CeFi is making the DeFi jump. Will it work?

The centralized finance sector received less than 7% of crypto venture funds every month from July to October. This is a far cry from 2021, where it would receive greater than half of all venture capital, according to data compiled by FalconX.

As their share of venture funds stagnates, centralized exchanges are increasingly adopting features common to decentralized finance (DeFi). Industry watchers were split on whether CeFi’s pivot to DeFi stemmed from a need for liquidity or from real interest in DeFi technology.

David Lawant, head of research at crypto prime brokerage FalconX, said the firm’s data appears to show a decline over time in CeFi fundraising relative to DeFi. He noted however that the funding slide could be a result of CeFi firms having acquired sufficient runway from venture rounds in 2021 and 2022.

But CeFi’s funding lull also comes alongside revenue disappointment.

On centralized exchanges specifically, trading has compressed greatly since 2021. The share of trading happening on decentralized exchanges has increased relative to centralized offerings over time. Riyad Carey, analyst at crypto research firm Kaiko, said he grasped the gravity of the CeFi decline when looking at minute by minute volumes for bitcoin.

“It was pretty striking how fewer exchanges now have significant volumes when fees on volume are supposed to be an exchange’s main source of revenue,” Carey said.

As trading fees become less lucrative, centralized platforms are racing to build the “all-in-one crypto app,” Carey said, citing Coinbase as a prominent example. Coinbase debuted its Base layer-2 over the summer and launched an on-chain verification platform last week.

OKX and Kraken are following Coinbase in developing Ethereum layer-2s while Binance released a custodial wallet, signaling a burgeoning trend among centralized exchanges, Blockworks previously reported.

Carey said the DeFi ventures stem largely from a search for liquidity on the part of CeFi platforms, but industry participants Blockworks spoke to had varying takes on the reasons behind the pivot.

Brian Rudick, senior strategist at crypto financial service firm GSR, said one cause for CeFi’s interest in DeFi products could be a desire on the part of centralized firms to “introduce more hooks” and cross-selling. He noted that users of a centralized exchange’s layer-2 might also make use of its wallet offering, for example.

For Banafsheh Fathieh, co-founder of crypto venture fund Lightspeed Faction, CeFi helped establish crypto as an asset class, while DeFi centers on crypto’s place as a technological trend.

“The core of the innovation in my view is probably going to continue to be on the DeFi side, so it’s not surprising I think that a lot of the CeFi players are increasingly looking to do more sort of on-chain,” Fathieh said.

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