Traditional financial services, such as borrowing and lending, were only available through banks and established financial institutions. The introduction of blockchain technology changed everything. The discussion shifted to a new set – decentralized finance and centralized financing (CeFi) – as cryptocurrency’s popularity grew.
What is Centralized Finance (CeFi), and how can it help you?
Before DeFi was invented, Centralized Finance was the standard in trading cryptos. It holds a stronghold on the cryptocurrency industry. Centralized finance (CeFi), all orders for crypto trades are handled by a central platform. Central exchanges manage funds. It doesn’t mean that you have a private keys that gives you access to your wallet.
The exchange will also tell you which coins they offer for trading, and how much you have to pay to trade on their exchange.
You don’t have ownership of your cryptocurrencies when you buy/sell via a central exchange. A centralized exchange will impose rules on you. The centralized exchange also sets the rules.
What is Decentralized Financial Management? (DeFi)
Decentralized exchange does NOT involve an exchange. Automated applications, built on top blockchain platforms, manage the entire process. Decentralized finance ensures that everyone can take part in a fair and transparent system of financial transactions. It allows those who don’t have bank accounts to gain access to banking and financial services through blockchain technology.
DeFi is an open-source financial service platform that is transparent, permissive and free of all restrictions. This decentralized financial system provides services such as borrowing, yield farming (crypto lending), asset storage, and many more.
DeFi is a better option than CeFi because you have complete control over your assets, and can also own the key pair that will be used to access your wallet. Decentralized apps (dApps), built on the blockchain platforms, will be required to participate in DeFi.
What makes DeFi different to CeFi?
DeFi and CeFi would have many differences, but the question is whether users should be able to trust technology or people.
DeFi gives users confidence that the technology will execute as promised on the services they are receiving. CeFi, on the other side, trusts business personnel to manage funds and implement business services.
Both DeFi and CeFi deliver a wide range of cryptocurrency-related financial services. Let’s talk about the unique features and functions of each ecosystem that make them different.
CeFi features
- Centralized Exchange (CEX).
To manage funds in an internal account, users can use a traditional cryptocurrency trading platform such as Binance or Kraken. While funds are stored on exchanges, they are not in the users’ possession and can be hacked if security measures fail.
This has led to various security breaches against centralized exchanges. Customers who are part of a centralized exchange don’t mind sharing personal information with these companies or placing funds in their custody, as they believe central exchanges to be trustworthy.
Additionally, large exchanges may have dedicated departments with customer service representatives who can assist customers. Customer satisfaction is enhanced by the high level of customer service, which gives customers the comfort level they need to feel secure and in good hands.
- Fiat Conversion’s Flexibility
For fiat currency conversions, centralized services are more flexible than decentralized ones. DeFi services are not flexible enough to allow fiat or cryptocurrency conversions.
It is easy to onboard customers in the Centralized Finance, (CeFi), ecosystem. This can improve customer experience.
- Cross-chain service
CeFi services enable trading LTC, XRP, and BTC from independent blockchain platforms. DeFi does not support cross-chain trades because of the complexity and latency involved. CeFi can get custody of funds on multiple chains to overcome this issue. CeFi has a major advantage because many of the highest-market-cap and most frequently traded coins are stored on separate blockchains that don’t use interoperability standards.
DeFi: Features
- Permissionless
DeFi does not require user permission. CeFi requires users to go through a KYC procedure to access the services. This means they need to provide their personal information and deposit some money to gain access to them.
You can access the services directly using your wallet, without registering or depositing any money with DeFi. DeFi is freely accessible to all, and there is no discrimination.
People who wish to build their own decentralized platforms can also do this freely. It facilitates collaboration and provides high levels of accessibility. DeFi products are intended to be mutually beneficial. DeFi products can also be called money legos.
- Trustworthness
DeFi services have a number of benefits. You don’t have the need to believe that they will perform as promised. DeFi users can audit their code to verify that the service is working as expected.
- Quick Innovation
DeFi also has a fast rate of innovation. Decentralized Finance Ecosystem continues to build new capabilities and experiment with new capabilities. DeFi has evolved from a build-centric space to a rich ecosystem with innovative financial services.
DeFi space is working to provide alternative solutions in functionalities that have seen centralized financial services flourish. DeFi is unable to allow the transfer incompatible cryptocurrencies, such as BTC. Solutions like tBTC/WBTC, which are compatible with decentralized protocols, eliminate this gap by acting as tokens based on the BTC value. DeFi users can access Bitcoin via DeFi, without having to use the token.
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