Bitcoin and other digital currencies have created an entire ecosystem around blockchain. So much so that the world has started arguing that decentralized solutions are going to replace traditional financial services in the time to come.
Whether or not it will happen is something that only the future will tell, but what we are seeing happening today is a new competition brewing right within the blockchain ecosystem. The competition, titled “DeFi vs CeFi” or “centralized vs decentralized cryptocurrency”.
While for some time, CeFi has been the primary mode of cryptocurrency trading, DeFi is now gaining popularity with the investors who are showing resistance from the authority, uniformity, and control of centralized exchanges. But does it mean CeFi is going to lose its charm to DeFi? Let’s find out the answer through their comparison.
What is DeFi (Decentralized Finance)?
DeFi is a global and open financial system which brings transparency and accessibility in the global blockchain market. Through DeFi, you can self manage services like trading, insurance, lending, issuance of money, staking, payments, financial data, over-the-counter (OTC) trading, asset management, and more.
What is advantageous about working on DeFi blockchains is the absence of a central authority who would approve or deny access. Instead, DeFi cryptos enable peer-to-peer transactions without the need to involve a third party.
Features of DeFi (Decentralized Finance)
Permissionless – Anyone from anywhere can use the DeFi blockchains without seeking any approval or acceptance. Moreover, decentralized finance platforms offer greater accessibility and chance of community interactions.
Trustless – The biggest advantage of DeFi cryptos lies in the fact that it is trustless. You can easily audit the code and use tools like Etherscan to check if your transaction was completed and ensure that the DeFi services are performing efficiently.
Continued innovation – The DeFi crypto list is filled with examples where capabilities are being developed and new ones are being tested. The ecosystem as a whole is filled with a range of innovative financial services.
An aggregator of decentralized liquidity with automatic price optimization.
It is a decentralized predictions market.
A decentralized exchange.
A decentralized tool for lending and stablecoin minting.
It is a decentralized margin trading and lending platform.
What is CeFi (Centralized Finance)?
CeFi or Centralized Finance is where you trust centralized companies like crypto exchange platforms to store your funds and manage services.
Most of the CeFi service providers have a Know Your Customer (KYC) and Anti Money Laundering (AML) policy in place to comply with the jurisdictions’ rules. It means that you have to share your personal information with them and ensure that your funds are not coming from or will be used for any illegal activity.
Now, while CeFi crypto platforms take the load of crypto management off your hand, they come with limitations like you not having the authority, uniformity, and control on your cryptos.
Features of CeFi (Centralized Finance)
Seamless customer support – Within every Centralized Exchange, there is an internal account for managing users’ funds. Furthermore, large CeFi companies take care of users’ data and give assistance to the customers through a dedicated customer support team, thus bettering the trust level.
Flexible conversion – CeFi makes the process of converting the fiat currency into cryptocurrency easier. The ease that the platforms offer, lead to greater customer onboarding – an example of which can be seen in Coinbase and its 89 million global users.
Interoperability – CeFi enables easy lending, trading, borrowing, and payment-based services by using funds which are in custody from multiple chains.
Services for cross-chain swaps – Centralized finance enable trading of cryptocurrencies on the basis of independent blockchain platforms. While DeFi falls short because of complexity and delays in performing cross-chain swaps, CeFi obtains assets custody from multiple chains.
Centralized Exchange (CEX) – Using the centralized exchange you can handle the portfolio through an internal account and avoid blockchain transaction fees. Moreover, since the funds are on the exchange, you do not have to worry about the management part of it.
A cryptocurrency exchange that facilitates trading, borrowing, margin trading, native stablecoin, lending, payments and more.
It’s a fiat and cryptocurrency lending and borrowing platform.
A platform for borrowing, lending cryptocurrencies.
A lending and borrowing platform that deals with insured Bitcoin to DAI.
A universal cryptocurrency layer and financial infrastructure.
Now that we have looked into the basics of DeFi vs CeFi (or, centralized vs decentralized cryptocurrency) in terms of what they are and their feature offerings, it is time to dive into the differences between centralized finance and decentralized finance.
DeFi vs CeFi: The key differences
Although centralized finance and decentralized finance focus on the same thing – increasing the adoption of blockchain in the world, there are some crucial differences that lie between both. Let us look at what those differences are.
Even Though DeFi code might not always be open source, its execution should be publicly verifiable to be called a non-custodial DeFi. Thus, unlike CeFI, every DeFi user can observe and then verify the execution of DeFi state changes.
A blockchain transaction enables sequential actions to be performed. These actions can be made atomic, meaning the transactions would either complete with all the activities or fail together. This programmable atomicity element is not present in CeFi.
Centralized finance gives less anonymity to users than the ones they would get through decentralized finance. A majority of DeFi projects are handled by unidentified groups of individuals.
