CeFi is an approach within the cryptocurrency market to handle the purchase, sale and trading of cryptocurrency tokens through a central exchange. Although centralized finance and decentralized finance focus on the same thing – increasing the adoption of blockchain in the world, there are some crucial differences that lie between both. Flexible conversion – CeFi makes the process of converting the fiat currency into cryptocurrency easier. The ease that the platforms offer, lead to greater customer onboarding – an example of which can be seen in Coinbase and its 89 million global users. Seamless customer support – Within every Centralized Exchange, there is an internal account for managing users’ funds.
As CeFi businesses are legal entities and connect to conventional payment channels (credit cards, Apple Pay, etc.), they still involve a middleman for some operations. As a result, the handling fees may exceed the costs of similar services in DeFi. Well-established CEXs are licensed business entities with formal leadership and strict internal procedures. They comply with applicable regulations in their jurisdiction, including KYC, AML, user protection, and investor protection requirements. CeFi businesses are also liable for losses due to hacks or other malfeasance.
Most CeFi service providers tend to abide by regulations outlined by the local authorities where they operate. These regulations make it mandatory for centralized financial institutions such as exchanges and trading platforms to implement Know Your Customer and Anti Money Laundering practices. The benefit of using DeFi over CeFi is that you have full control over your assets and own the key pair for your wallet.
Features of CeFi
Imagine this process happening more-or-less automatically through code, and voila! As we’ve already discussed, DeFi platforms use a decentralized structure, meaning no one person or group has control at any given time. DeFi platforms also give their customers total control of their assets. But if you don’t know how to safeguard your assets properly, you may want your chosen financial services to hold them for you. But modern “CeFi” relates to using crypto assets without the element of decentralization. DeFi, on the other hand, offers financial services in a totally decentralized, peer-to-peer nature, where decision-making and security are spread across the network members .
Of course, it’s only been in digital form for a few decades, but people were using a centralized system of money as far back as ancient Mesopotamia. You don’t have to put your faith in the service to do what is promised, which is the main advantage of using DeFi services. By reviewing their code and using third-party tools like Etherscan to determine whether a transaction was adequately executed, users may confirm that DeFi services operate as intended.
On the contrary, because CeFi runs a tough KYC and AML check, the institutions in CeFi offer transactions at no extra cost. A blockchain transaction enables sequential actions to be performed. These actions can be made atomic, meaning the transactions would either complete with all the activities or fail together.
DeFi services rely on smart contracts and currently operate beyond government oversight. Their users maintain control of their private keys and do not have to provide any personal data. Centralized platforms are regulated, require KYC and AML (Anti-Money Laundering) compliance, and take custody of users’ funds. Peer-to-peer interactions are based on immutable smart contracts — computer programs that automate agreements between people or entities.
Monetary Banking Services
Despite some subtle differences, the final debate always comes as to whether people should place their faith in technology or humans. Users of DeFi rely on the technology to operate as intended to take advantage of the services being provided. Users of CeFi, on the other hand, have faith that a company’s employees will handle money management and service delivery.
DeFi vs CeFi | Difference between Centralized and Decentralized Finance
For example, in 2020, liquidation prices on Maker collapsed, and some liquidators received free ETH due to network congestion and Dai illiquidity. In this environment, financial products are owned by the community without top-down control. With its contractual efficiency, shared infrastructure, and public nature, a DeFi protocol can foster financial inclusion. It reflects a shift from traditional finance to direct transactions powered by public computer code. Lido, Rocket Pool, Marinade Finance, Ankr, and Staker are protocols where crypto users stake their assets and earn rewards.
Moreover, because users don’t have custody of their money, they’re susceptible to censorship and asset confiscation. CEXs are generally easier to use with interfaces similar to conventional financial apps. Transaction costs can be lower—depending on the CEX—since there’s no interaction between transactions and the blockchain. Transaction costs tend to be lower on CEXs as fees are purely for profit and don’t involve potentially high gas fees. This is because centralized services can be more easily corrupted and attacked, as there is a central point of power and control. In addition, such platforms are also more exposed to technical malfunctions that can shut down the entire server.
