Published on January 17th, 2023
The concept of cryptocurrency has become more widely known than ever before. Many retail investors are open to investing in cryptocurrencies, not just organizations.
The conversation has now changed to a new set of issues, Defi (decentralized finance) and CeFi, as the idea of cryptocurrencies has evolved (centralized finance). Although Defi and CeFi both provide various financial services linked to cryptocurrencies, they are different.
iTechnolabs is a Blockchain development company to assist the Cryptocurrency Exchange, End To End DApp Solutions, Smart Contract Development, Crypto-token-development and Crypto Wallet Development.
Defi and CeFi provide various financial services relating to cryptocurrencies, but they differ. In this blog, we explore the difference between Defi vs CeFi.
What is CeFi?
The primary concept behind a centralized exchange is that under centralized finance, all crypto trading transactions are channeled through a central deal (CeFi).
Here, consumers register for an account with various businesses and send and receive money through the same network. This is not all, however. These exchanges support financing, borrowing, and margin trading, among other services, and offer crypto trading solutions.
What is Defi?
Defi refers to a group of financial products and services built using blockchain technology in the public blockchain space. Defi can be described as an open, global financial system. With Defi, you have control and visibility over your money, exposure to international markets, and alternatives to your local currency or banking options.
Here, a reliable internet connection proves to be essential. The markets are constantly open, and no centralized authority can reject payments or refuse you access to anything, which is another unique aspect of this decentralized financial system. The introduction of Ethereum paved the path for leveraging DeFi’s potential inside the financial sector, inspiring companies, and enterprises to develop and implement solutions that created the Defi ecosystem.
With Defi, multiple chances to create a reliable and open financial system became a reality. Defi provides a wide range of services, including borrowing, yield farming, lending in cryptocurrencies, asset preservation, and much more.
Features of Cefi (Centralized Finance)
CeFi has multiple features like:
1. Centralized Exchange
Users deposit money to a stock cryptocurrency exchange, such as Binance, Kraken, or Bitcoin, to handle it in an internal account. Although cash is maintained on the exchange, they are not in the users’ possession, and they are therefore exposed to risks if the exchange’s security precautions are ineffective.
Centralized exchanges have been the target of numerous security threats as a result. Due to their trust in centralized exchanges, customers do not mind disclosing personal information or entrusting these businesses with their money.
Large exchanges also have departments that provide customer service personnel to assist customers. A high standard of customer service gives customers peace of mind and reinforces their perception that their money is safe.
2. The flexibility of Fiat Conversion
Converting from fiat currency to cryptocurrency and vice versa is easier with centralized services than with decentralized ones. Defi services provide fiat with less flexibility than centralized entities often do, which makes it necessary to convert between cryptocurrencies and fiat. The Centralized Finance (CeFi) ecosystem makes it easy to onboard new users, which can enhance the user experience.
3. Cross-chain services
Investing in LTC, XRP, BTC, and other currencies from autonomous blockchain platforms is supported through CeFi services. Defi services do not accept these tokens because cross-chain swaps are time-consuming and difficult.
As many of the most popular and highest market capitalization coins exist on separate blockchain and do not adhere to interoperability standards, it is a significant advantage for CeFi.
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Features of Defi (Decentralized finance)
Defi has multiple features like:
1. Do not need any Permission
Users can use Defi without asking for permission. Users of CeFi must go through a KYC process to access a service, which requires them to provide confidential data or make a payment.
Users don’t need to deposit funds with Defi or provide information about them to use the services directly using a wallet. Defi is accessible to all parties without any restrictions or prejudice, which explains why.
Additionally, anyone who wants to build on a decentralized platform is free to do so. The products created within the Defi ecosystem are made to complement one another. Defi products are also referred to as “money Legos” because of this.
2. Trustless
The main advantage of using DeFi services is that you don’t have to trust them to provide what they promise. Users can verify that DeFi services work as intended by inspecting their code and checking whether a transaction was correctly processed using third-party tools like Etherscan.
