DeFi vs CeFi
Before the reflection on differences between CeFi and DeFi, let us focus on what is CeFi. It is an abbreviation for centralized finance referring to the closed financial markets. On the other hand, when we reflect on what is DeFi, it is evident that it is the opposite of CeFi. Decentralized finance points out the different tools, frameworks, and technologies that enable open, secure access to financial services with assurance of flexibility and control.
The definitions of DeFi and CeFi point out the differentiating factor of a centralized entity, which dictates the level of trust with each approach. If the trust is vested in the business itself, you can identify it as a trait of CeFi. As a centralized approach, CeFi implies that a business has to ensure management, execution, and sustenance of trust with ethical measures at any cost.
In the event of a breach of trust, end-users are less likely to exhibit trust in a CeFi business. CeFi also presents credible advantages of flexibility by adapting services such as fiat conversions, direct service, and cross-chain exchanges according to customer needs.
Centralized Finance (CeFi)
Decentralized Finance (DeFi)
Conventional trading activities (margin trading, payments, derivatives trading, lending, and borrowing)
Tailored for customer needs
No direct assistance with limited support
Fiat to Cryptocurrency conversion
Mandatory requirement for accessing CeFi services
No need for KYC to access DeFi services and only a unique identification number is required
Not applicable for all assets
Not applicable for all assets
Support for Stablecoins
Transfer of Custody of Funds
No transfer of custody of funds in investments made by a centralized entity
Transfer of custody is imperative for DeFi transactions
Transparency of Transactions
A centralized entity takes away transparency completely
Open-source nature of transactions strengthens transparency
Focused on business
Focused on technology and process
DeFi does not impose any requirements for establishing user identity for accessing financial services. Rather than depending on the personal information of users, DeFi services provide a unique identification number to users for leveraging banking services.
As a result, users have the assurance of safety of their funds and data with all aspects of security vested in the user’s responsibility. Let us take a look at the factors in the DeFi vs CeFi comparison from the perspective of DeFi.
DeFi is capable of providing decentralized exchange platforms that do not have any centralized systems. DEX platforms leverage smart contracts in unison with decentralized protocol solutions and Ethereum. The design of smart contracts also ensures better automation of fulfilling necessary orders. Users of DEX-based systems don’t have to go through the sign-up process for using the concerned service.
The connection of user wallet to DEX service is enough to enable trade on DEX platforms. Apart from the setback of lack of support for cross-service solutions, DEX services enable trading in cryptocurrencies without funds to withdraw from user wallets. The transfer of funds happens only after the execution of the trade to provide a comprehensive guarantee of the safety of funds.
DeFi vs CeFi also points out the permissionless nature of the former. As a result, users don’t need a KYC process like in CeFi services to use DeFi services. Users can connect their wallets to DeFi service, followed by taking necessary actions like fund transfers, trading, and many others.
Additionally, there is no restriction on access to DeFi services due to its permissionless nature. Furthermore, enterprises can leverage DeFi services for the welfare of the general public. At the same time, enterprises can also use DeFi services to expand their business to unreachable geographic locations.
Many players in the DeFi ecosystem are striving for innovation at a rapid pace. The experiments on leveraging decentralization for reforming the existing finance market, along with the arrival of new financial services paint DeFi, is a positive light.
On the other hand, CeFi does not foster innovation due to the centralized approach, albeit without absolving it completely. DeFi also presents a better potential for uncovering new assets with the facility of incentives to users involved in the stages of asset development and growth.
The trust factor in DeFi depends on the complete process rather than on a specific system. As a result, users can assure their funds from theft or wrong transfers with DeFi. The auditing of DeFi services by developers informed users, and interested entities ensure better support for transparency and monitoring of transactions. Therefore, DeFi services present a global approach in comparison to closed CeFi services.