In the world of cryptocurrencies centralized and decentralized finance has all kinds of products and services but before we jump into investing in this world one important question needs to be answered. What is the difference between Cefi and Defi?
What is Cefi?
Centralized finance (Cefi) is very similar to the traditional finance we all know and use. It is a centralized platform usually created by an individual or a team offering any product or services related to cryptocurrencies from buying and selling to borrowing and margin trading.
Just like the traditional finance in Cefi there is an intermediary platform which is called a Centralized Cryptocurrency Exchange (CEX) where you would deposit your assets and can use the services they offer.
Examples of Cefi services would be spot trading, margin trading with leverage, borrowing and more.
Decentralized finance (Defi) is a new and innovative way of doing financial transactions which uses smart contracts and algorithms. By using blockchain technology users can make financial transactions on decentralized networks like Ethereum, polygon, avalanche and many more without any intermediary.
Defi is run on a peer to peer system through decentralized apps (Dapps). These applications provide services examples of them would be yield farming, token swapping, liquid staking, lending and more.
Is Defi better than traditional banking?
traditional banking is centralized meaning the banks stand in the way of sender and receiver. Let’s say I want to buy a car,
In traditional banking, I have to send a request to my bank for transferring the amount to the owner of the car then the bank would check If I have the said amount after that the bank would make the transaction and notify me that it is completed then I would have to inform the owner that the amount is transferred to your account.
But the same process in Defi would be different because I can directly transfer the money myself to the owners account without any intermediary and we can make the deal there.
Defi is considered better than traditional banking in four section
- The use of open source code and the ability that the transaction is visible for everyone to see which reduces fraudulent activities.
- Developers can use Smart contracts to create the same services banks give like borrowing and lending, transferring funds and etc. but without them being in the middle.
- The ability Defi gives users to have full control over their assets instead of an intermediary.
- And lastly the cheaper cost of transactions.
What is the difference between Cefi and Defi?
- The most important difference is Cefi platforms have custody over your money meaning you will have to trust the CEX with your money but in Defi you are in control of your assets and can withdraw them anytime you wish.
- KYC is always needed when working in Cefi whereas in Defi you can operate completely anonyms.
- Transparency is another issue where in many occasions on Cefi platforms has led to illegal and unethical behaviors which mostly ends in users losing their assets however in Defi all the transactions are recorded and visible for everyone to see on the blockchain.
- Security is an issue on Cefi platforms because they are vulnerable to security breaches and hackers stealing user’s money whereas on Defi each individual has a wallet which is protected by a private key or if they really want to be secure they can use a hardware wallet.
- Regulations is another difference where Cefi follows the rules and regulations of governments and need to have anti-money laundry, KYC and etc. where Defi doesn’t require much regulations.
- And lastly Innovation has been mostly the same for Cefi and doesn’t have much room for big and new improvements but because Defi is fairly new we still haven’t seen its maximum capacity and maturity so we can be hopeful that in the coming years Defi would have so much to offer.
In conclusion each platform has its own advantages and disadvantages Cefi is more familiar for beginner users and offers good services if you are willing to trust the platform and accept the risks but Defi seeks to eliminate the intermediaries and give power and control to the users many believe that the future of finance would be in decentralized finance.