When it comes to buying, interacting with, and storing your hard-earned cryptocurrencies and crypto assets, you will be faced with a choice: CeFi versus DeFi: centralized finance versus decentralized finance.
This centralization debate is at its height for investors looking to expand their portfolios and get the most out of their money.
CeFi has been the dominant medium for cryptocurrency trading. However, DeFi is rapidly gaining popularity as investors begin to turn away from the control, uniformity, and authority of centralized exchanges.
Considering that the size of the DeFi market reached $274 billion in November 2021, it is worth looking into.
What is centralized finance?
Centralized finance, CeFi, is the traditional form of finance and is how most people are used to handling money. With CeFi, a central authority controls the financial system and implies that all crypto trade orders are processed through a central exchange.
This central authority can be a government, a bank or another financial institution. CeFi typically relies on fiat currency, which is money that is not backed by any physical commodity.
It was the most popular method for exchanging cryptos before the invention of DeFi, and it had a solid hold on the cryptocurrency market.
The funds are managed by a central exchange, which then decides which coins are traded and what fees must be paid.
When you use CeFi, you don’t directly own your cryptocurrencies –– rather, they are owned by the exchange. You are also subject to the rules established by the exchange, which may change at any time without notice.
What is Decentralized Finance?
In the public blockchain space, decentralized finance, more commonly referred to as DeFi, is a catch-all term for financial products and services based on blockchain technology. Simply put, DeFi is an open, global financial system that provides transparency and accessibility to global markets.
With DeFi, you not only have control and visibility over your money, but you also have exposure to global alternatives to your local currency or banking options. You need an internet connection to access DeFi services. Once you are logged in, you can take advantage of online money-making opportunities such as borrowing, productive farming, loans and more.
In decentralized systems, there is no central authority to block or deny you access. Instead, DeFi technologies enable peer-to-peer transactions without the need for a third party.
The launch of Ethereum has opened the door to maximizing the potential of DeFi within the financial industry, thereby encouraging businesses and companies to build and deploy projects that form the DeFi ecosystem.
By using decentralized technologies, such as smart contracts to securely oversee the process, DeFi can always ensure the trust of all parties involved. DeFi offers a robust financial system that is available anytime and anywhere.
What are the differences between DeFi and CeFi?
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Now that you know a bit more about the 2 main types of cryptocurrency funding options, let’s take a closer look at the differences between CeFi and DeFi.
In the CeFi system, exchanges are responsible for protecting consumer money. DeFi, on the other hand, assumes that smart contracts (a contract between two parties that applies specific trading rules/conditions when a certain/specific condition is met) would guarantee the success of the transaction.
Basically, with DeFi, users control their funds and stocks, but with CeFi, exchanges can set limits and even block trades for users.
To better understand these differences, let’s take a closer look at some of the features of CeFi vs DeFi.
Features of the CeFi
Centralized Exchange (CEX)
By using a centralized exchange, you can manage your wallet within an internal account, avoiding blockchain transaction fees. Although your funds are held on the exchange, they are not under your direct control as custodians of your funds.
For example, when you want to buy or sell cryptocurrency, you will need to place an order through a centralized exchange. The CeFi exchange then matches your order with another user who is also looking to buy or sell that same cryptocurrency.
The transaction is then completed and the CeFi exchange manages the funds and finally registers the transaction on the blockchain.
Fiat conversion flexibility
The more centralized the service, the more flexibility it offers in transferring money between fiat and cryptocurrency. However, these conversions between cryptocurrencies and fiat frequently rely on the centralized exchange (CEX).
For example, when you want to buy Ethereum with US dollars using CeFi, all you have to do is find a CEX to offer you offers for this type of pairing.
CeFi also offers more traditional financial products and services, such as loans, savings accounts and credit products.
Services for cross-chain swaps
CeFi services enable trading of LTC, XRP, BTC and other cryptocurrencies based on independent blockchain platforms.
For example, where DeFi fails due to the delays and complexity of executing cross-chain exchanges, CeFi can compensate by obtaining custody of many chains’ assets.
CeFi’s biggest advantage is that since many of the most frequently traded and highest market cap coins are decentralized blockchains with no interoperability standards, it has a considerably wider reach than others. scholarships.
No permission required
Anyone and anyone from anywhere can use the DeFi system, without the need for prior permission or acceptance.
For example, users must follow a KYC (Know Your Customer) procedure to use CeFi, which involves submitting personal information or depositing money to access the services.
Users of different types of DeFi networks, on the other hand, can access services without revealing personal information or requesting access. All interested parties can use DeFi openly and freely without any restrictions.
Additionally, decentralized platforms have a high degree of accessibility and encourage community interaction. Within the DeFi ecosystem, assets are created to take advantage of each other.
No Trust Necessary
The most important advantage of using DeFi systems is that no user trust is required.
For example, you can audit code and use additional tools like Etherscan to check if a transaction was completed correctly, to ensure that DeFi services are working as intended. This contrasts with centralized exchanges where users must trust a third party to execute the transaction on their behalf. With DeFi, it’s strictly peer-to-peer.
Another key feature is the rapid pace of innovative DeFi developments. The DeFi platform is always developing current capabilities and testing new ones. Consequently, the decentralized movement has evolved into a complex ecosystem brimming with revolutionary financial services.
In an industry where centralized financial services have succeeded, the DeFi sector has also tried to provide different methods to solve these problems.
Take DeFi’s inability to facilitate the transfer of incompatible cryptocurrencies like Bitcoin (BTC) and Ethereum (ETH), for example. Using solutions compatible with DeFi protocols, like tBTC and WBTC, they solve the problem by pegging other tokens to the price of Bitcoin.
This allows DeFi users to access BTC without requiring direct use of Bitcoin’s network. Bitcoin, unlike Ethereum, does not support smart contracts, so to use DeFi applications, WBTC or another form of tokenized bitcoin is required.
With the CeFi, a central authority controls the financial system. CeFi implies that all crypto trade orders are processed through a central exchange.
In the public blockchain space, DeFi is a catch-all term for financial products and services based on blockchain technology.
In the centralized system, exchanges are responsible for protecting consumer money. DeFi, on the other hand, assumes that smart contracts would guarantee successful transactions.
- Features of the CeFi: CeFi features include: centralized exchange (CEX), fiat conversion flexibility and services for cross-chain swaps.
- DeFi Features: DeFi features include: no permission needed, no trust needed, and constant innovation that improves the user experience.
Now, will you choose CeFi or DeFi? The answer may depend on your individual needs and goals. One thing is certain: the future of DeFi is gaining momentum.