In a world where trust and transparency in centralised finance (CeFi) are increasingly questioned, and the fear of complexity and scams in decentralised finance (DeFi) looms, many are left searching for a sustainable investment option.
The question arises: how can projects ensure their tokens are more resistant to market volatility?
CeDeFi, a hybrid model combining elements of CeFi and DeFi, might hold the answer.
In this article, we explore the potential of CeDeFi as an alternative to traditional financial systems and analyse its implications for businesses, technology, and leadership experts.
What is CeDeFi?
As the name suggests, CeDeFi is a hybrid model combining centralised and decentralised finance, which has emerged as an option to traditional alternatives.
It’s an accumulated financial system combining the CeFi and DeFi models so platforms can provide investors with complete transparency and control and drive easy accessibility.
CeDeFi offers investors access to DeFi products, such as decentralised exchanges (DEXs), yield farming tools, liquidity aggregators, and lending protocols. It borrows elements from both worlds, offering an innovative approach to financial services.
At the same time, users and their investments are governed by a single or small group of entities similar to CeFi. A permissionless DeFi environment upholds transparency but doesn’t guarantee security.
CeDeFi can effectively solve this problem and introduce benefits like faster transactions, lower fees, and improved security.
The centralised finance element
At the heart of CeDeFi lies centralised finance (CeFi), a system built on trusted intermediaries such as banks and financial institutions. CeFi offers a robust regulatory framework and customer protection but can be slow and expensive.
In December 2022, the centralised banking industry, which includes fintech, managed around US$370 trillion in international assets. This vast sum underscores the continued dominance of traditional financial institutions in the global economy.
The decentralised finance element
On the other hand, decentralised finance (DeFi) operates on blockchain technology, removing the need for middlemen. DeFi offers enhanced accessibility, transparency, and autonomy, but it can be complex and lacks regulation.
As of March 2023, the total value locked (TVL) in DeFi is over $50 billion. This figure highlights the growing popularity of decentralised finance and its increasing influence on financial markets.
How can CeDeFi help make tokens more resistant?
CeDeFi combines the best of both worlds to provide a financial system that balances efficiency, security, and transparency. It addresses the shortcomings of traditional finance while leveraging the strengths of decentralisation.
Complete transparency of user funds
Ensuring token residency depends on transparency. Take the recent FTX collapse for an example. If users had a transparent view of how their funds were being managed, such a catastrophic situation could have been avoided. Unfortunately, centralised platforms don’t offer this transparency.
This is where CeDeFi can make a notable change. Platforms leveraging CeDeFi, such as Midas Investments, use the ‘Glass Box’ approach to ensure transparency. It’s a strategy based on the concept that each deposit box has a glass frontage. So, anyone can view the box’s contents but not access it. Users can check the blockchain address to see how their funds are stored and managed in real-time, thus ensuring complete transparency.
Advanced on-chain security to track market anomalies
This innovative model also establishes a robust security infrastructure. CeDeFi Projects like Midas support investment strategies through an automated monitoring and alert system active 24/7. So, the platform and its native token are always ahead of market volatility and liquidation risks.
More specifically, such projects use on-chain alert systems. This allows the platforms to close any DeFi investment positions immediately if they see any market anomaly. This on-chain alert system is integrated with every DeFi protocol on the platform and can monitor several key market metrics and parameters in real time. As soon as any market abnormality is detected, client funds are pulled out.
The much-needed perspective due diligence
CeDeFi platforms also perform in-depth due diligence on each associated protocol to ensure that potential scams and rug pulls are avoided. This includes assessing the development team’s background, evaluating their code, assessing their financial and network data, and analysing their roadmaps. The protocols are blocked and removed from the platform if these assessments reflect significant risks.
These comprehensive strategies in transparency, on-chain security, market analysis, and due diligence help CeDeFi projects protect their user funds from any market abnormalities, extreme volatility, or security issues.
The possible downsides of CeDeFi
Despite the potential advantages, CeDeFi faces several challenges, including regulatory hurdles, adoption barriers, and technological limitations.
Even though such platforms allow users access to several critical decentralised features, their core model still requires them to give up custody of their assets.
Moreover, the concept is still in its early stages, and therefore, there is a high learning curve associated with its protocol. With more intuitive and user-friendly projects emerging, this problem will be resolved over time.
Also, the CeDeFi model heavily relies on Ethereum, as most protocols are built on this blockchain. So, if Ethereum fails, CeDeFi projects will likely follow. However, as other blockchains increasingly adopt this model, this risk might soon be diversified.
Lastly, it’s essential to acknowledge that CeDeFi is not immune to scams. Due to the lack of regulations in this space, fraudulent projects based on this model will likely continue to arrive. Therefore, it is the user’s responsibility to be vigilant and only use regulated CeDeFi protocols that are well-known and well-established.
Key takeaways of CeDeFi
CeDeFi is a hybrid model that combines centralised and decentralised finance systems.
It aims to offer a more efficient, transparent, and secure financial system.
The CeDeFi model faces challenges but also provides opportunities for innovation and growth.
Summing up the above, CeDeFi might not be a panacea but a good balance of pros and cons. Despite its potential downsides, this innovative unified model holds the potential to solve some of the biggest problems of crypto and blockchain, and such projects can bring much-needed stability and resistance in the crypto space.
The bottom line
As the world of finance continues to evolve, CeDeFi offers a promising alternative to traditional systems.
Although it is not without its challenges, the CeDeFi model has the potential to reshape the financial landscape, providing a more efficient and inclusive solution for the future.
About the Author: Iakov Levin is the Founder & CEO of Midas Investments.