Blog

DeFi vs CeFi

image

What is DeFi?

DeFi (or “decentralized finance”) is a system that allows the financial sector to exist without intermediaries and all people to use it the most efficient way. It is the thing that removes anyone in the middle when parties make financial transactions. 

Earlier, you went to a bank or a brokerage to settle your deals and other business issues, but several years ago, everything changed forever — there occurred an innovative way to manage your money and business. Various technologies and protocols are there to make DeFi possible to run — smart contracts that automate agreement terms between parties, crypto networks focused on peer-to-peer (P2P) transactions and dApps. 

Interestingly, the term DeFi appeared for the first time in an August 2018 Telegram chat between Ethereum developers and entrepreneurs trying to find out the best name for the movement of open financial applications built on Ethereum. 

What’s the aim? To step into the future, simplify financial services, and transform the habitual way of economics, creating a decent alternative to Centralized Finance. It’s something exceptional and beautiful, not only complicated and hard to understand.  

Some prominent examples of DeFi are Aave, PancakeSwap, Fantom, Colony Lab

 

What is CeFi?

CeFi (or “centralized finance”) — that was at the very beginning of cryptocurrency operations, all of them went through a central exchange, so a user didn’t have a private key and didn’t have access to his/her wallet. The exchange dictated how much fee you must pay to work with their exchange platform. So a user was tied to the intermediary and its rules and authority. The funds were managed by the individuals in charge of the exchange. 

 What’s the aim? It was the same as DeFi has, but it was the first step into replacing our traditional financial system TradFi. It was created to level up our usual, habitual viewpoint of dealing with money. 

Here are some: YouHodler, Celsius Network, Gemini, and Hodlnuat, Binance

Advantages of DeFi

 

Non-custodial nature

That means that users keep full custody of their holdings. Nobody but you manage your assets, and nobody is in the middle. It gives you high anonymity and security levels, you don’t pay withdrawal fees, it aggregates liquidity. It gives you a wider range of coins thanks to the collaboration with numerous exchanges. 

 

Openness

DeFi gives access to every single person. There are no middlemen, which means — a user disobeys industries, companies, banks, and their laws. DeFi system removes a long, annoying authenticate process. Making a transaction becomes quick and straight.

 

Transparency

DeFi is an open-source blockchain providing easy access, so anyone can see the details of the transactions. The aim is that the transactions are fraud-free and can be easily verified or checked in case of an argument. But there is no need to be afraid of such transparency, as a blockchain is private, transparent, and secure at the same time. 

 

Decentralized transactions 

That’s maybe the main point of the whole system because its users don’t have to sign up once they use DEX platforms for dealing with their business, but you only need to have a crypto wallet and an internet connection. 

 

Tokenization

As there are smart contracts and dApp technology existing on DeFi platforms,  it empowers users to tokenize anything they want — starting with commodities and ending with artworks. There are fungible and non-fungible tokens out there. The first option means they are interchangeable and divisible. The second one stands for being non-interchangeable and non-divisible.

 

Disadvantages of DeFi

 

Centralized data feed

Blockchains don’t have an opportunity to access information beyond the chain. That’s why there may appear a necessity for a third party to supply real-world data to the blockchain, which makes data centralized to issues related to centralization.

 

Shared responsibility

The DeFi projects are not responsible for your mistakes. Their main aim is to remove any third parties, and it is the users who are completely in charge of their holdings. Above all, DeFi space is still young and has a lack of tools preventing possibilities of human mistakes and errors.

 

Advantages of CeFi 

 

Centralized exchanges (CEX)

The biggest plus of CEX is that there is an opportunity for margin trading, exchange staking, lending, borrowing, and other trading programs once you need them. The platforms are highly liquid, and that’s why trading volumes are so massive, which is quite attractive for newbies who have an opportunity to sell them.

 

Cross Chain Services

CeFi services support the trading of coins issued on independent blockchain platforms. Some of them are LTC, XRP, BTC, etc.,. DeFi services do not support these tokens because of the complexity of performing cross-chain swaps. CeFi gets custody of funds from multiple chains; that’s why it can overcome that issue. It is one of the most notable benefits for CeFi as many of the traded and highest-market-cap coins exist on independent blockchains.

 

Easier to convert from fiat to crypto

The system is more flexible, thus it’s easier to operate when a user wants to convert their funds from fiat to crypto and a way around. Centralized authority is still necessary when we are talking about traditional money. 

 

Disadvantages of CeFi

 

No anonymity 

Compared to DeFi, there is not that high level of anonymity while using CeFi platforms. Users have to trust people governing a platform to manage and ensure that a crypto platform works as it should. It is about engaging with other people, not with technology like in DeFi's case. 

 

Hacks and other attacks

As we are talking about online virtual space, it could be a tasty deal for hacker and decrime issues. The main reasons for attacks could be coding mistakes, developer ignorance, and misapplying with third-party protocols. CeFi platforms contain personal data, which obviously makes it delectable for hackers.

 

Lack of ​​transparency

The nature of CeFi systems implies a lack of transparency. Platforms in the DeFi space are empowered by technologies, for instance, smart contracts, which provide a higher level of transparency. 

 

Custodian

CeFi platforms ask users to keep their funds on the platforms providing financial services.

 

DeFi keywords

  • dApp — short for decentralized applications that run on a smart contract network. 
  • Public key — a cryptographic code used to enable transactions between parties, they allow a user to receive cryptocurrencies in his/her account. 
  • Private key — it is usually a long randomly generated sequence of symbols that is almost impossible to guess, it encrypts and decrypts data. It’s your access to the blockchain address. 
  • Smart contracts — programs stored on a blockchain platform that works when prearranged conditions and terms are met. 
  • DEX — short for decentralized exchange that works as a peer-to-peer exchange network based on the DeFi platform. 
  • Gas fees are a name for Ethereum network fees charged for a transaction. 

 

Final thoughts

 

Both Decentralized and Centralized Finance want the same, so they don’t compete if we talk about their nature's core. They made it possible for people to have their business online without dealing with real-life banks, brokerages, and dull offices. They brought us to a new level of perception of how things could work in the future. 

As it usually happens DeFi and CeFi got their points. Both systems allocate equal price values for specific assets. However, DeFi presents a great advantage over CeFi in many crucial aspects.

It feels like DeFi is an evident and promising alternative to CeFi with the facility of better control over managing financial issues, and it can be that it leads us to a cashless society without anybody to interfere. Thanks to the DeFi system, the general public has almost limitless access to financial services and can make all the operations themselves. 

Mainly, it depends on the holder and their needs. If you value transparency and privacy, DeFi is a perfect choice. Once sharing risks, flexibility, and diverse options to invest are the most crucial features, then CeFi could be the option you’re seeking. 

Related Articles