In this article we are going to compare two popular crypto terms: CeFi and DeFi. DeFi stands for decentralized finance, while CeFi stands for centralized finance. We’ll look at the characteristics of both terms and also give some examples. UniSwap is a good example of DeFi and the Coinbase platform probably rings a bell at CeFi. In addition to the features, we will cover the differences between decentralized and centralized finance and introduce a relatively new term: CeDeFi.
What is DeFi? #
As mentioned above, DeFi stands for Decentralized Finance. It is a global system that is accessible to everyone. Financial products, as we know them today, have an expiration date. Relatively new developments and trends, such as crypto, NFTs, blockchain and Web3, will put an end to the traditional forms that we have known for centuries.
By applying decentralized networks and blockchains, financial products and services are transformed into a more transparent form. Intermediaries are no longer needed and the platforms, protocols and dApps can now be managed technologically. Smart contracts also come into play here; if you want to know more about this, read this article.
With decentralized finance you can take matters into your own hands and trade on the blockchain, ensure business, grant credit, secure money issuance, strike, make payments and receive payments and build and manage your wealth. Perhaps the most important fact of all is that there is no central authority to exert influence. It’s all open-source and transparent, making it available to anyone, whenever you want. Transactions are approved through a peer-to-peer network.
Features of DeFi – Decentralized Finance #
- Trustless. You can trade with anyone, including people you don’t know and trust. By checking the codes and applying tools, it is possible to complete transactions without inadvertently being duped;
- Innovation. A wide range of financial services has already been set up, which you can really have fun with. You can also buy more and more DeFi crypto coins, so that you can ride on this big wave. (Note: this is not financial advice! Always do your own research and never blindly trust someone’s opinion or your gut feeling and don’t invest money that you can’t afford to lose in risky investments);
- Permissionless. Anyone can use the blockchain – and therefore also DeFi – whenever you want. There are gigantic communities and countless people who are only too happy to help you on your way. Best of all, you don’t need permission from central authorities or intermediaries!
Advantages and disadvantages of decentralized finance #
+ Opening a wallet is the first step and also the last, because you don’t have to open an account
+ You don’t have to go through a KYC procedure
+ Sell and buy yourself without permission and intermediaries
+ Transparency, so anyone on the blockchain can see the sequence of transactions
– Sometimes fees can skyrocket due to volatility
– Difficult application of current legislation and regulations (keep everything well!)
– Projects can also suddenly collapse or fail due to volatility
– Due to lack of regulation, you are responsible for protecting your wealth
What is CeFi? #
CeFi was the standard before DeFi was invented. CeFi stands for Centralized Finance. In the case of centralized finance, all crypto trades are handled via a central exchange, so they are also those in power. You don’t have your own wallet with a private key, but everything is owned by someone else.
The stock exchange is therefore the one that exerts influence on the fees and the offer in currency. It seems obvious to me that this is not the most ideal way of doing business. That’s why DeFi was developed. You can recognize the central exchanges by their KYC policy and the AML policy. KYC stands for Know Your Customer, so an identity check, and AML stands for Anti Money Laundering.
There are large CeFi providers that are quite vulnerable with all the associated consequences. These are the three main causes that can cause such a party to fall or collapse:
- Returns too high – credit providers offer high returns, which are sometimes completely out of context. A good example of how things can go wrong is the investment of CeFi providers in the risky Terra; a crash to remember. Due to this collapse, the lenders were unable to pay out users’ returns;
- Lack of collateral – loans with too little collateral are a risk in itself. The financial risks are skyrocketing, which can have negative consequences for users;
- Non-transparent business – where DeFi works with smart contracts and governance forums, CeFi cannot be followed publicly. Privatization and bookkeepers behind closed doors have control over your coins.
Features of CeFi – Centralized Finance #
- Interoperability. CeFi is a global system that makes it easier to work across various blockchains. This interoperability makes it easy to borrow, buy, sell and use certain funds as they are maintained by various superpowers. Note: blockchain interoperability has already had several breakthroughs in the DeFi world;
- CEX. CEX stands for Centralized Exchange and that means that you basically just have a bank account at an exchange, with which you bypass the fees on the blockchain;
- High quality customer service. CeFi companies ensure that they invest jointly in large funds, on which they deploy customer service teams. In the world of DeFi, this isn’t happening much yet, because it’s all still pretty news, a lot has to come from the community. In a few years this picture will look very different, I suspect.
Advantages and disadvantages of centralized finance #
+ CeFi have been around for a long time and have had the opportunity to make platforms intuitive for an optimal user experience
+ Wider range of financial services
+ Custodial solutions so users can keep their assets safe
– Many differences between providers and products, making DYOR essential
– Knowledge of crypto scene is indispensable
– Sometimes time lock on executing transactions, so that your assets are frozen
– Stablecoins come in all shapes and sizes, so be careful what you invest in
– Bank saving is protected to some extent, but crypto saving is not
Differences between DeFi and CeFi #
So, what are the main differences between DeFi and CeFi? Here are the main differences:
- With CeFi it is possible to trade from fiat to crypto, while this is not possible with DeFi;
- Non-custodial means that you have control over your own wallet + seed phrase. This is not the case with CeFi, but it is with DeFi;
- DeFi does not (yet) have many cross-chain solutions, while this is the case with CeFi, as described above;
- At DeFi you do not have to deal with KYC procedures, but CeFi must comply with current laws and regulations.
What about CeDeFI? #
CeDeFi is a combination of centralized and decentralized finance. What does such a synergy of centralized – old-fashioned – systems and decentralized – based on smart contracts – systems look like? By taking centralized finance as a basis, you offer access to modern forms of financing. CeFi systems are used, while as a user you have access to yield farming tools and DEXs.
CeFi is run by one or more entities, which makes it difficult to make it open and free. This is precisely what many users dislike and where DeFi really sets itself apart. However, it is a hybrid solution, which could potentially provide a breakthrough in several areas. Faster transactions, solving security issues, easy trading and optimization of the existing crypto world.
There are quite a few differences between DeFi and CeFi and it is not surprising that these camps are often diametrically opposed. CeFi supporters go for the confidence of the heavily used financial system, while DeFi fans want to see the innovation and the new possibilities.
In this article, I have highlighted the essential differences and similarities. All the advantages and disadvantages of centralized finance (CeFi) and decentralized finance (DeFi) have been listed, so that you can immediately see where the pain points are. Perhaps you are in doubt between the two or you want to use both in a certain way in your portfolio, then you can now easily assess how you approach this and why.