To be honest, the term CeDeFi (Centralized Decentralized Finance) sounds oxymoronic and too confusing. So what does this term actually mean and why are we calling this CeDeFi? Well, in order to understand that, we first need to take a step back and look at the current state of things in the world of blockchain technology and decentralized finance (DeFi).
The Rise of CeDeFi
Well, the story of CeDeFi can be single-handedly attributed to the Binance crypto exchange. In April 2018, one of the biggest crypto exchanges Binance decided to create a separate blockchain network – Binance Chain. The aim of the Binance Chain was to create a high-speed blockchain that can support large transaction throughput while competing with other blockchain networks such as Ethereum.
Important Read: What is DeFi?
However, the Binance Chain blockchain lacked smart contract support and allowing developers to build applications on top of its blockchain network. Whereas, the Ethereum network, on the other hand, supported smart contracts, thus witnessed a surge of applications beings built on its network and subsequently the rise of DeFi.
Therefore, Binance decided to create another blockchain network that supports smart contracts and can compete with the Ethereum blockchain network. That leads back to the blockchain scalability issues and the famous blockchain scalability trilemma.
Further Read: Introduction to Blockchain Scaling Solutions
As we discussed in our introduction to blockchain scalability solutions, the scalability trilemma suggests that it’s practically impossible to create a blockchain network without compromising on any of these three properties – security, decentralization, and scalability.
Binance Smart Chain
Binance, in this case, rather than adding smart contract ability on its blockchain network and sacrificing the transaction throughput, decided to compromise on the decentralization of the blockchain to achieve scalability. There comes the Binance Smart Chain – a fully programmable blockchain while supporting smart contracts.
However, it’s a well-known fact that building a blockchain network from the scratch with smart contract capabilities takes years. Additionally, it takes a lot of effort to attract developers and users to new blockchain networks with different protocols and programming languages. Therefore, Binance decided to play smart. It forked the current Ethereum network while optimizing it for low fees and higher transaction throughput. At the same time, Binance Smart Chain compromised on decentralization and censor-resistant properties.
Furthermore, Binance Smart Chain also decided to opt for a different consensus mechanism. Rather than opting for Ethereum’s Proof of Work (PoW) consensus mechanism, Binance opted for a Proof of Stake Authority (PoS-A) model. Binance Smart Chain also tweaked some other properties such as block time and gas limit per block (transaction fees). And the rest is history.
Even though from an ideological point of view, the Binance Smart Chain compromises on the main ethos of blockchain – decentralization. Therefore, it has been the center of criticism from the promoters of decentralization.
But the network has witnessed an exponential boom right from its birth in September 2020. The Binance Smart Chain quickly started attracting a lot of users and capital through the rise of CeDeFi. The BSC (Binance Smart Chain) ecosystem has become a huge network within no time with its own exchanges, stablecoins, derivatives, cross-chain protocols, NFTs, insurance, lending protocols, yield farming, oracles, wallet, games, community, tooling, and many more.
Coming back to its name, well, it all started with traditional finance (TradFi). Then with the rise of blockchain tech, we stumbled upon decentralized finance (DeFi). Taking another step in this direction, Binance took the DeFi and built a scalable solution but compromising on decentralization, therefore the name – centralized decentralized finance (CeDeFi). It will be interesting to see whether the CeDeFi ecosystem will overtake the DeFi ecosystem in the coming years. Only time will tell.