CeFi vs DeFi: Comparing Centralized Finance to Decentralized Finance
July 5, 2022 7:16 AM
To those who are unaware of the cryptocurrency market, the traditional Centralized Finance ecosystem might look out of place because its users are unaware of the laid down rules or agreements of financial assets and products. On the other hand, decentralized finance has been making its debut as a financial ecosystem that claims to offer a clear process as well as control, to users. This can be partially attributed to the underlying integrity-protected blockchain and also higher financial assets in comparison to CeFi.
What is CeFi in crypto?
The primary principle that highlights centralized exchanges (CEXs) in crypto is that all crypto trading orders are routed through a central exchange under centralized finance. CeFi companies include but are not limited to Binance, Kraken and Coinbase. In the platform, users can create accounts and use them for sending and receiving tokens. The platforms offer a lot of services which is not excluding lending, borrowing and margin trading.
However, funds are stored on the exchange, they are being managed outside of users' control and are exposed to threats if the exchange gets hacked. As a result, centralized exchanges have been targeted by various security attacks as hackers tries to exploit these organization's. Meanwhile, users of centralized exchanges are content with placing their funds in the custody of these organizations because they believe central exchanges are trustworthy and would offer a bit of customer support if anything goes wrong.
What is DeFi?
Decentralized Finance, a new sub-category of blockchain main focus is on the development of financial technology and services on top ledgers with smart contracts. DeFi acts as a service provider without intermediaries by utilizing cryptocurrencies and smart contracts. DeFi is very compatible with most CeFi’s products which include asset exchanges, leveraged trading, loans, stablecoins and decentralized governance voting.
Decentralized Finance (DeFi) provides financial services without intermediaries such as banks by utilizing cryptocurrencies and smart contracts. Financial institutions operates as transaction guarantors in the centralized financial world. Because your money passes through these institutions, they have enormous influence on what happens. Nonetheless, in DeFi, the financial institution has been replaced by some lines of code published on the blockchain, and those lines of code is dubbed smart contract.
Three distinguishing characteristics distinguish DeFi. The transparency, control and accessibility. DeFi allows users to examine the precise rules that guide the operation of financial assets and goods. It makes an effort to eliminate private agreements, back-deals and centralization. All these are very critical barriers to CeFi transparency.
Comparing Different properties Between DeFi and CeFi
Explaining a few properties below that are common between centralized finance CeFi and decentralized finance DeFi.
In DeFi, asset supply involving a lot of cryptocurrencies is prone to changes in the DeFi universe but in CeFi, central banks have the sole capacity to create fiat money.
Transaction fees on the blockchain and DeFi are important for avoiding spam. However, we cant say the same for CeFi institution's because of the capacity to rely on Anti-Money Laundering (AML) verifications of their clients, CeFi organizations can choose to offer transaction services for almost zero fees or might be mandated by governments to offer some free services.
24 Hours Market
CeFi markets are well known for experiencing outages. for example The New York Stock Exchange and the Nasdaq Stock Exchange, are the two major trading venues in the United States, and they only operate Monday to Fridays and observe the 9:30 am to 4:00 pm daily operational hours.
However, its different on DeFi because of the non-stop nature of blockchains, DeFi and crypto markets are open 24 hours a day, seven days a week.
Blockchain provide pseudo-anonymity rather than true anonymity where DeFi can found. In contrast, centralized exchanges with AML policies are frequently the only practical option for converting money to crypto assets, these exchanges or organizations have the access to reveal address ownership to law enforcement if requested because CeFi institutions are regulated.
How CeFi and DeFi can both work together?
CeDeFi is the opposite extreme of the DeFi spectrum. It’s largely a token-harvesting approach that has no similarity to DeFi certificate. Here, customers have the option of using CEX platforms, which can be comparable to Binance. In DeFi, CeDeFi is the opposite while it’s a similar concept in CeFi.
CeFi and DeFi operate on different processes and user behaviors, CeFi’s stress testing could be a great teaching moment for DeFi players. CeFi is very dependent on circuit breakers to control excessive asset fluctuation. On the other hand, DeFi seems to have avoided such interruptions so far which could help CeFi to better have an understanding of its limit.