Centralized Finance (CeFi)#
CeFi or Centralized Finance is a system of cryptocurrency trading managed by central exchanges. It’s run by fund managers and professionals that work on the development and operational processes of these exchanges.
When you trade on a centralized exchange you are bound by the rules imposed by the exchange. As a CeFi user, you can only trade cryptocurrencies available on their platform and transact with fees offered by the exchange. Also, you will only have limited access to what goes on with your wallet.
Every transfer, purchase, and/or sale you make will undergo strict processes that ensure authenticity and security. If anything wrong happens to your wallet such as crypto exploits or heists, these exchanges will be held accountable for replacement.
Examples of CeFi:#
Binance
It is a cryptocurrency exchange that allows users to trade, borrow, lend, pay, and transfer cryptocurrencies. It primarily offers lower fees, comprehensive chart options, and more than 500+ cryptocurrencies available for trading. They offer limit orders, market orders, P2P trading, and margin trading among many other transactions.
Coinbase
Just like Binance, Coinbase offers similar cryptocurrency services. They differentiate themselves for being a beginner-friendly platform with an accompanying digital wallet you can make easy PayPal withdrawals on. Unlike Binance, their platform may cost more per trade and offer less cryptocurrencies.
BlockFi
Also another exchange that offers fiat borrowing and lending. BlockFi lets its users leverage their cryptocurrencies. It’s focused on giving users a way of earning interest on their holdings and lending funds.
Decentralized Finance (DeFi)#
Exchanges don’t make the rules in decentralized finance. Automated programs developed on the blockchain control the entire processes of DeFi.
Decentralized finance aims to create a fair financial system in which everyone can take part. Even individuals without a bank account can use blockchain technology and DeFi.
In essence, DeFi aspires to build a permissionless, open-source, and transparent financial services ecosystem where anyone can participate in crypto lending, borrowing, yield farming, asset storage, and other services that are available through this decentralized financial system.
The capacity to maintain control over your assets is the main advantage of decentralized finance over centralized finance. This means you own the wallet’s key pair and are the only one who has control over your own money. Furthermore, users who wish to engage in DeFi must do so using decentralized applications (DApps) created on top of blockchain platforms.
Real-life Examples of DeFi:#
MakerDAO
A stablecoin minting and lending platform that provides loans with predetermined interest rates.
Borrowers deposit Ethereum funds in a Maker smart contract. This smart contract makes a CDP or Collateralized Debt Position. Users receive interest based on the appreciation and depreciation of the digital assets they trade on.
Uniswap
An open-source decentralized crypto trading protocol that cultivates a network of DeFi apps. It trades and provides liquidity for ERC20 tokens. Developed by Uniswap Labs, the protocol was built for DeFi developers and traders.
Polygon
A protocol building and connecting Ethereum-compatible blockchain networks.
Neptune Mutual
Built with transparency in mind, Neptune Mutual is a DeFi insurance parametric-based cover protocol. Intended to protect user profits and reduce risk exposure. It provides guaranteed stablecoin liquidity through hedging capital risks and smart contract exploits.
What Key Features Set DeFi and CeFi Apart?#
Centralized finance is managed through exchanges while decentralized finance is technology-dependent.
Despite the fact that DeFi and CeFi have numerous distinctions, the question remains whether customers should trust technology or people.
Users of DeFi have faith in the technology’s ability to carry out the services they need. However, CeFi users trust a company’s employees to manage finances and provide those services.
CeFi#
Centralized Exchanges
Users deposit funds to a standard cryptocurrency exchange, such as Binance and Coinbase. These exchanges manage those deposit funds in an internal account. Users have limited control over funds stored on the exchange and will need permissions to make transactions.
Centralized exchanges have also been the subject of a number of security breaches. Given the sense of comfort centralized exchange users experience on CeFi platforms, they often reveal personal information and place funds in the custody of these organizations.
Fiat Conversion
When converting cash to cryptocurrency and vice versa, centralized services offer more flexibility than decentralized services. Converting cryptocurrency to fiat normally necessitates the use of a centralized organization; yet, DeFi services do not provide fiat in a flexible manner.
Cross-chain Services
Trading of BTC, XRP, LTC, and other coins issued on separate blockchain systems are supported by CeFi . DeFi services do not support these coins due to the latency and complexity of completing cross-chain exchanges. CeFi can solve this problem by obtaining custody of funds from several blockchains. Many of the most often traded and highest-market-cap coins exist on separate blockchains and do not follow interoperability standards, making this a huge benefit for CeFi.
DeFi#
Permissionless
Users do not need permission to use DeFi. To use CeFi’s services, consumers must first undergo a KYC process, which requires them to give personal information or make a financial deposit.
Trustless
The biggest advantage of using DeFi services is that you don’t have to trust that they’ll work as advertised. Users can verify that DeFi services work as expected by auditing their code and using external tools like Etherscan to see if a transaction was completed appropriately.
Innovative
Another notable benefit of DeFi is its rapid rate of innovation. The DeFi space has evolved from a build-centric environment to a diverse ecosystem with ground-breaking financial services. DeFi space has been working to give alternate approaches to handle the issue in functionalities where centralized financial services have developed.
Which “Fi” System is Better?#
CeFi and DeFi seek to accomplish the same goal.
They want to popularize cryptocurrency trading and increase trading volume. However, the manner in which these two achieve their goals differs.
Centralized finance works by establishing trust along the way. It promises security of funds as well as fair trade on those funds. It also has a wider range of fiat-crypto-fiat conversions. Crypto trading is also available to investors who possess traditional currencies.
On the other hand, decentralized finance wants to keep the market free of the constraints of regulation. It gives investors a place to put their strategy into action without having to deal with a middleman.
Privacy, autonomy, and transparency are key features for DeFi. Decentralized finance is a more user-centric financial system compared to CeFi.
It’s definitely the better “Fi” if having more control over your funds and digital assets is a must-have for you.
