When it comes to buying, engaging with and storing your hard-earned cryptocurrencies and crypto assets, you will be faced with a choice: CeFi vs DeFi: centralized finance versus decentralized finance.
This debate over centralization is at an all-time high for investors looking to expand their portfolios and get the most from their money.
CeFi has been the dominant medium for cryptocurrency trading. However, DeFi is quickly gaining popularity as investors begin to shy away from the control, uniformity and authority of centralized exchanges.
Considering that the DeFi market size reached a whopping $274 billion in November 2021, it’s worth looking into.
What Is Centralized Finance?
Centralized finance, CeFi, is the traditional form of finance and is how most people are used to dealing with money. With CeFi, a central authority controls the financial system and involves all crypto trade orders being handled through a central exchange.
This central authority can be a government, a bank or another financial institution. CeFi typically relies on fiat currency, which is money that is not backed by any physical commodity.
This was the most popular method of trading cryptos prior to DeFi’s invention, and it had a firm grip on the cryptocurrency market.
Funds are managed by a central exchange, which then decides which coins are traded and what fees need to be paid.
When using CeFi, you don’t own your cryptocurrencies outright –– they are instead held by the exchange. You are also subject to the rules set by the exchange, which can change at any time without notice.
What Is Decentralized Finance?
In the public blockchain space, decentralized finance, more commonly referred to as DeFi, is a catch-all term for financial products and services built on blockchain technology. In simple terms, DeFi is an open and global financial system that offers transparency and accessibility to global markets.
With DeFi, you not only have control and visibility over your money but also have exposure to global alternatives to your local currency or banking options. You need an internet connection to access DeFi services. Once you’re connected, you can take advantage of opportunities to make money online such as borrowing, yielding farming, lending and more.
In decentralized systems, there is no central authority to block or deny you access. Instead, DeFi technologies allow for peer-to-peer transactions without the need for a 3rd party.
The launch of Ethereum opened the door for maximizing the potential of DeFi within the financial industry thereby encouraging businesses and enterprises to build and deploy projects that form the ecosystem of DeFi.
Utilizing decentralized technologies, such as smart contracts to oversee the process safely, DeFi can still provide trust for all parties involved. DeFi offers a robust financial system that is available anytime and anywhere that you are.
What are the Differences Between DeFi and CeFi?
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Now that you know a little bit more about the 2 main types of cryptocurrency finance options, let’s take a closer look at the differences between CeFi vs DeFi.
In the CeFi system, exchanges are in charge of protecting consumers’ money. DeFi, on the other hand, assumes that smart contracts (a contract between two parties that enforces specific rules/terms of negotiation when a certain/specific condition is met) would guarantee the transaction’s success.
Basically, with DeFi the users are in control of their funds and actions, but with CeFi, the exchanges can set limits and even block trading for users.
To better understand these differences, let’s take a closer look at some of the features of CeFi vs DeFi.
Centralized Exchange (CEX)
Using a centralized exchange you can manage your portfolio within an internal account, avoiding blockchain transaction fees. Although your funds are kept on the exchange, they are not within your direct control, as the exchange custodians your funds.
For example, when you want to buy or sell a cryptocurrency, you will need to place an order through a centralized exchange. The CeFi exchange then matches your order with another user who is also looking to buy or sell that same cryptocurrency.
The trade is then completed, and the CeFi exchange manages the funds and eventually records the transaction on the blockchain.
Fiat Conversion Flexibility
The more centralized the service is, the more flexibility it provides in moving money back and forth between fiat and cryptocurrency. However, these conversions between cryptocurrencies and fiat frequently rely on the centralized exchange (CEX).
For example, when you want to buy Ethereum with US dollars using CeFi, you just need to find a CEX to provide you with offers for this type of pairing.
CeFi also offers more traditional financial products and services, such as loans, savings accounts, and credit products.
Services for Cross-Chain Swaps
CeFi services enable the trading of LTC, XRP, BTC and other cryptocurrencies based on independent blockchain platforms.
For example, where DeFi falls short due to delays and complexity in performing cross-chain swaps, CeFi can compensate by obtaining custody of assets from numerous chains.
CeFi’s biggest benefit is that, since many of the most frequently traded and highest-market-cap coins are decentralized blockchains without interoperability standards, it has a considerably broader reach than other exchanges.
No Permission Needed
Anyone and everyone from anywhere can make use of the DeFi system, without first needing permission or acceptance.
For example, users must complete a KYC (Know Your Customer) procedure to use CeFi, which involves submitting personal information or depositing money to access services.
Users of different types of DeFi networks, on the other hand, may access services without revealing personal information or applying for access. All interested parties can use DeFi openly and freely without any restrictions.
Furthermore, decentralized platforms have a high degree of accessibility and encourage community interaction. Within the DeFi ecosystem, goods are created to profit from one another.
No Trust Needed
The most important advantage of utilizing DeFi systems is that no trust from the user is needed.
For example, you can audit the code and use extra tools like Etherscan to verify if a transaction was completed correctly, to ensure that DeFi services perform as stated. This is in contrast to centralized exchanges where users must trust a 3rd party to execute the transaction on their behalf. With DeFi, it’s strictly peer-to-peer.
Another key feature is the rapid rate of innovative DeFi developments. The DeFi platform is always developing current capabilities and testing new ones. Hence, the decentralized movement has evolved into a complex ecosystem brimming with revolutionary financial services.
In an industry where centralized financial services have been successful, the DeFi sector has attempted to provide different methods of addressing these problems, too.
Take the inability of DeFi to facilitate the transfer of incompatible cryptocurrencies like Bitcoin (BTC) and Ethereum (ETH), for example. By using solutions compatible with DeFi protocols, like tBTC and WBTC, they solve the problem by pegging other token’s to the price of Bitcoin.
This allows DeFi users access to BTC without requiring the direct use of Bitcoin’s network. Bitcoin, unlike Ethereum, doesn’t support smart contracts, so in order to use DeFi applications, WBTC or another form of tokenized bitcoin is necessary.
What is centralized finance?
With CeFi, a central authority controls the financial system. CeFi involves all crypto trade orders being handled through a central exchange.
What is DeFi?
In the public blockchain space, DeFi is a catch-all term for financial products and services built on blockchain technology.
What are the differences between DeFi and CeFi?
In the centralized system, exchanges are in charge of protecting consumers’ money. DeFi, on the other hand, assumes that smart contracts would guarantee the success of transactions.
- CeFi Features: CeFi features include: centralized exchange (CEX), fiat conversion flexibility and services for cross-chain swaps.
- DeFi Features: DeFi features include: no permission needed, no trust needed and constant innovation that improves user experience.
Now, will you choose CeFi or DeFi? The answer may depend on your individual needs and goals. One thing is for sure: the future of DeFi is gaining momentum.