In the cryptocurrency financial market, there are two established systems, CeFi and DeFi. CeFi came before DeFi, but DeFi was the most searched keyword. There is a lot of concern about these two concepts. What is DeFi, CeFi? What is the difference between them? Let’s find out through the following article.
I. DeFi and CeFi concepts
1. What is DeFi?
DeFi stands for Decentralized Finance, also known as Open Finance. This is a place in which institutions, markets, and financial instruments are decentralized.
The main purpose of DeFi is to create a transparent financial system that does not need to be delegated through any organization. Users have complete control over their digital assets, and no one has the right to censor or change them without the owner’s permission.
What is DeFi – Image: nextbigwhat.com
2. Some applications of CeFi
- Decentralized exchanges (DEX) like Uniswap, Pancakeswap
- Algorithmic and automated lending services like Compound, Aeve
- DeFi stablecoins like bitcoin, ethereum,…
3. What is CeFi?
Contrary to DeFi, CeFi stands for Centralized Finance, in which components such as organizations, markets, or tools are centrally managed. More specifically, financial assets or products and services will be entrusted to some organization, which is a third party. This third party can be a government, a bank, a stock exchange, an exchange, etc.,…
4. Some applications of CeFi
- Centralized exchanges like Binance, Coinbase, Gemini
- Cryptocurrency staking and lending services like BlockFi, Celsius and Nexo
- Stablecoins like USDC (from Coinbase) and Libra (from Facebook)
What is CeFi – Image: bengbenggaming.com
II. Difference between DeFi and CeFi
For users to have a better overview and clarity, let’s take a look at some similarities and differences between these two platforms.
1. Similarities
- Both platforms include a number of financial services, allowing users to perform activities: borrowing, lending, saving, paying bills, trading derivatives, etc., …
- Allows making cryptocurrency transactions, or users can convert from fiat to crypto on DeFi and CeFi.
- Support for stablecoins (which are digital currencies developed on the Blockchain platform and have stable value).
- Both trends favor the use of blockchain and cryptocurrency.
Similarities between DeFi and CeFi – Image: fiahub.com
2. Differences
- Trust
This is the biggest difference between DeFi and CeFi. Delegation through an intermediary of CeFi leads to lack of transparency, manipulation and many other problems. Users will be dependent on organizations and not fully grasp the circulation of their assets.
Meanwhile, DeFi takes advantage of Blockchain technology which is transparency and decentralization to eliminate these intermediaries.
- Access rights
At CeFi, it is because of the fiduciary nature that will limit user access. They cannot check every information about their assets.
With DeFi, users can access anywhere, anytime, as long as there is an internet connection, without restricting anyone.
- User experience
Some aspects of CeFi are quite similar in design to the traditional finance space. So it becomes more familiar and accessible to users than the novelty of DeFi.
Difference between CeFi and DeFi- Image: cryptoitunes.com
- Cost
Usually, CeFi exchanges charge higher fees to maintain the platform, pay their employees, improve their products, among other things.
The DeFi platform is more affordable because there is no custodial service and especially no team involved in the governance process.
- Security
Centralized exchanges are responsible for security and strive to maintain a high level of security. However, there are still situations where exchanges are hacked and funds are stolen.
The DeFi platform has no such risks as it does not store user funds. However, it still contains potential risks.
Steven Becker – President of the Maker Foundation once commented that: “DeFi and CeFi complement each other. They provide more options for people and organizations to use their power and ability to create financial opportunities.” So although there are many differences between CeFi and DeFi, both bring certain benefits to users in particular and the economy in general. Depending on the needs of each person, there will be an appropriate choice of CeFi or DeFi.
