For tech enthusiasts and investors, blockchain and cryptocurrencies have expanded into vast domains. Payment processing, lending, and borrowing have traditionally been handled by established financial institutions.
Within the cryptocurrency world, there are two major types of finance that investors use to purchase cryptocurrency, participate in protocols, and store their crypto assets. Unlike the traditional banking system, which is completely centralized, cryptocurrency allows users to engage in decentralized finance, allowing them to complete ownership and unrivalled access to their funds.
With the rise of cryptocurrencies, however, there has been an ongoing debate between decentralized finance (DeFi) and centralized finance (CeFi).
In this blog, we will go over these in-depth and draw a brief comparison between “DeFi vs CeFi” and “centralized vs decentralized cryptocurrency” to better understand their similarities and differences.
What is Centralized Finance (CeFi)?
CeFi, or Centralized Finance, refers to the practice of entrusting centralized companies, such as cryptocurrency exchange platforms, with the storage and management of your funds.
For hundreds of years, traditional financial institutions have dominated the finance industry. Cryptocurrencies were traded using centralized finance. It gives specific authorities strong control over the cryptocurrency industry. All funds are managed by CeFi’s central exchange. As a result, you don’t always need a private key to access your wallet.
To comply with the rules of the jurisdictions, most CeFi service providers, such as Carret, have a Know Your Customer (KYC) and Anti Money Laundering (AML) policy in place. It means you must share your personal information with them and ensure that your funds are not being used for illegal purposes.
What are the Features of CeFi (Centralized Finance)?
Faultless customer service:
There is an internal account for managing user funds within Centralized Exchanges such as Carret. Furthermore, large CeFi companies, such as Carret, protect users’ data and provide assistance to customers through a dedicated customer support team, increasing trust.
Adaptable conversion:
CeFi facilitates the conversion of fiat currency to cryptocurrency. The platform’s ease of use leads to increased customer onboarding into the Carret platform.
Centralized Exchange (CEX):
By utilizing a centralized exchange, you can manage your portfolio through an internal account while avoiding large blockchain transaction fees. Furthermore, because the funds are traded on the exchange, you don’t have to worry about management.
Cross-Chain Services:
Centralized exchanges make it incredibly simple to convert a large number of different currencies into cryptocurrency, making CEXs much more interoperable than the current DeFi standard.
Some CeFi examples:
Carret:
A Crypto investment platform with a high yield return. You can earn up to 17% APY on your cryptocurrency deposits.
Coinbase:
A cryptocurrency exchange that enables trading, borrowing, margin trading, native stablecoin, lending, payments, and other functions.
BlockFi:
It is a lending and borrowing platform for fiat and cryptocurrency.
Celsius:
A cryptocurrency lending and borrowing platform.
What is Decentralized Finance (DeFi)?
DeFi, or decentralized finance, refers to a completely decentralized financial system that operates on top of transparent blockchains with no centralized authority. dApps are applications and technologies that run on top of blockchains to provide trustless, permissionless access to anyone with an internet connection.
All DeFi applications strive to be open-source, allowing anyone to independently verify the code while also attempting to provide all of the services that CeFi does, such as lending, storage, and borrowing.
Unlike centralized exchanges, when using decentralized finance, you will always use a self-custodial wallet, which means the user has complete ownership of their assets.
What are the Features of DeFi (Decentralized Finance)?
Permissionless:
DeFi, in contrast to Centralized Finances, is completely permissionless. Users can use a wallet to directly access services without providing any personal information. Users in CeFi, on the other hand, will be required to complete a KYC process to gain access to services. Furthermore, they are required to share personal information and deposit funds into their accounts.
DeFi enables users to participate in and openly access Blockchain services without any barriers or discrimination. As a result, DeFi fully utilizes Blockchain technology. Users can conduct their activities freely without fear of restrictions or privacy issues. Furthermore, they have greater accessibility and better collaboration opportunities with the community.
Trustless:
The biggest advantage of DeFi cryptos is that they are trustless. You can easily audit the code and use tools like Etherscan to verify that your transaction was completed and that the DeFi services are functioning properly.
Better Innovation:
We are all aware that a constrained environment inhibits innovation and change. As a result, DeFi is known for being well-suited to rapid innovation. A Decentralized Finance ecosystem is ideal for testing new capabilities and features.
Traditional financial institutions such as banks have recognized the potential of the DeFi space’s robustness. It has been a more cost-effective method of providing alternative solutions to a problem.
Some DeFi examples:
Totle:
A decentralized liquidity aggregator with automatic price optimization.
Augur:
It is a prediction market that is decentralized.
Kyber:
A decentralized transaction.
MakerDAO:
A decentralized lending and stablecoin mining tool.
Defi vs Cefi: What Are The Major Differences?
Although both centralized and decentralized finance seeks to increase global blockchain adoption, there are some key differences between the two.
Let us go through these distinctions.
Asset Management:
DeFi provides users with complete control over their assets. While this is fantastic, users should consider their options and determine whether they can keep their assets secure.
To keep assets safe, CeFi Crypto institutions have implemented several security protocols. Before deciding on an exchange to trade on, investors must conduct extensive research.
Public validation:
Even if DeFi code is not always open source, its execution must be publicly verifiable to be called a non-custodial DeFi. As a result, unlike CeFI, any DeFi user can observe and then validate the execution of DeFi state changes.
Custody:
DeFi, as opposed to CeFi, gives its customers complete control over their assets. However, this comes with the caveat that users must face all technical hazards. CeFi is more useful in this situation. Centralized finance platforms serve as custodians and are a popular option for managing cryptocurrency assets.
Security:
Despite CeFi’s best efforts to maintain complete security, there have been numerous breaches involving CeFi-based cryptocurrency exchange platforms.
In the case of DeFi, on the other hand, the only thing users need to be concerned about is the code and consensus algorithm used in the decentralized finance project.
Customer Service:
Most users do not have a thorough understanding of Blockchain and Crypto. While this is the case around the world, users should not be discouraged from investing in Crypto because they learn through investing as well. Customer Support terminals in Centralised Exchanges assist users in resolving issues, whereas this service is not available in DeFi.
Expenses incurred:
Centralized exchanges can choose to charge a low transaction fee for their services. Because these exchanges have access to user identities, any illegal transactions can be tracked. DeFi, on the other hand, has relatively higher transaction fees to serve as a deterrent to spam. Furthermore, the transaction fee on a Defi blockchain is affected by network congestion.
Conclusion:
The main takeaway from this debate between DeFi and CeFi is that they are both working towards the same main goal, which is to mainstream cryptocurrency through mass adoption.
As a result, the debate should not be Centralized vs Decentralized, but rather Centralized Finance plus Decentralized Finance, to unite the crypto community as a whole. They are designed to coexist, and that is what we should strive for.
Both the Defi and Cefi systems have advantages and disadvantages. DeFi works best when a user wants complete control over assets. Because of the distributed nature of the system, DeFi systems also perform well in extremely volatile conditions.
CeFi, on the other hand, is the clear winner in terms of usability. CeFi systems are becoming more secure with each passing day. Which one to select is determined by the investor’s priorities.
With Carret, the safest, and simplest crypto investment app in India you can invest in different DeFi and CeFi tokens with the lowest trading fees in the market. 24Carret, Carret’s flagship product, pays up to 17% annual percentage yield on stablecoins to investors who prefer less risky investments.