DeFi vs. CeFi: Exploring The Differences
What is Decentralized Finance (DeFi)?
DeFi stands for decentralized finance, which is blockchain-based finance that does not rely on central financial intermediaries to offer services. Instead, it uses smart contracts on the blockchain. An agreement is an automated code that runs on the blockchain and cannot be changed. Transactions in smart contracts are processed by the blockchain without any third-party intermediaries.
What is Centralized Finance (CeFi)?
Centralized entities run CeFi services such as centralized crypto exchanges. Most CeFi service providers follow the regulations outlined by the local authorities where they operate. These rules make it mandatory for centralized financial institutions such as exchanges and trading platforms to implement Know Your Customer and anti-money laundering practices.
CeFi VS DeFi: Which is best?
If CeFi issues can be summed up using the word trust, then DeFi issues are primarily related to risk. On the last point above regarding the code, many DeFi protocols have fallen prey to savvy hackers who have managed to find vulnerabilities in the underlying programming.
DeFi vs CeFi: Similarities
DeFi and CeFi share some similarities in the sense that they both involve similar financial services. Sometimes the end-user is not even aware that a crypto service depends on the DeFi or CEFI infrastructure. At the moment, CeFi and DeFi both enable the same set of financial services, including spot trading, derivatives trading, margin trading, lending and lending, payments, and the creation of stable coins.
What to think about DeFi and CeFi in the future?
The medium-term future is bright for both DeFi and CEFI, as the financial crisis will highlight the importance of refugee assets with a low correlation to traditional markets. It will also emphasize the importance of blockchain solutions for all types of financial services that should not be manipulated by governments.
CeFi vs DeFi
There are many similarities between CeFi and DeFi in terms of the financial services they provide.
1 Centralization: In a centralized finance environment, the exchange or trading platform is owned by a single entity, or often by a corporation. They provide a variety of services to make crypto more accessible to their customers. However, centralized exchanges are in charge of everything from getting users involved and setting ground rules, among other things.
DeFi applications, on the other hand, goal to decentralize ownership and become community-owned. Everyone has a say in how the application should function while the community runs and maintains its code.
2 Permission: In centralized finance, users have to sign up and submit KYC rules. This is often to prevent criminal activities such as money laundering and to comply with crypto regulations. In DeFi, as long as you have a non-custodial crypto wallet like MetaMask, you are not required to submit KYC or sign up for an account.
3 Trust: In centralized finance, you have no choice but to trust exchanges and other centralized apps with your assets. In DeFi, you don’t have to trust anyone with your assets or if you want to trade them using peer-to-peer swaps or anything.
Final thoughts
Decentralized and centralized finance both aim to achieve the same goal. They plan to popularize crypto trading and improve trading volume. However, how these two ecosystems fulfill their purposes is different. We are at Kointrack, making blockchain technology accessible to people.
