The Security of CeDeFi Projects: Specifics, Challenges, and Solutions

Despite the ongoing bear market, the crypto industry has shown incredible resilience. This is best highlighted by the fact that even though the sector as a whole is just a decade old, the total capitalization of Bitcoin alone is more than that of mainstream giants such as Exxon, Walmart, Nvidia, and JP Morgan Chase, among several others.

This meteoric rise can, in large part, be attributed to the growth of domains such as decentralized finance (DeFi), whose total value locked (TVL) rose from a meager $600M to a staggering $170B between Q1 2020 and Q4 2021. In recent months, several concerns related to the ecosystem’s security have emerged, exacerbated by the collapse of major platforms such as Celcius, Vauld, and Babel Finance.

As a result, the credibility of the centralized finance (CeFi) sector has taken a huge hit. Many investors are questioning the risk control mechanisms associated with these projects. During all of this madness, DeFi protocols haven't remained unscathed either. A few big-name projects, including Terra Luna — estimated to be worth $4B just a few months back in May —  collapsed overnight.

The merge of DeFi and CeFi

Due to the aforementioned unfavorable developments, the concept of CeDeFi has continued to garner an increasing amount of traction with investors globally. As the name implies, the technology combines CeFi and DeFi.Having brought the two worlds together, it allows for the creation of financial platforms that are superior to each component — all while featuring minimal risks.

By adopting the transparency of DeFi, these offerings allow their users to easily keep a close tab on how their assets are utilized at all times. The CeFi aspect helps users manage and understand the risks and rewards associated with their savings. Additionally, most CeFi projects today use flexible strategies and can deliver high-interest rates while maintaining complete transparency.

Thanks to their wide-ranging benefits, CeDeFi investment platforms have continued to attract a growing number of users and capital from retail/institutional clients. Therefore, their underlying security structures have continued to become of critical importance to the digital asset industry.

CeDeFi Security Explained

Certain operational and functional aspects give the CeDeFi ecosystem its security specifics. The main reason for that is that the projects operating within this space are not only capable of working with various blockchain networks — but can also be faced with potential custody-related issues.

To elaborate, the first security specific affecting the CeDeFi landscape is liquidity. Why? First and foremost, these projects need to be able to pull their client’s funds from any DeFi investment products if they suspect something is wrong with them. This is the primary threshold for developing these kinds of hybrid offerings.

To answer this challenge, projects use on-chain alert systems, allowing them to close any DeFi investment positions immediately if they see anything out of the ordinary happening. These on-chain alert systems work with every DeFi protocol and monitor various key metrics and market parameters in real-time. Should they detect any anomalies, they can immediately respond to the event and pull out their clients’ funds.

The second fundamental security specific worth mentioning is the due diligence of DeFi protocols and investment products. As the technology is still relatively nascent, there is always a chance that something can go wrong with the smart contracts of the platforms operating within this space. To this point, the best solution I see is conducting thorough due diligence of each protocol associated with them, checking the team’s background, examining their code and audit data while also analyzing what actions the dev team took about any issues identified during their assessments.

The future of finance lies within the realm of CeDeFi

Modern CeDeFi platforms are in their early stages of development and are, therefore, still identifying the opportunities that can arise by the blending of CeFi and DeFi. Not only that, most people are only just beginning to realize the risks associated with this space. Hence there is a growing forum of forward-looking investors/developers looking to tackle these security problems head-on.

Some security issues are already known, and some are yet to surface, but I believe the developers can use their experience to predict many of those and take necessary actions.**

Thus, as we continue to head into a future driven by decentralized technologies, it will be of great essence that technologists pay attention to the various security aspects of CeDeFi, especially by leveraging the power of on-chain alert modules, audits, and other available tools.