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Digital currencies are no longer a term that only a few are aware of. Presently, these are not merely organizations that show an inclination towards the crypto space, but a big number of retail investors are ready to start making investments in digital currencies. With the idea of digital currencies expanding with the passage of time, the talk of the hour has now shifted to the latest set of considerations which are decentralized finance (DeFI) and centralized finance (CeFi). Though both these provide a broad range of digital currencies that are associated with financial services, they are varied from each other. This article will throw light on the comparison between DeFi vs CeFi.
What Are Centralized Finance (CeFi)?
Before the introduction of DeFi, the standard trading platform was centralized finance (CeFi). It manages a stronghold in the crypto space. In CeFi all trade orders in crypto are taken care via a central exchange. Funds are handled by specific operating the central exchange. It implies that you do not own a private key that offers you access to your wallet.
Along with that, the exchange identifies which coins are listed by them for trading or the amount of fees you are required to pay to trade with their exchange. Concluding the idea of Centralized Finance, you do not own your digital currencies when selling or purchasing through a centralized exchange. Moreover, you are subject to the rules of a centralized exchange levied on you. Also, you are required to abide by the rules that have been set by the centralized exchange.
What Is A Decentralized Exchange (DeFi)?
No exchanges are associated with the decentralized exchange. The whole process functions through automated applications that are created over the blockchain platform. Along with that, decentralized finance formulates a transparent and fair financial system where anyone can take part. It enables unbanked people to avail banking and financial services through blockchain technology.
DeFi emphasizes creating an open-source, transparent, and permissionless financial service ecosystem. The decentralized financial operating system provides services, including yield farming, borrowing, crypto lending, asset storage, and many more.
The advantage of using DeFi in DeFi vs CeFi is that you have complete control over your assets and also you own the key pair for your wallet. Along with that, users who want to take part in DeFi are required to use dApps (decentralized applications) constructed on the blockchain platforms to avail the DeFi services.
DeFi Vs CeFi: How Are They Different?
Though you would find many variations between CeFi and DeFi, the question is whether customers should trust technology or humans.
In DeFi vs CeFi, in the case of DeFi, users trust that the technology will act as proposed to implement on services being provided. On the contrary, with CeFi platforms, users trust the people of the business to handle funds and implement the services of the business.
Both DeFi and CeFi provide a wide range of digital currency-related financial services. Let us discuss some of the characteristics and functionalities of both the ecosystems that segregate them from each other. Here is a comparison chart of DeFi vs CeFi.
Parameters | DeFi | CeFi |
Funds Custody | The user has complete authority over funds custody. | Outside of user’s custody |
Services available | Borrowing, Lending, Payments, Trading | Trading, Borrowing, Fiat-to-crypto, Payments, and Lending |
Personal Information | Proof of Work | Pluggable Framework |
Security | Not accountable for funds. | Vulnerable in case of security bridges on the exchange. |
Market Cap | $16 billion* | $324 billion* |
Customer Service | NA | Provided by major changes. |
| Risk Factor | Security relies on the technology you are using. | Centralized exchanges are responsible for security. |
Now that you know the difference between DeFi vs Cefi, let us have a look at some of its use cases. Let us begin with some DeFi and CeFi examples.
Use Cases Of CeFi
Coinbase
Coinbase is a digital currency exchange that facilitates borrowing, margin trading, trading, native stablecoin, CeFi lending, payments, and many more.
Fairlay
It is a Bitcoin Prediction Market and Exchange that operates on the CeFi model.
BlockFi
A digital currency and fiat borrowing and lending channel.
Celsius
A digital currency payments, borrowing, and lending platform.
Ledn
An insured BTC to DAI lending and borrowing platform.
Libra
A financial infrastructure and digital currency layer across the globe.
Use Cases Of DeFi
Totle
Totle is an aggregator of decentralized liquidity that has automatic price optimization.
Augur
A decentralized predictions market.
Nexus Mutual
A decentralized insurance tool.
Kyber
A decentralized exchange.
MakerDAO
A decentralized stablecoin lending and minting tool.
bZx
A decentralized margin trading and lending platform.
Conclusion
After the comparison of DeFi vs CeFi, it can be concluded that both Centralized and Decentralized Finance focuses to achieve a similar goal. They aim to make crypto trading famous and enhance the trading volume. However, the way these two systems carry out their functions is different.
CeFi assures the security of funds and also fair trade on those funds. Investors that have conventional currency can also take part in the process of crypto trading. Moreover, CeFi exchanges offer them with customer support services that are absent in DeFi services. On the contrary, DeFi aims to create space intrusion free. It offers an area for investors to enact their strategies without having to deal with a middle body.
Both of these structures have their advantages and disadvantages. It depends on the investor and their requirements. If you prefer privacy and transparency, DeFi is the right structure to choose from. On the contrary, if your focus is on trust, sharing of flexibility, risks, and increased choices to invest, you should opt for CeFi.
