DeFi vs CeFi .
As Bitcoin shook the way we use currencies, decentralized finances (DeFi) are changing the landscape of finance. We look at the advantages and risks of DeFi vs. CeFi (centralized finance) in this article, comparing their advantages and disadvantages. Let’s start by discussing what these two industries are and how they differ.
Decentralized finance and centralized finance are both designed to provide traders with a platform to use cryptocurrencies for their financial needs and services, but they do so in distinctly different ways.
What Is CeFi?
CeFi is a centralized finance exchange that provides crypto trading services as well as loans, interest-earning accounts, lending and borrowing. Similar to traditional financial services, CeFi offers similar services, but also lets users use crypto (instead of fiat money) as collateral.
The fact that these services are offered by a centralized exchange removes some control from the trader. This contributes to a shift in a more decentralized direction than traditional financial trading services.
The trader’s on-platform wallets are typically linked to the platform’s private keys, meaning they are subject to the platform’s rules and fees.
- Processes transactions more quickly
- Streamlined buying and selling processes (fiat-crypto trading)
- Exchange multiple cryptocurrencies across chains
- Support for customers is available
- Third-party compliance leads to higher transaction fees
- Control of funds is lacking
- Data needed for personal identification
What Is DeFi?
On the other hand, decentralized finance platforms use smart contracts to automate traditional financial tools. Once certain criteria have been met, smart contracts are able to execute automatically without intervention from a third party. By doing so, traders can trust the technology rather than a corporation.
Due to the decentralized nature of the industry, it provides a wide range of decentralized services, such as loans, derivatives, insurance, margin trading, etc. Since no one party is in charge, users are in complete control of their funds and can store them wherever they want. Additionally, these services do not require the sharing of any personal information.
The biggest disadvantage of DeFi platforms is that they do not support cross-chain exchanges. Among the platforms used by DeFi are MakerDAO, Compound, and Uniswap.
- There is no need to provide any personal information
- There is no involvement of third parties
- A complete and transparent process
- Regardless of where you live, DeFi is available to everyone.
- There are no cross-chain exchanges
- Beginners should not attempt this
DeFi vs CeFi
Taking a look at decentralized vs centralized finance, we can compare their benefits and risks. Choosing between humans and technology is essentially a question of trust.
An established business manages funds and delivers services, so it makes sense for users to trust the CeFi platform. As a substitute, people may choose to use decentralized financial services in the spirit of decentralized currencies, which provides greater control and greater transparency when engaging in the various activities available.
As investors flock to use DeFi applications, the DeFi industry grew by $125 million in just one month in 2020. While DeFi has grown at an exponential rate over the past few years (the industry is currently worth over $137 billion), CeFi platforms continue to outnumber them. Recent changes in sentiment have resulted in some traders believing that centralized exchanges have become more like banks in how they operate.
Although the traditional financial sector has seen little innovation in the last several decades, both the DeFi and CeFi industries are making tremendous advances in propelling the sector forward. Both have their own benefits and costs, but among the benefits are better access to and innovation in financial services, better infrastructure, and more attractive yields.