Previously traditional financial services like payments, lending, and borrowing were performed successfully via established financial institutes and banks.
But now, emerging technologies such as Web3.0, Blockchain, AI, and ML are transforming the entire digital world. Moreover, these technologies made cryptocurrencies more accessible and familiar, and due to this crypto and NFT space is flooded with various new updates.
If I talk about the most trending term and updates related to the Blockchain ecosystem, then it is DeFi and CeFi. Now you might be wondering what they are. They both are crypto financial services that manage crypto trades.
Now the question arises if both offer the same services, which is better? Well, to help you find the best one here, we have made a comparison between both DeFi and CeFi.
So, let’s begin the DeFi vs. CeFi war!
Decentralized Finance (DeFi) Overview
DiFi is a new approach to blockchain-powered finance and has seen tremendous growth from less than $1 billion in 2019 to more than $100 billion just 2 years later, enticing at least 1 million investors in the process.
Additionally, the number of institutional investors entering the DeFi industry market is expected to grow to $800 billion in 2022.
DeFi is an open financial system that brings transparency and accessibility to the worldwide Blockchain market. This decentralized financial system offers various services such as borrowing, crypto lending, yield farming, asset storage, and much more. Moreover, using DeFi, unbanked people can also access banking and financial services with the help of Blockchain technology.
Using DeFi, you have full command over your assets and own the key pair for your wallet. To use DeFi services, users need to use dApps built on Blockchain platforms. To better understand DeFi, you can hire Blockchain developers from a reliable Blockchain development company (Infrablok).
DeFi Key Features
Permissionless – Anyone can access the DeFi blockchains without any approval or acceptance. Moreover, decentralized finance platforms provide outstanding accessibility and allow interaction with the community.
Trustless – The most significant benefit of utilizing DeFi services is you don’t ought to trust that the service will function as promoted. Users can verify that DeFi services function as intended by auditing their code and utilizing external tools like Etherscan.
Persisted innovation – The DeFi crypto-list is filled with various examples where capabilities are being created and new ones are being tested. The ecosystem is filled with a broad range of innovative financial services.
Some Popular And Real Use Cases of DeFi
- Totle is an aggregator of decentralized liquidity with automatic price optimization.
- Augur a decentralized predictions market.
- Nexus Mutual is a decentralized insurance tool.
- Kyber is a decentralized exchange.
- MakerDAO is a decentralized stablecoin minting and lending tool.
Centralized Finance (CeFi) Overview
Centralized Finance has a stronghold over the cryptocurrency industry. In CeFi, all crypto trade orders are controlled via a central exchange, and funds are managed by specific operating the central exchange. It means you don’t own a private key that gives you access to your crypto wallet.
Moreover, most CeFi service providers have an Anti-Money Laundering (AML) and Know Your Customer (KYC) policy to concede with the jurisdictions’ regulations. It means you have to share your personal details to check any sort of activity.
CeFi Key Features
Flexible conversion – CeFi makes conversion of fiat currency into cryptocurrency easier.
Interoperability – CeFi allows easy trading, lending, borrowing, and payment-based services by utilizing funds in custody from multiple chains.
Services for cross-chain swaps – Centralized finance allows cryptocurrency trading based on independent blockchain platforms. While DeFi is not preferred because of complexity and delays in cross-chain swaps.
Centralized Exchange (CEX) – Using the centralized exchange, you can manage the portfolio via an internal account and avoid blockchain transaction fees.
Some Popular And Real Use Cases Of CeFi
- Coinbase is a cryptocurrency exchange that facilitates margin trading, native stablecoin, lending, payments, trading, borrowing, and more.
- Fairlay is a Bitcoin prediction market & exchange that runs on the CeFi model.
- BlockFi is a cryptocurrency and fiat borrowing and lending platform.
- Libra is a global financial infrastructure and cryptocurrency layer.
DeFi vs. CeFi: Know The Difference Between CeFi And DeFi
Centralized finance and decentralized finance have a similar focus that is increasing the adoption of blockchain in the world, but some critical differences lie between both. Here take a look at the differences between DeFi and CeFi.
1. Atomicity
A blockchain transaction allows sequential measures to be executed. These activities can be made atomic, which means transactions would either get completed with all activities or fail together. This programmable atomicity segment is not present in CeFi.
2. Anonymous Development
Centralized finance provides less anonymity to users in comparison with decentralized finance. Unidentified groups of individuals handle a majority of DeFi projects.
3. Custody
Unlike CeFi, DeFi gives its customers the full power of their assets. However, users have to face challenges related to all the technical hazards. At this point, CeFi is more advantageous. The CeFi platforms act as custodians and are a famous choice for managing cryptocurrency assets.
4. Malleability Of Execution Order
Users working on permissionless blockchain require to share the transactions they desire to complete on a P2P network. Due to this order malleability, DeFi sees numerous market manipulation tactics. Whereas, CeFi has a strict regulatory provision that leaves no scope for market manipulation.
5. Fiat modification Flexibility
As the CeFi platform works on a model where fiat currency is applied for exchange, it gets simpler for users to switch to CeFi compared to DeFi.
6. Security
Well, CeFi does its best to maintain entire security, but there are multiple instances of breaches around CeFi-based cryptocurrency exchange platforms. Whereas, in the case of DeFi, the user just have to care about code and the consensus algorithm employed in the decentralized finance (DeFi) project.
DeFi vs. CeFi Comparison Table
Wrapping Up
CeFi and DeFi work around the same financial services, including trading, lending, insurance, staking, issuance of money, payments, financial data, asset management, over-the-counter (OTC) trading, and more. Users do not even notice if their crypto service is based on CeFi or DeFi infrastructure.
Our Blockchain experts prefer merging CeFi and DeFi, where both the infrastructures can be used together. Examples related to it you can see below:
- Oracles like Chainlink transport CeFi data to DeFi
- Synthetix allows users to trade their CeFi financial components as DeFi derivatives.
In addition, DeFi is continually optimizing CeFi to meet blockchain’s impressive offerings. For example, decentralized finance’s exchange mechanism known as Automated Market Makers (AMM) has encouraged CeFi’s over-book architecture.
We believe that DeFi and CeFi have a place in the Blockchain room. For new Blockchain entrepreneurs, it is important to know the difference between DeFi vs. CeFi, as when you have a clear understanding of both crypto financial services, then only you can pick the best architecture for your next project.
Moreover, if you need any help in choosing the best between DeFi and CeFi, connect with our Blockchain Experts; they will help you make the right decision by analyzing your project requirement.