3. Quick Innovation
The high pace of innovation at DeFi is another critical benefit. The Decentralized Finance Ecosystem continuously develops its current capabilities and tests new ones. The once build-centric DeFi industry has evolved into a thriving ecosystem with cutting-edge financial services.
DeFi space has been attempting to give alternatives to the problem in functionalities where centralized financial services have developed. For instance, technologies like BTC and WBTC that are suitable with decentralized protocols bridge the gap by acting as tokens pegged to the value of BTC and can be used to get around DeFi’s inability to allow the movement of incompatible cryptocurrencies like BTC. Users of DeFi can now access Bitcoin using DeFi without first having to utilize the token.
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Defi vs CeFi: The key differences
There are some significant distinctions between centralized finance and decentralized finance, even though both aim to increase the usage of blockchain globally. Let’s investigate these disparities:
1. Public verifiability
Even if the DeFi code may not always be available online, its execution must be open to public inspection to qualify as a non-custodial DeFi.
2. Atomicity
A blockchain transaction can include multiple financial transactions and sequences of actions. The combination can be made atomic so that the whole transaction will succeed or fail simultaneously. CeFi doesn’t have this programmable property of atomicity, but it is possible to enforce CeFi’s atomicity through costly and time-consuming legal agreements.
3. Custody
DeFi, compared to CeFi, enables clients to control their assets whenever they want directly. Without such insurance, the majority of technology risks are borne by users. It is common to hold bitcoin assets on centralized exchanges. These are the same as traditional custodians.
4. Execution order malleability
When using permission less blockchain, users frequently use a peer-to-peer network to share publicly the transactions they want to carry out. Because there is no persistent centralized body directing the order of transaction execution, peers could, for instance, engage in competitions for transaction fee proposals. This order malleability has allowed for the development of many market manipulation strategies that can be used frequently on blockchain.
Contrarily, CeFi regulatory bodies impose strict standards on financial institutions and services, including how transaction orders must be carried out. This is possible even though CeFi’s financial intermediaries are centralized.
5. Privacy
Only blockchains with non-privacy-preserving smart contracts include DeFi. As a result, rather than offering actual privacy, these blockchains offer pseudo-anonymity. These marketplaces have the authority to disclose address ownership to law enforcement, given that centralized exchanges with AML standards are typically the only feasible alternative for converting money to cryptocurrency assets.
6. Cross-chain services
CeFi services can be used to trade BTC and other important coins on different blockchains. DeFi services often do not handle these tokens since atomic cross-chain trades are complex and time-consuming.
CeFi services address the issue by keeping cash out of many chains (whereas tokens for decentralized services must follow Ethereum token standards to achieve interoperability). This is a massive advantage for CeFi because many of the highest market capitalization and most traded coins live on different blockchains and do not follow interoperability regulations.
7. Inflation
The depreciation of an existing currency supply brought on by adding a new supply is known as inflation. Even though the loss of a currency’s purchasing power is what is meant by inflation, the connection between supply and inflation is sometimes obscure; occasionally, the money supply might rise without contributing to inflation.
CeFi continues to allow central banks to issue fiat currencies. The value of a representative basket of consumer goods, also known as a consumer price indicator, is often used to measure inflation.
In the DeFi universe, it is difficult to determine the asset supply of multiple cryptocurrencies. Bitcoin (BTC) will likely face a problem where the supply has a hard cap, but the economic activity it must support does not, resulting in a shortage of currency. Blockchains, including Bitcoin, may also be susceptible to security instability without a block reward and hence no inflation.
It will be interesting to watch if the inflation of the currency system causes BTC and other cryptocurrencies to experience substantial income disparities. There needs to be conclusive proof that Cryptocurrencies solve this issue.
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iTechnolabs is a Blockchain development company to assist the Cryptocurrency Exchange, End To End DApp Solutions, Smart Contract Development, Crypto-token-development and Crypto Wallet Development.
The vital lesson to be learned from this argument between DeFi Vs CeFi is that they are both aiming to make cryptocurrencies widely accepted through widespread use. Therefore, to bring the entire crypto community together, the debate should not be Centralized VS Decentralized but rather Centralized Finance with Decentralized Finance. We should strive to have them coexist since that is what they should do.
