Launching a New CeDeFi Investment Product: Key Aspects, Metrics, and Security Risks

You have likely heard about decentralized finance (DeFi), a $60 billion sector that offers open access to financial services like lending, borrowing, staking, and yield farming through smart contract-powered, community-governed, and non-custodial protocols.

In contrast, centralized finance (CeFi) platforms are company-controlled, custodial solutions that lack the transparency of DeFi protocols and are subject to regulatory compliance. At the same time, these solutions are more user-friendly and feature-rich, as well as facilitate inexpensive (or even free) off-chain transactions.

Interestingly, there is a new trend in the crypto market called CeDeFi (centralized-decentralized finance) that aims to combine the best features and attributes of CeFi and DeFi by acting as a bridge between the two markets.

On the one hand, CeDeFi ecosystems are centralized, regulatory-compliant, and custodial solutions. However, they leverage this architecture to retain all the benefits of the CeFi model while offering more user-friendly and cost-efficient access to DeFi products like decentralized exchanges (DEXs), liquidity aggregators, yield farming pools, and lending protocols.

As the basic building block, modern CeDeFi projects use DeFi protocols, smart contracts, and their own algorithms to achieve increased transparency and make viable risk projections. A CeFi layer goes on top of this foundation to keep the traditional model of decentralized finance activities (e.g., lending, borrowing) intact.

But how can new projects launch their CeDeFi investment products, and what should they consider to achieve their goals? Let's take a look from the perspective of someone who has already built one.

Getting Started With CeDeFi

The hardest part of launching a new product is determining where to start.

In my experience, the first thing we should do at this point is to define the potential needs of our users. What do they want to see in an investment portfolio, and what kind of exposure and benefits do they want to get?

If you get these questions answered, the second step is research. For a new CeDeFi product, you should focus on exploring the DeFi protocols for this strategy and how you can execute it most efficiently.  Regarding the latter, in the ideal scenario, you will be able to maintain direct exposure to the platform and its assets and simultaneously collect token rewards (if possible) or commissions in the case of liquidity pools. Next, we look at what kind of allocation we can get there. While you should analyze all the essential metrics of the protocol, like its TVL (Total Value Locked) and token liquidity, don't forget to do your due diligence on the DeFi platform and its team.

Now that you are finished with putting the components of the new CeDeFi product together, it's time to build an investment thesis showcasing what a user gets and how he potentially benefits when he utilizes this financial solution. Simultaneously, it's a good idea to think up ways to help him with hedging and optimize his position to achieve better results.

Finally, we execute the strategy and monitor the current threshold we have set for each DeFi protocol, as well as the allocation for individual positions.

Security Challenges and How to Tackle Them

Fortunately, CeDeFi solutions do not face the fundamental safety issues of CeFi platforms, as the prior simply provide an interface on top of DeFi protocols. For this very reason, their primary security challenges lie within the decentralized finance component.

As CeDeFi projects empower users with the ability to invest in DeFi protocols, service providers have to ensure that the decentralized finance platforms they integrate with are always active and liquid. To achieve this goal, CeDeFi solutions develop their own on-chain alert systems. Compatible with every DeFi protocol inside their ecosystems, this tool helps them monitor key metrics and respond immediately to crucial events on decentralized platforms.

Since CeDeFi platforms offer investments for their customers across DeFi protocols, they must do their own diligence to ensure their safety. This includes manually analyzing the critical metrics of decentralized finance projects' ecosystems, their teams, code, and audits, as well as whether and how they resolved auditors' comments, among many other aspects.

Battle-testing CeDeFi: Are These Solutions Popular?

The CeDeFi sector is still very young, with much room for growth, which means that we have yet to see a project within this space that has achieved widespread adoption among crypto users. I can serve with a case study featuring Midas.Investments.

Founded in 2018, Midasis a custodial CeDeFi crypto-investment platform that attracted over 80 000 users worldwide and more than $250M in Assets Under Management over the last 4 years. Launching new CeDeFi investment strategies “Soft Long”, “Soft Short”, and “DeFi Token Farming” just a month ago, showing great user interest:

• About $4 million TVL in CeDeFi strategies
• More than 1,500 active users of CeDeFi solutions

Interestingly, despite the current bear market, only one of Midas' three CeDeFi strategies is unprofitable, with the best performing product featuring nearly 65% YTD ROI. These metrics are far better than what the average DeFi or CeFi platform offers. Yet, users are still treading very carefully with CeDeFi, especially if we consider Midas' TVL and active users. However, I expect this to change soon as the sector grows and the release of new CeDeFi strategies.

Joining Crypto's Next Big Sector

CeDeFi bridges decentralized and centralized finance to combine their best features. As a result, the sector has excellent potential, providing tremendous value for users seeking to gain exposure to investment strategies that offer optimized yields via hand-picked DeFi products and a user-friendly interface.

To join the space and build a new CeDeFi product, projects need to know where to get started, the key metrics and components to look at, as well as consider the sector's security challenges and potential solutions.

However, Midas's example illustrates that CeDeFi still has much room to grow. While this may stop some from getting involved, others can leverage this opportunity to join the sector and gain an advantage over those who enter the market later.

In the end, as it solves an important pain point in the crypto market, CeDeFi has the potential to become a similarly successful industry sector as CeFi or DeFi in the future.