Defi vs. Cefi: Definition, Pros and Cons
Blockchain technology has sparked a new medium of crypto artwork inspired by bitcoin, systems of decentralization, and financial freedom. Some players predict that decentralized solutions would gradually replace traditional financial services. While it’s too early to make any conclusions, we can observe that a fascinating competition and interaction between decentralized finance (DeFi) and centralized finance (CeFi) is taking place inside the blockchain market. Both DeFi and CeFi provide a vast array of possible cryptocurrency-related services. In this post, Trait Sniper will provide a holistic view of both phrases.
CeFi (Centralized Finance)
Definition
Before DeFi, Centralized Finance (CeFi) was the standard for crypto trading. In CeFi, a central exchange that manages all crypto transaction orders. The platform lists the trading currencies it provides and the fees connected with using its platform. In contrast to DeFi, the coins you buy are not yours. CeFi is always accompanied by "custodial" or "trust," indicating that financial assets, goods, and services would be handed to an institution. Most customers agree to give their data or store cryptos with these corporations if they are reputable businesses. Not only trading services, but the CeFi companies also provide borrowing, lending, margin trading, and other financial services.
Example
Crypyo.com
The pioneering payment and cryptocurrency CeFi platform are Crypto.com. Through Crypto.com, users may purchase cryptocurrencies at true cost and purchase 55+ cryptocurrencies such as Bitcoin (BTC), Ethereum (ETH), Ripple (XRP), and Litecoin (LTC) with a credit card through our mobile app. The Crypto.com VISA Card gives you access to optimal interbank exchange rates and crypto cashback worldwide.
Pros & Cons
Pros
CeFi provides custodial solutions that share the risk of new users in maintaining seed phrases and keeping the addresses and keys secure.
They are able to provide a larger variety of conventional financial services such as direct support for fiat currencies.
Cons
In centralized systems, users lose the opportunity of having autonomy over their funds.
Risk of compromised privacy when agreeing to share personal information.
DeFi (Decentralized Finance)
Definition
Decentralized finance (DeFi) is a type of blockchain-based finance that does not rely on middlemen such as brokers, exchanges, or banks to offer financial services but leverages smart contracts on the blockchain, such as Ethereum. The DeFi platform enables anybody to lend to or borrow from others, bet on price movements on a vast array of assets using derivatives, trade cryptocurrencies, fence against risk, and earn interest on accounts like savings accounts.
DeFi goes around applications called DApps (decentralized applications) that perform financial functions on a digital ledger known as the blockchain. Instead of executing transactions through a central exchange, the transactions here are executed directly between the participants, through the mediation of smart contract schemes. DApps are typically accessed through a Web3-enabled application or browser extension, such as MetaMask which allows users to interact directly with the Ethereum blockchain through a web page. Many of DApps can connect and work together to create complex financial services.
Example
MetaMask
MetaMask is the most familiar DeFi wallet with 30M active users. It utilizes browser integration and attractive design to serve as one of the primary gateways to the world of Web3, decentralized finance (DeFi), and NFTs. By connecting MetaMask to Ethereum-based Dapps, users can spend their coins in games, stake tokens in gambling applications, and trade them on decentralized exchanges (DEXs). It also gives users an entry point into the emerging world of decentralized finance, providing a way to access DeFi apps such as Compound and PoolTogether.
PancakeSwap
PancakeSwap is a quick and cheap decentralized exchange native to Binance Chain for swapping BEP-20 tokens. Users will need their own crypto wallets such as Trust Wallet, MathWallet, and Binance Chain Wallet to use PancakeSwap, as the DEX does not support fiat currency. On Pancakeswap, if the tokens are traded on other networks such as ERC, BEP 2, etc. all have to be converted to BEP-20 to be traded.
Pros & Cons
Pros
DeFi is permissionless and inclusive. It allows anyone with a crypto wallet and an internet connection access DeFi services without having to wait for bank transfers or pay conventional bank fees (but maybe add other crypto-specific fees, ex: gas fees).
Transactions are in real-time and transparent. The market is straightway updated and the high level of transaction data transparency ensures all users can view network activity.
Cons
DeFi technology is nascent and has not yet been exhaustively stress-tested at scale over a long period of time. Funds may be lost or placed at risk. In addition, DeFi has flourished in the absence of norms and regulations, therefore legal protection for consumers is inadequate.
The enlarged technical architecture of DeFi can have various failure points, expanding the attack surface accessible to hackers.
Risk of asset loss if users forgot the secret phrases.
Cefi vs. Defi comparison
Final Thought
Both phrases have advantages and disadvantages that align with user objectives. Both Decentralized and Centralized Finance aims to achieve the same goal. They plan to make crypto trading popular and improve the trading volume. However, the way these two ecosystems carry out their objectives is different. With DeFi, consumers have trust that the system will execute promised services as advertised. On the other hand, with CeFi, consumers trust a business's workers to operate funds and perform the business's services.
Recently, the new term 'CeDeFi' is developing. Centralized decentralized finance (CeDeFi ) is an innovative blockchain-based financial ecosystem. It was formed by a collaboration of crypto industry leaders, including Binance, MakerDAO, and Kyber Network. CeDeFi offers customers a decentralized platform for accessing a vast array of financial services, including lending, borrowing, and payments. CeDeFi has the same merits as DeFi, but with greater control and centralized decision-making. We will have an article to analyze CeDeFi potential to change the way of finance world soon.