The concept of cryptocurrency is spreading across the world day by day, not only retail investors but also financial institutions are now showing interest in cryptocurrencies. There are a lot of technicalities as cryptocurrency and blockchain technology are very wide concepts. Changes in technology are also upgrading the crypto industry in many ways providing more functions to the users and other facilities like lending, borrowing, payments, etc through blockchain technology without any government authority. So, DeFi (decentralized finance) and CeFi ( centralized finance) are two terms that are important to understand as a crypto investor. Let us discuss about DeFi vs CeFi
What is CeFi (centralized finance)?
Centralized finance means an ecosystem of centralized exchanges where all the transactions and trade orders are handled by the exchange. All the crypto you buy or funds you have on the exchange are also handled by the central exchange there will be no private key on the exchange to access your wallet all you have is an account on the central exchange platform where your funds and crypto will be stored but this doesn’t mean they are unsafe, they are completely safe as there is a much-reputed company working in this field since very long time also you have to follow some rules and regulations to trade on the centralized exchanges. Some examples of CeFi are Binance, Coinbase, etc.
What is DeFi (decentralized finance)?
There is no interference from any central exchange in decentralized exchanges. These decentralized exchanges are automated applications built through blockchain technology, the coding of these applications is done in a way where all the operations on the exchange get complete automatically. Decentralized exchanges create a fair ecosystem of financial systems where anyone can participate without any central authority. It provides complete control over your funds on the exchange and other facilities like staking, yield, crypto lending, farming, etc with complete transparency, users just need to use dApps (decentralized applications) to get access to all their services.
DeFi vs CeFi
Although both DeFi and CeFi had their pros and cons, the question is which is more reliable or beneficial?
The DeFi is completely based and works through the technology automatically which offers complete transparency to the users, whereas in CeFi every operation on the exchange is handled by the whole team whom the users trust on the team. In the CeFi ecosystem, the exchange ensures the safeguard of the funds of the users, and on the other hand in the DeFi ecosystem users can use their service as their responsibility.
There are some key points that how DeFi and CeFi are different:
Fiat conversion: Conversion of fiat (national currency) into crypto requires regulation, so the CeFi ecosystem is more convenient in case of fiat conversion into crypto and vice versa as this is under the control of the exchange whereas the DeFi ecosystem is not controlled by any central authority fiat conversation is not much convenient there.
Cross-chain service: Cross-chain swap is a complex task and for the coins like BTC, LTC, XRP, etc which are issued on their independent blockchain it is even more difficult. CeFi can easily perform these complex tasks as they get custody of funds from various chains whereas DeFi did not support these coins on their platform.
Security: On CeFi platforms like Binance, Coinbase, etc users need to verify their identity in order to make trade orders, and on the DeFi platform, there is no need for KYC to trade. As the CeFi is a big platform with different departments for every problem, the risk of digital attacks by hackers is very less and it feels that the funds are in good hands whereas on DeFi which are automated applications there are more chances of attacks by hackers as compared to CeFi.
Services: DeFi gives all the services like lending, borrowing, and payments services like CeFi but when it comes to human interaction DeFi does not provide services as CeFi which has a team of professionals, and a department of customer care are there who clarify the queries of the users 24/7 which makes convenient for the users and on the other hand on DeFi platforms users themselves have to clear all their doubts.
Conclusion: The DeFi and CeFi ecosystems are working on the same objectives to make crypto trading popular worldwide. As both CeFi and DeFi have their pros and cons so it’s upon the investors and their needs, if someone wants more privacy and transparency they should go for DeFi like totle, augur, kyber, etc and someone wants more security of funds they should go for CeFi platform like Binance, Coinbase, blockFi, etc.