DeFi vs CeFi: The key differences
It enables DeFi users to access Bitcoin via DeFi without requiring to use the token directly. The recent bankruptcy filing by FTX, one of the largest crypto exchanges in terms of trading volume, sent shock waves among crypto investors, who were already losing faith in CeFi platforms. Following the collapse of FTX, investors have been flocking to DeFi exchanges/platforms in large numbers. By November 15, 2022, Uniswap had become the second-largest exchange for Ethereum trading, replacing the centralized exchange Coinbase. While DeFi has a reputation among speculative traders for being lucrative, but volatile, there do exist a few newer, “boring” examples of how DeFi can make the average person’s life better. This is where we take real world assets, such as a business loan or mortgage, and bring them on-chain while enabling the borrowing of money and taking out loans from a pool of lenders.
Furthermore, large CeFi companies take care of users’ data and give assistance to the customers through a dedicated customer support team, thus bettering the trust level. What is advantageous about working on DeFi blockchains is the absence of a central authority who would approve or deny access. Instead, DeFi cryptos enable peer-to-peer transactions without the need to involve a third party. Whether or not it will happen is something that only the future will tell, but what we are seeing happening today is a new competition brewing right within the blockchain ecosystem. The competition, titled “DeFi vs CeFi” or “centralized vs decentralized cryptocurrency”. Moreover, individuals who plan to build on top of a decentralized platform can do that freely.
It provides faster, cheaper, and more secure transactions than TradFi through exchanges, wallets, crypto lending, and other options. Blockchain technology is evolving rapidly as more businesses embrace its versatile applications. The total cryptocurrency market cap exceeds $1 trillion — a gigantic leap from under $200 billion two years ago. Solutions enabled by thousands of digital assets fuel a debate between two approaches to financial services. Lending and borrowing protocols help crypto users lend their idle crypto assets and earn interest in return.
It offers centralized platforms that combine existing banking services with the new digital asset economy, primarily targeting users who are not yet willing to give up fiat currencies. A transparent, open-source, and equal for all kinds of service environment is what DeFi seeks to create. The decentralized financial system provides services, including lending money, yield farming, digital currency, asset storage, and more. You own the key pair for your wallet while using DeFi instead of CeFi. Furthermore, to access DeFi services, users wishing to equip DeFi, decentralized applications created on blockchain technology are a must. Using a combination of smart contracts and algorithms, decentralized finance is an innovative form of financial service.
We hope you’ve noticed the differences between conventional and cryptocurrencies by now. Although it was only introduced slightly over ten years ago, cryptocurrencies have diversified into many different classes. CeFi and DeFi are two major subways for blockchain-based financing.
Permissionless – Anyone from anywhere in the world can use the DeFi blockchains without seeking approval or acceptance. Furthermore, decentralized banking platforms provide better accessibility and opportunities for community interaction. Decentralized platforms have become popular over the past few years, yet many people are still totally bewildered by how they work.
Centralized exchanges have thus been the subject of numerous security attempts. Customers on the centralized exchange are comfortable disclosing personal information and entrusting these businesses with their money because they believe central exchanges to be reliable. Users deposit money to the exchange to manage it in an internal account using a conventional cryptocurrency exchange, like Kraken, Coinbase, or Binance. Even if money is maintained on the exchange, they are not in the users’ possession and, therefore, is open to threats should the exchange’s security procedures fail. It ultimately boils down to relying on an open, permissionless smart system or placing your trust in individuals to responsibly manage your cryptocurrency cash. In any case, the advent of these services is a sign of the future promise of cryptocurrencies and how they will continue to challenge how we understand and utilize money in the modern world.
What our blockchain service experts see happening is a merger of both, where both the infrastructures would complement each other. Even Though DeFi code might not always be open source, its execution should be publicly verifiable to be called a non-custodial DeFi. Thus, unlike CeFI, every DeFi user can observe and then verify the execution of DeFi state changes.