Average investors involved with digital assets at the individual and institutional levels have found themselves in a Goldilocks situation. Decentralized finance (DeFi) isn't predictable enough due to its unwieldy, unregulated structure and reliance on often-volatile cryptocurrencies. Centralized finance (CeFi) is too stagnant given the rising fiat inflation and rudimentary options for growing wealth from controlled exchanges.
To be fair, both CeFi and DeFi come with their own virtues. But neither is completely copacetic to the needs of investors despite their advantages. So is there a "just-right" path to take with their assets? A phenomenon called centralized decentralized finance, or CeDeFi, could provide the answer to investors skeptical about taking the plunge into a new financial realm.
CeDeFi is not necessarily about creating a facsimile of traditional banking with some extra technological strings attached. While this might be impressive to a novice investor, institutions with more robust resources and expertise will see right through it and abandon these projects without a second thought. By combining decentralized and centralized finance principles, developers and projects can create products or services that compound the best of what these spaces have to offer.
What counts as CeDeFi?
Simply put, CeDeFi encompasses any way of modernizing conventional financial management through decentralized means. Blockchain technology certainly holds an appeal for financial institutions given its flexibility and the communities available to tap into.
But for many such institutions, blockchain represents a risk that may be too big to justify adopting in a meaningful capacity. For the projects strictly operating in the CeFi realm, the Celsius breakdown and its subsequent revelations only added more fuel to the aversion of traditional finance (TradFi) to crypto.
Progress on the CeDeFi track has been more touch-and-go, but projects that would fall under its defined umbrella have made developmental strides. A big leap forward in CeDeFi functionality came with the launch of the Binance Smart Chain. Rebranded later as the BNB Chain, this launch embodied an unforeseen expansion from Binance in embracing large-scale blockchain applications and multi-chain scaling. BNB Chain sought to build a parallel blockchain economy by adopting centralized fund principles, emphasizing project-building and on-chain governance mechanisms.
Blockchain regulation contributes to building a landscape resembling CeDeFi. Many blockchain-related regulatory bodies and laws place necessary stopgaps on the "Wild West" of crypto and DeFi that borrow from traditional, centralized financial frameworks. Though this may seem like heresy to crypto purists, these regulations are a necessary step to make a decentralized banking reality actually viable.
CeDeFi principles offer a middle ground between the enthusiasm of blockchain adopters and the cautious nature of financial institutions. This technology has the potential to bridge the gap in the very sought-after institutional adoption market. But like any good mediator, CeDeFi solutions must consider what each side of the finance world looks to gain from the other.
Expanding the possibilities of both worlds
Developing the functionality and feasibility of CeDeFi requires striking a balance in which facets of DeFi and CeFi can be utilized. Building services or products that properly combine these financial worlds relies on extracting their respective best qualities that complement each other in implementation and scale.
For instance, DeFi brings a lot of advantages in organizing financial infrastructures due to its core operational tenets. Transactional transparency, as well as a lack of intermediaries and administrative costs for offices and staff, are all key pillars of how DeFi projects operate. DeFi additionally unlocks new investment scenarios such as providing liquidity and asset diversification. But DeFi is still filled with volatile assets that are quite volatile and not perceived to be as reliable as traditional investment avenues by institutions.
Asset tokenization, specifically for physical assets, unlocks the best opportunity to broaden the scope of CeDeFi projects. Tokenizing assets like precious commodities or traditional corporate ownership like stocks can alter how investors create strategies and allocate funds. The greatest potential here is to use DeFi infrastructure along with quality assets that might be acceptable to institutional players.
Making these traditionally centralized assets available through the blockchain helps level the playing field of who can feasibly invest in these commodities. Crypto and blockchain are able to lift the typically high entry barriers of investing in sought-after physical assets. By breaking down ownership of commodities that are otherwise only available for accredited investors, retail investors would be able to diversify their holdings into stable assets.
DeFi already bears a reputation for having a steep learning curve and represents a niche even to crypto enthusiasts, let alone retail investors. Though DeFi protocols and strategies benefit from being flexible and customizable in their applications, traditional investment tools can add levity to attract a more traditional investor to consider it.
But bringing DeFi and CeFi together doesn't mesh well in every circumstance, there must be a coherent connective tissue between the two spaces. For instance, it doesn't make sense to try and bring centralized financial management strategies to a decentralized autonomous organization (DAO). In cases where the rules of how traditional or centralized institutions operate are completely upended, trying to rein in these platforms through half-hearted bridges or developments will end in disappointing results.
Appealing to crypto enthusiasts and finance traditionalists is a fine tightrope to walk, but combining the best facets of these financial systems can foster innovation and wider adoption. As more individuals and institutions look at options to effectively build wealth, CeDeFi provides an answer to those seeking innovative solutions to DeFi and CeFi limitations.