Centralised finance platforms, in CeFi jargon, are financial and regulated companies that enable the lending and borrowing of digital assets.
CeFi: what is it?
CeFi stands for Centralized Finance. When we use this term when talking about cryptocurrencies, we are usually talking about financial institutions that operate in the world of digital assets and allow credit and debt through them.
These platforms are called lending and borrowing platforms and in them our position will vary between lender and borrower depending on what motivation we use them for.
The company pays anyone who wants to deposit on its platform an annual interest according to the type of asset we are talking about, and lends this liquidity to anyone who wants to obtain a loan. Clearly, the platform's profit will depend on the difference between what is asked of the borrower and what is given to the lender.
It should be remembered that these platforms use a system of collateral-based debt, which means that in order to obtain a loan and become a borrower, it is important to deposit credit before being able to proceed with the debt. This is because the collateral, i.e. the value that guarantees our debt, is often given by the cryptocurrencies that we deposit in the platform.
How a CeFi platform works
Let's now take a closer look at how this type of platform works and, above all, how we users can act within it.
To give you a clear example: John can deposit within one of these CeFi platforms 1 BTC worth $40000, earning an interest of 4% per year.
So John at the end of next year, if the price of Bitcoin has remained unchanged, will have earned: ($40000/100)*4= $1600.
In this first example, John uses CeFi's platform as a creditor, i.e. the one who injects liquidity into the platform and receives in return a passive income, an annual interest.
At this point, John can decide whether to open a collateralised debt with the platform. This would allow him to get a loan, but would stop guaranteeing him 4% per year on his Bitcoin.
However, if you would like to continue holding your Bitcoin and, in the meantime, have spendable money (e.g. stablecoin, FIAT currencies), you could use the platform's "Loan" to borrow 1.5:1 of the face value of what you deposited: 40000:x = 1.5:1 -> x= $4000/1.5 -> $26,666
John will then be a debtor to the platform and, in order to redeem the Bitcoin he used as collateral, he will have to compensate the platform for the debt issued plus the interest the platform will charge for offering this service.
In this way he will have continued to 'hold' his Bitcoin, even while he needed to hold a liquid sum.
The reason why these platforms offer a credit/debit ratio of 1.5:1 is that the value of the collateral underpinning the loan could change. In fact, if the price of Bitcoin during the loan period had dropped from
$40k to $26666 the platform would have sold the BTC automatically, liquidating John's debt, so that he could get back the value of the debt.
It will be up to you to figure out when and how much to expose yourself, whether to add more capital or reduce the debt through its rehabilitation.
How to use a CeFi platform
To use a CeFi platform, all we need to do is access the official website of one of the platforms offering this service and create an account.
Once this is done, we need to send to the address provided by the cryptocurrency platform. We can do this by passing through the network, or by sending cryptocurrencies through a classic bank transfer.
Doing this operation will cost you nothing except the passage through the network or your bank.
The best CeFi platforms currently number less than a dozen: BlockFi, Nexo, LEDN and Celsius are some examples.
All CeFi platforms implement : Know Your Customer. When registering an account, it is necessary to show your documents as well, so that we can confirm the identity we are declaring.
It is therefore important to have your identity card or driving licence with you when creating your account. If you use reliable platforms, you need have no fear.
Conclusion
This is a short article you need if you have never heard of CeFi. With this base of knowledge, you just have to go and discover the world of CeFi.
Obviously, the fact that they are centralised platforms does not make us immune to risk, nor does it relieve us of our usual responsibilities as crypto investors. I therefore recommend that you use different passwords for each platform and, where possible, add two-factor authentication.
I hope I have helped you to broaden your knowledge and thank you for your time.
As always, thank you for reading! Greetings
