Before the introduction of Cryptocurrencies, all the financial services like borrowing, lending, deposits were carried out by banks or NBFC and is called TradFi (Traditional finance). It had many loopholes, disadvantages and only selected few were able to enjoy all the benefits.
But then came bitcoin and everything changed for good. CeFi (Centralised Finance) was born and the battle began, CeFi vs TradFi. And while this battle was going in full swing, another horse entered the race, DeFi (Decentralised Finance).
Very clearly TradFi is the loser of this race and the battle is between CeFi and DeFi.
While both of these methods of finance were developed to help users use Cryptocurrencies for financial services, they approach it in different ways.
- In CeFi or Centralised Finance, your funds are managed by an exchange and you don’t own any private keys to your wallets. The exchange gets to decide which tokens will be listed next. Also, exchanges may ask for your personal details and everything is subjected to their rules
- DeFi or Decentralised Finance is an open source, permission less and completely transparent financial system. A user is in complete control of his/her holdings. Users need to use dApps built on top of blockchain to access DeFi.
CeFi means you need to trust people. DeFi means you need to trust the technology.
CeFi (Centralised Finance)
Centralised Exchange (CEX)– Binance, Coinbase, Kraken and Huobi require users to send funds on their exchanges and users need to provide their personal information but in return you’ll be able to enjoy a wide variety of services like borrowing, lending, OTC etc. at one place. Additionally, they have a dedicated department to support their customers and excellent customer service offers a certain level of comfort, reinforcing the feeling that their funds are in good hands.
Fiat Conversion: While using CeFi, users find it easier to convert their Crypto holding to fiat or vice-versa. DeFi services do not offer this flexibility.
Cross-Chain Services: CeFi supports coins from different blockchains like BTC, LTC, ETH, XRP etc. There tends to be a latency in cross-chain swaps and they are complex due to which DeFi doesn’t provide these services. This is a big advantage for CeFi because many of the highest-market-cap and most frequently traded coins exist on independent blockchains and don’t follow interoperability standards.
DeFi (Decentralised Finance)
Permissionless: Users aren’t required to provide any personal information while using the services. All you need is a Crypto wallet. Connect it to the DEX (Decentralised Exchange) and you’re good to go. This is because DeFi is designed to be openly accessible to all parties, without any discrimination or barriers.
Trustless: The most significant benefit of using DeFi services is you don’t need to trust that the service will perform as promoted. Users can authenticate that DeFi services perform as intended by auditing their code and using external tools such as Etherscan to identify if a transaction was correctly executed.
Liquidity Pool Protocol (LPP): Dex’s are replacing the old order book with revolutionary liquidity pool protocol. There is no dependency on order book to fulfill a buy/sell order and it depends on how much liquidity is there in that pair’s pool. A liquidity provider gets the benefit whenever an order gets filled.
Few Examples of CeFi:
Binance: A cryptocurrency exchange facilitating trading, margin trading, borrowing, lending, futures, and more.
Nexo: A cryptocurrency lending and borrowing platform.
Celsius: A cryptocurrency lending, borrowing, and payments platform.
Few Examples of DeFi:
Augur: A decentralized predictions market.
MakerDAO: A decentralized lending and stablecoin minting tool.
Nexus Mutual: A decentralized insurance tool.
At the current moment in time, CeFi is better than DeFi, simply because it had several years to develop and offer far more options to users in comparison to DeFi platforms. But given the pace at which DeFi is evolving (Uniswap is a perfect example), it may not be long before DeFi will stand neck to neck with CeFi.
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