Centralized Finance

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Centralized Finance Overview

What do we mean by Centralized Finance?

Centralized exchanges are digital marketplaces where cryptocurrency trading takes place. These exchanges offer beginner investors a familiar, friendly way of trading and investing in cryptocurrencies.

Centralized Finance, often abbreviated as CeFi, refers to traditional financial systems and services where transactions are facilitated and governed by central institutions, like banks or centralized exchanges.

Unlike decentralized finance (DeFi) which operates on decentralized networks or blockchain technology, CeFi systems rely on intermediaries to execute and manage transactions. A notable example within the cryptocurrency domain is centralized exchanges, which act as gatekeepers for buying, selling, and trading digital assets, as opposed to decentralized exchanges which operate without a central authority.

With the rise of Web3, VCs (venture capitalists) are increasingly investing in centralized platforms and services that bridge the gap between the traditional financial world and the emerging decentralized ecosystem.

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Frequently asked questions

Centralized exchanges are typically considered better for new investors who may not understand the complexities of decentralized finance and decentralized exchanges such as Uniswap. They have easy UI, support chat functionality, and can be linked to your bank. But it doesn't mean they are better and using centralized exchanges comes with its own set of trade off (not your keys, not your coins as they say!).

Centralized exchanges like Binance, Coinbase or Kraken have several disadvantages, including:

  • Lack of control over crypto wallet keys: Users have no control over their crypto wallet keys, which means they lack direct access to their assets. This can lead to significant losses, for example, in the event an exchange is hacked.
  • Higher risk of hacks: Centralized exchanges are more vulnerable to hacks than decentralized exchanges, as they are a single point of failure. If a centralized exchange is hacked, users' funds can be lost or stolen.
  • Longer approval times for new cryptocurrencies: Centralized exchanges often take time to approve new cryptocurrencies for trading, which can be frustrating for users.
  • Centralized control: Centralized exchanges are controlled by a single entity, which means that users are subject to the rules and regulations of that entity. This can limit users' freedom and flexibility.