Centralized Finance is a structured financial service that allows people to apply for loans or earn interest on their cryptocurrency by lending or borrowing it through a centralized exchange.
Drawbacks of CeFi include high transaction fees due to third-party involvement, lack of transparency and lack of complete control over your digital assets, which has resulted in the rise of Decentralized Finance (DeFi).
Compared with DeFi, CeFi dominates the cryptocurrency market as CeFi platforms are far more established.
However, CeFi platforms operate similarly to that of the traditional banking sector. When people lend or gain interest on their cryptocurrency, they use it as collateral. The CeFi platform is the so-called custodian of your digital assets - they ‘safeguard’ your cryptocurrency while it earns interest but this also means that you lose control over them. So, if there is a hack on the Centralized Exchange where your cryptocurrency is being stored, your assets are at risk.
Examples of CeFi exchanges are Binance, Coinbase, and Diem (formerly called Libra). These exchanges not only support crypto trading services but other services such as lending, borrowing, and margin trading as well.