Unlike CeFi, DeFi gives their customers complete control over their assets. However, this comes with a challenge that users are made to face all the technical hazards. This is where CeFi is more beneficial. The centralized finance platforms act as custodians and are seen as a popular choice for managing cryptocurrency assets.
Malleability of execution order
Users working on permissionless blockchain tend to share the transactions they wish to complete on a P2P network. Because of this order malleability, DeFi sees multiple market manipulation tactics. Compared to this, CeFi has a stringent regulatory requirement in place which leaves no scope for market manipulation.
Charging transaction fees in DeFi is very common. On the contrary, because CeFi runs a tough KYC and AML check, the institutions in CeFi offer transactions at no extra cost.
A majority of cryptocurrencies are frequently traded on centralized finance. Decentralized finance generally does not support these tokens as they are complex and cause delay in completing cross-chain exchange.
Fiat conversion flexibility
Since a CeFi platform works on a model where fiat currency is involved for exchange, it gets easier for users to trade in CeFi compared to DeFi.
Although CeFi does its best to maintain complete security, there have been multiple instances of breach around CeFi-based cryptocurrency exchange platforms. On the other hand, in the case of DeFi, the only thing users have to care about is paying attention to the code and the consensus algorithm used in the decentralized finance project.
|Services||Borrowing, Lending, Trading, Payments||Payments, Lending, Trading, Borrowing, Fiat-to-crypto|
|Public verification||Execution should be publicly verifiable||Not mandatory to verify publicly|
|Atomicity element||Present||Not present|
|Anonymous development||More anonymity||Less anonymity|
|Custody||Gives customers complete control over assets||Acts as custodians|
|Malleability of execution order||Multiple market manipulation tactics possible||Stringent regulatory requirement leaving no scope for market manipulation|
|Transaction cost||Charges transaction fee||Offers transactions at no extra cost|
|Cross-chain services||Delay in completing cross-chain exchange||Majority of cryptocurrencies are traded frequently|
|Fiat conversion flexibility||No fiat conversion flexibility||Fiat currency is involved for exchange|
|Security||More secure||Less secure|
Now even though there lies some crucial differences in centralized finance vs decentralized finance, it is difficult to think of a scenario where only one architecture would exist.
What does Appinventiv think about the difference between DeFi and CeFi?
Amidst the many differences that both the models consist of, what cannot be ignored are the similarities.
CeFi and DeFi both work around the same financial services – trading, insurance, lending, issuance of money, staking, payments, financial data, over-the-counter (OTC) trading, asset management, and more. Moreover, the end-user does not even tend to notice if their crypto service is based on CeFi or DeFi infrastructure.
What our blockchain service experts see happening is a merger of both, where both the infrastructures would complement each other.
Examples of these can be seen in:
- Oracles like Chainlink transport CeFi data to DeFi
- Synthetix enables users to trade their CeFi financial elements as DeFi derivatives.
- Grayscale Bitcoin Trust allows their users to trade Bitcoin on a CeFiover the counter market.
In addition to these, DeFi is continuously optimizing CeFi to meet blockchain’s unique offerings. For example, decentralized finance’s exchange mechanism called Automated Market Makers (AMM) has inspired CeFi’s over-book architecture.
Noting all of these factors, we believe that DeFi and CeFi both have a place in the blockchain space. For a new blockchain entrepreneur, it is important to know what difference they both have and the areas where they can learn from others. Only when you have an understanding of that level, can you decide the best architecture for your project.
In summary: CeFi comes with the promise of fund security and fair trade. Moreover, investors with fiat currency can also be a part of crypto trading with a backing of an active customer support team. DeFi, on the other hand, aims to make the blockchain space middle men and intrusion free.
Both of the models come with their own set of benefits and limitations. If privacy and transparency is important for you, go with DeFi and if you want greater flexibility, share risks with others in the blockchain network, choose CeFi.
FAQs around DeFi vs CeFi
Q. What is the difference between DeFi and crypto?
A. Eventhough the DeFi cryptocurrency is Ethereum, there are very few elements in the DeFi vs Crypto discussion.
Cryptocurrencies store value, just like their fiat currency counterpart. DeFi is a platform/architecture that enables you to lend trade cryptocurrencies.
Q. Why is DeFi over CeFi?
A. The reason why blockchain enthusiasts believe that DeFi would rule over CeFi is because of its nature. Decentralized finance is truly open source, the users don’t have to give control of their assets to a central authority. Moreover, DeFi plays an amazing role in maintaining anonymity of the users, something that gets missed in CeFi because of the stringent regulatory compliances.
Q. Which model should I choose to start my business?
A. If you want to keep the control of the blockchain system in your hands without giving it to any regulatory body, go for a DeFi model. However, if you want to make a system where your users would get an assurance that a centralized authority is looking over their crypto and data, go with CeFi.