's crypto and this is regulated. The government has set out strict rules and policies for CEX to prevent money laundering and other financial crimes. In CeFi, centralized exchanges have the right to freeze a user's account when the account is flagged fraudulent.
Features of Centralized Finance (CeFi)
1. Interoperability
In decentralized finance, cryptocurrency trading works on only cryptocurrency tokens of the same blockchain. Trading ERC20 tokens can be only exchanged with tokens built on ERC20 (Ethereum blockchain), the same allies to BEP20 (BNB blockchain), TRC20 (Tron blockchain), and all other blockchains. In CeFi, trading, lending, staking, and all other cryptocurrency financial activities are done irrespective of the crypto token’s blockchain. In CeFi, ERC20 tokens can be traded with BEP20 tokens and any other token listed on the centralized exchange in another blockchain. In CeFi exchanges, the conversion of traditional fiat currency to cryptocurrency and vice versa is simple and effortless, demonstrating CeFi's cryptocurrency interoperability.
2. Centralized Exchanges (CEX)
Another feature of CeFi is centralized exchanges (CEX). CEX are online marketplaces for buying and selling cryptocurrencies. Users entrust these "middlemen" to perform trading services on CEX. CEX performs a variety of functions and responsibilities, including lending and borrowing services, cryptocurrency futures trading, and cryptocurrency staking. CEX is regulated and has trading policies that are structured by the government; fraudulent users' assets are seized, and trading profits are taxed depending on the user's government. CEX has advantages and disadvantages, whereas, they have many functionalities that decentralized exchanges (DEX) do not.
Examples of Centralized exchanges:
Binance
Coinbase
Bitmart
FTX
Kraken
Kucoin
Huobi Global
Features of Centralized Exchanges
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Fees: One of the features of CEX is Fees, CEX exchanges have very small and negligible trading fees compared to DEX. Fees are induced in actions like trading and withdrawals.
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Usability: CEX has a significant advantage over DEX in terms of usability. When compared to decentralized exchanges, centralized exchanges are much easier to use. Users can easily convert their crypto to FIAT and vice versa.
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Speed: Centralized exchange trading orders are filled compared to decentralized exchanges. This makes centralized exchanges averagely faster than decentralized exchanges. Centralized exchanges use order-book trading technology where bots are set which are willing to buy and sell the token a trader wants to trade.
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Security: There are very few cryptocurrency scams on CEX. CEX is a residual exchange, which means that the exchange owns the user's private key, making security extremely tight. In DEX, a user may lose access to his or her private key or seed phrase and thus be unable to access his or her cryptocurrency wallet. A hacker can also gain access to the location where a user saves his or her private key and steal the user's assets. Scammers create and persuade people to buy fraudulent and fake cryptocurrencies, and people end up getting "rug-pulled." The phrase "pulling the rug out" inspired the name, a developer attracts investors to a new cryptocurrency project and holds a majority of the cryptocurrency tokens. After getting enough investors, the developer withdraws the liquidity of the project. The investors are then left with worthless crypto with no value.
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Custody: In a Centralized exchange, the exchange has custody of the user’s private key and has control over the user's assets. A user has to agree with the terms and conditions of the exchange before using the CEX. A CEX has the right to freeze a user’s assets if it’s termed fraudulent. CEX watches out for cryptocurrency laundering, and once an account is flagged, it’s frozen until the user provides proof of funds and the reason for the transaction. CEX function as our traditional bank in this regard.
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Regulations: Centralized exchanges are regulated and licensed by the government in other to be accepted in a country. There are several countries that don’t accept centralized exchanges because their terms of use, policies, and services don’t abide by the constitution of the country.
Limitations of Centralized Finance (CeFi)
CeFi operates under a centralized authority that oversees our exchange services within CEX platforms. These systems are generally considered to be less risky than DeFi, as they are backed by insurance, and adhere to well-established policies and regulatory safeguards to protect user account privacy and integrity.
In the context of banking services and centralized financial systems, users do not need technical expertise to access their bank accounts or utilize centralized money transfer applications such as Western Union, Skrill, or Neteller. Customer support is provided directly by these centralized platforms; in contrast, DeFi platforms typically do not offer such services. However, centralized financial and banking systems do have certain limitations.
Transaction fees tend to be higher in CeFi due to the involvement of multiple financial intermediaries. This is one of the key reasons why many individuals worldwide are increasingly adopting decentralized platforms. Additionally, most CeFi providers may temporarily suspend accounts in cases of policy violations. Nonetheless, platforms like CoinCatch enable users to deposit and withdraw cryptocurrencies such as USDT, BTC, and others at any time, while also allowing cross-chain trading with very low fees.
Challenges Facing Both Systems: CeFi and DeFi
The CeFi and DeFi regulatory environment remains in evolutionary stages globally, posing a big challenge for the sustainable development of both systems. The CeFi platforms already face current regulatory oversight as far as safeguarding investors and preventing financial crime are concerned, but they may struggle to embrace the rapid innovation in the digital asset sector. DeFi, however, is confronted with even tougher regulatory challenges due to its decentralized and cross-border nature, and whether there should be an argument on how to apply existing legislation or create new legislation applicable to this new-generation financial model. Balancing the support of innovation and safeguarding investors will be important in determining the future path for both CeFi and DeFi.
Summary
In summary, Centralized Finance (CeFi) has both advantages and disadvantages. CeFi platforms are responsible for safeguarding users' assets within the exchange. While there have been rare instances of security breaches and asset thefts through hacks of centralized exchanges, such cases are uncommon. Users who opt for non-custodial wallets should be aware of the risk of losing access if private keys are compromised or lost. Additionally, hackers may gain access to assets by targeting the storage locations of private keys. Many functions traditionally performed manually within CeFi can now be automated through smart contracts, including peer-to-peer trading, buying and selling assets, staking coins, and earning additional tokens through strategies like yield farming. Trading on CeFi platforms tends to be more seamless compared to DeFi, and transaction fees are generally lower in CeFi. Interoperability is a key feature of CeFi, as centralized exchanges facilitate cross-chain trading—an option typically not available in DeFi platforms.
CoinCatch Team
Disclaimer:
Digital asset prices carry high market risk and price volatility. You should carefully consider your investment experience, financial situation, investment objectives, and risk tolerance. CoinCatch is not responsible for any losses that may occur. This article should not be considered financial advice.
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