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The centralized finance (CeFi) and its associated risk

Prior to the introduction of DeFi, centralized finance was the standard for cryptocurrency trading. In centralized finance (CeFi), all cryptocurrency orders are handled through a centralized exchange. This means that you don't have the private key that gives you access to your wallet. Furthermore, the centralized platform decides the exchange pairs and how many commissions you have to pay to trade. However, by having custody of your funds, the CeFi company provides both security and (often) refunds for their users in the event of a hacker attack. Binance and Coinbase, to name a few of the most famous, go to great lengths to ensure users' funds are protected.

But what exactly do they do with our crypto? Let's see some examples together:

Cash and Carry Trade:

Some institutional figures can turn to CEFI platforms, using their funds for cash and carry trades, to be able to buy a specific crypto on spot and at the same time go short on a derivative of the same crypto (typically a future) to gain the spread between the two prices.

Exchange arbitrage:

They can use cryptocurrencies to take advantage of the price differences between exchanges.

Margin pool:

Exchanges can borrow their liquidity from these companies for their margin pools.

Collateralized loan:

Borrowing a crypto asset using another asset as collateral, for example asking USDC from BTC as collateral.

BTC Grayscale Arbitrage:

Grayscale is a regulated trust in the United States that holds Bitcoin, and gives exposure to bitcoin to investors who want to use traditional brokerage methods. Every 6 months they sell part of their funds in order to win the profits and distribute them to investors.

We should always be careful with these loan services. In the but not impossible case in which these platforms are remotely insolvent towards us, they have not put a single penny of their capital at risk, and after covering all their costs, they will surely make sure to reimburse the investors in some way, perhaps in full, perhaps partially. Let's remember the regulated markets and how many people never saw their money after a bank went bankrupt. Let us now think of the crypto market which is not regulated, it could very well happen the same, there is no type of protection from the authorities, at least for the moment.

But the beauty of crypto is also this, being free to choose and at the same time taking all the responsibilities of the case. Complete responsibility, of course, but also personal growth and awareness of the dangers.

Bitcoin and altcoin in an interest-free hardware wallet or a CEFI platform to accrue interest? The first option should not automatically exclude the other. Both can coexist. It is up to each of us to choose the right allocation percentages based on our risk profile.


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