Cryptocurrency has revolutionized the traditional financial services landscape, providing access to payment, lending, and borrowing options via blockchain technology. With the expansion of the cryptocurrency market, two distinct concepts have emerged, namely Centralized Finance (CeFi) and Decentralized Finance (DeFi). In this article, we will explore the pros and cons of both CeFi and DeFi and highlight the differences between the two.
Understanding Centralized Finance (CeFi)
CeFi refers to the traditional financial system where all crypto trade orders are processed through a central exchange. The central exchange is responsible for managing the funds, and users do not have access to their private keys. In other words, when you buy or sell cryptocurrencies through a centralized exchange, you do not own the assets. Additionally, the exchange controls which coins are listed for trading and the fees charged for using their platform.
Understanding Decentralized Finance (DeFi)
DeFi operates through automated applications built on blockchain platforms, and there is no central exchange involved in the transaction process. It aims to create a transparent and fair financial system where anyone can participate. DeFi offers a wide range of financial services, including borrowing, yield farming, asset storage, and crypto lending. Users have full control over their assets and own the key pair for their wallets. To access DeFi services, users need to use decentralized applications (dApps) built on blockchain platforms.
Differences Between DeFi and CeFi
DeFi and CeFi differ in various ways. One of the most significant differences is the level of control users have over their assets. In DeFi, users have complete control over their assets, while in CeFi, the central exchange controls the assets. Additionally, DeFi is transparent and operates on a permissionless ecosystem, while CeFi is centralized and operates on a permission system.
Another difference is the trust factor. In DeFi, users trust the technology to perform as expected, while in CeFi, users trust the central exchange and its people to manage funds and execute the business’s services.
Features of CeFi
1- Centralized Exchange (CEX)
One of the significant features of CeFi is the use of centralized exchanges (CEX). Binance, Kraken, and Coinbase are examples of traditional cryptocurrency exchanges. With CEX, users send funds to the exchange to manage them within an internal account. However, funds are stored on the exchange, and users do not have custody over them. This means that users are vulnerable to security threats in case the exchange’s security measures fail.
While centralized exchanges have been the target of various security attacks, customers on these exchanges trust them with their personal information and funds. Moreover, large exchanges have customer service departments that offer assistance to customers, providing a sense of security and comfort.
2- The Flexibility of Fiat Conversion
Centralized services offer more flexibility than decentralized services when it comes to converting fiat to cryptocurrency and vice versa. Conversion between cryptocurrency and fiat usually requires a centralized entity. Onboarding customers in the CeFi ecosystem is quite convenient and can offer a better customer experience.
3- Cross-chain services
CeFi services support trading of LTC, XRP, BTC, and other coins issued on independent blockchain platforms. However, DeFi services do not support these tokens due to the latency and complexity of performing cross-chain swaps. CeFi can overcome this issue by getting custody of funds from multiple chains, providing a significant advantage for frequently traded and high-market-cap coins that exist on independent blockchains and don’t implement interoperability standards.
Features of DeFi
1- Permissionless
One of the most significant features of DeFi is that users do not require permission to use it. With CeFi, users need to complete a KYC process to access services, which means they have to share their personal information or deposit some money before accessing services. On the other hand, users can directly access DeFi services using a wallet without providing personal information or depositing money. DeFi is openly accessible to all parties, without any barrier or discrimination, making it highly accessible and supportive of collaboration within the community.
2- Trustless
The most significant benefit of using DeFi services is that users don’t need to trust that the service will perform as promoted. Users can authenticate that DeFi services perform as intended by auditing their code and using external tools such as Etherscan to identify if a transaction was correctly executed.
3- Quick Innovation
Another significant advantage of DeFi is its quick rate of innovation. The DeFi ecosystem is constantly building current capabilities and experimenting with new ones. In functionalities where centralized financial services have thrived, DeFi has been working to deliver alternative ways to solve the issue. For example, to overcome DeFi’s inability to facilitate the transfer of incompatible cryptocurrencies such as BTC, solutions like tBTC and WBTC, which are compatible with decentralized protocols eliminate the gap by behaving as tokens pegged to the value of BTC. It enables DeFi users to access Bitcoin via DeFi without requiring using the token directly.
CeFi vs DeFi: Real Use Cases and Which One to Choose
When it comes to cryptocurrency trading, there are two main ecosystems that come to mind: Centralized Finance (CeFi) and Decentralized Finance (DeFi). Both aim to achieve the same goal, which is to make crypto trading popular and improve trading volume. However, the way these two ecosystems carry out their objectives is different. Let’s take a look at some real use cases of CeFi and DeFi.
Real Use Cases of CeFi
Coinbase: A cryptocurrency exchange that facilitates trading, borrowing, margin trading, native stablecoin, lending, payments, and more.
Fairlay: A Bitcoin Prediction Market and Exchange that runs on the CeFi model.
BlockFi: A cryptocurrency and fiat borrowing and lending platform.
Celsius: A cryptocurrency borrowing, payments, and lending platform.
Ledn: An insured Bitcoin to DAI borrowing and lending platform.
Libra: A global financial infrastructure and cryptocurrency layer.
Real Use Cases of DeFi
Totle: An aggregator of decentralized liquidity with automatic price optimization.
Augur: A decentralized predictions market.
Nexus Mutual: A decentralized insurance tool.
Kyber: A decentralized exchange.
MakerDAO: A decentralized stablecoin minting and lending tool.
bZx: A decentralized lending and margin trading platform.
CeFi vs DeFi: Pros and Cons
Both CeFi and DeFi have their pros and cons, and it ultimately depends on the investor and their needs.
CeFi promises the security of funds and fair trade on those funds. Investors with conventional currency can also take part in crypto trading. Moreover, CeFi exchanges provide customer support services that DeFi services do not offer.
On the other hand, DeFi wants to make the space intrusion-free. It provides a space for investors to implement their strategies without having to deal with an intermediary body. If you prefer transparency and privacy, DeFi is the right model to choose from.
Conclusion
Both CeFi and DeFi aim to achieve the same goal but carry out their objectives differently. CeFi provides trust, sharing of risks, flexibility, and increased options to invest, while DeFi promises transparency and privacy. It is up to the investor to decide which model to choose based on their priorities and needs.
