CeFi - also known as Centralized Finance - is a blockchain platform that functions like a traditional financial institution. DeFi, or Decentralized Finance, is a brand-new class of financial systems using open-source computer networks.
Although CeFi and DeFi perform similar tasks, there are some significant distinctions between the two. It's important to understand these two terms before investing in cryptocurrencies. Later, you'll also learn why DeFi is the future.
CeFi vs. DeFi: What is CeFi?
CeFi or Centralized Finance is a type of service provider. Using a centralized institution, users can engage in various financial activities. For example:
- Buying crypto
- Selling crypto
- Trading crypto
- Storing crypto
- and more
One popular example of a CeFi platform is a centralized exchange (CEX). Every CEX differs but in general, it is a place where you can store, buy, sell, and trade cryptocurrencies. A single, authoritative body controls a CEX. This is the very essence of centralization. Hence, users must trust this institution as it is the first and last line of defense between a user and their funds.
To grasp this concept, imagine CeFi as a traditional financial services institution - like a bank. When you want to use bank services such as applying for credit and opening savings accounts, you must deposit funds for the bank to hold. The bank then controls your money until you withdraw. In addition, you are charged a fee for using these services. The same fees and concepts apply to any CeFi platform.
What is the purpose of CeFi?
Today’s trading ecosystem still faces some challenges - particularly in guaranteeing fair trading. Centralized Finance attempts to make financial services as efficient and cost-effective as possible. While also ensuring fair exchanges throughout crypto transactions. However, these advantages are often offset by the high risk that centralization provides.
CeFi vs. DeFi: What is DeFi?
Decentralized finance (DeFi) is a newer model compared to centralized finance. It has a similar goal with different mechanisms.
- Organizing and enabling cryptocurrency transactions
- Exchanging cryptocurrency
- And other financial services using decentralized models.
DeFi, as the name implies, has no centralized authority. In other words, no one will have the power to impose rules or control your money. It differs from standard forms of finance for fiat currency in cryptocurrency marketplaces.
If CeFi has CEX, the DeFi model also includes the concept of decentralized exchanges or DEXs. This helps connect and enable users wishing to execute Bitcoin transactions. As a result, a transaction occurs without a third-party central authority if two peers can agree to do so.
How does DeFi work and what is a smart contract?
An important part of DeFi is a smart contract. Smart contracts automatically execute financial transactions. All without the need for a central authority. Cryptocurrency assets that transfer from one entity to another are stored in a smart contract. DeFi operates on a peer-to-peer principle. Thus, a central authority is not required to enable a smart contract.
Centralized vs. Decentralized Finance
Blockchain technology serves as the core building component for the operations of both DeFi and CeFi. Both strategies are used to provide a variety of financial services related to cryptocurrencies.
Although CeFi and DeFi have similar approaches to cryptocurrency, there are also quite a few differences between the two models. To compare, here are the lists of top features for CeFi and DeFi.
- Centralized Exchange (CEX): As mentioned above, CEX makes it possible for users to send funds and then manage them with an internal account.
- Broader financial services: One of CeFi's advantages is its wide variety of services to choose from, such as taking loans, earning interest, lending, and borrowing cryptocurrencies since they are operated by institutions that tie to traditional finance.
- Fiat conversion: The CeFi ecosystem enables more flexible conversion from fiat to cryptocurrency and vice versa.
- Cross-chain services: CeFi allows complicated cross-chain swaps, such as the trading of LTC, XRP, BTC, and other highly traded and market-capitalized coins produced by independent platforms.
- Decentralized Exchanges (DEX): DEX allows users to trade cryptocurrencies in an unguarded environment without the need for a middleman to handle the transfer and custody of cash.
- Asset custody: In the DeFi ecosystem, users have full authority over their asset custody without the need for any third-party involvement.
- Smart contract: Self-executing contract in which the terms of the arrangement between the buyer and the seller are stated directly. DeFi transactions can now be automated, transparent, and safe thanks to smart contracts.
- DApps: DApps which stands for decentralized apps is proof of how DeFi supports new types of applications for financing. DApps puts the future of finance in the hands of creative blockchain developers. This means limitless innovation compared to CeFi.
CeFi vs DeFi: Why DeFi is Better
From the key differences above, you can see how both systems have their advantages. However, if you look closely, there are several reasons why DeFi has better offers for investors and traders.
- Decentralized: The fact that customers do not have to wait or rely on a centralized system is precisely the reason why DeFi is superior. Similar to when utilizing bank service, you have to adjust with their operational hours and availability to access any financial products or services. DeFi, on the other hand, gives you constant direct control over your assets.
- Anonymity: On the blockchain, smart contracts issued by DeFi can be transparent, but user identification is not necessary or required. On the other hand, you may have to give some sensitive and personal information the moment you agree to send funds to the CeFi ecosystem.
- Security: Customers don't mind giving out personal information or giving these companies their money since they trust centralized exchanges. Money is maintained on the exchange within the CeFi system, but because it is not in the users' custody, it is subject to some security issues. As a result, centralized exchanges have come under a lot of security risks.
- Accessibility: You only need an internet-connected device to gain access, regardless of whether you want to build your own DeFi application or use one that already exists.
- Transparency: Since it is code and technology-based, everyone on the blockchain may see the code that runs the DeFi service, making it possible for users to verify or audit the service including the smart contract.
- Customer-centric: Besides having access to financial services, users can enjoy DeFi incentive models by receiving rewards for using the service. Also, users have the option of using a publicly hosted interface or their custom one to access the service.
- Compatibility: Due to their shared blockchain network, DeFi services are compatible with one another; when cross-blockchain interoperability networks are adopted, this phenomenon will be further reinforced.
- Lower cost: Most of the DApps have shown that they offer lower fees than CeFi-based transactions.
What does the future of DeFi look like?
The future of DeFi looks very much like the past of DeFi - albeit with a new twist. WALBI takes the best parts of all your favorite DeFi platforms but adds innovative touches to take them to the next level.
For example, WALBI’s inclusion of artificial intelligence (AI) gives crypto traders and HODLers access to unique abilities not found in traditional DeFi platforms.
While CeFi platforms continue to connect with TradFi banks bringing more of the same to the digital asset industry, DeFi continues to push the limits of what is possible with Web3 technologies. WALBI is at the forefront of that push and it’s free for everyone to try today.