What is CeFi & DeFi? Difference between CeFi and DeFi
Learn about centralized and decentralized financial services, their main differences as well as advantages and drawbacks of DeFi and CeFi.
CeFi Crypto Versus DeFi Crypto Projects: What Is The Distinction?
In the recent past, essential financial services, such as money transfers, loaning, borrowing, and insurance were only offered by traditional financial institutions and banks. But with the emergence and rapid adoption of blockchain technology and cryptocurrency, things have transformed significantly.
As the use cases of virtual currencies have only been increasing over the last decade, two different phenomena, stemming from the same concept, are receiving much attention from both crypto enthusiasts and institutional investors: centralized finance (CeFi) and decentralized finance (DeFi).
While both crypto market concepts revolve around the same goal (to let ordinary people use digital currencies for monetary activities), their methods to achieve this are quite different.
Let’s delve into these two concepts, find similarities and differences between CeFi and DeFi, spotlight the advantages and disadvantages of both, and explore where two worlds overlap.
Centralized Finance
It may sound like a surprise but Centralized Finance platforms were the first in the industry to offer services for trading cryptocurrencies. In a centralized entity, all transactions are routed through a central exchange. That is, funds are controlled by a given central exchange. With a CeFi platform, you do not own a private key that gives you access to your wallet.
More than that, the CeFi exchange decides on which coins it will include in its inventories for trading or which fees users will pay to use the functionality of this exchange.
You do not have control over your digital assets when you buy or sell crypto through a centralized exchange. Moreover, you are exposed to the rules that the centralized platform establishes for its participants (such as Know Your Customer procedures, withdrawal limits, restrictions on the volume of trading, etc.).
Decentralized Finance
The key characteristic of a decentralized exchange is that it does not require any middle man (a centralized entity) to offer crypto trading services. A decentralized exchange (DEX) has a peer-to-peer nature, which means that buyers and sellers are connected directly, without involving any third party, such as a traditional bank. All processes on a DeFi exchange are automatically arranged, controlled, and handled by smart contracts developed on the basis of a blockchain.
The purpose of decentralized exchanges is to create an effective, transparent, and fair global financial system where anyone can participate, even if they don’t have a bank account. It enables millions of people from all parts of the world, especially where banking services are poor or totally absent, to get easy access to quality financial and banking services with the help of blockchain technology.
Decentralized Finance aims to create an open-source, permissionless, and traceable financial ecosystem. It provides a good diversity of cryptocurrency-related financial activities, including crypto lending, margin trading, investment, borrowing, fund risk management, yield farming, digital asset storage, and even a decentralized predictions market (one of the DeFi ground-breaking financial services allowing you to make money on correct forecasts of future events).
DeFi solutions have one remarkable edge over their centralized counterparts: with DeFi, you have full authority over your digital assets, and you are the only party who owns the private key to your wallet. Users willing to access DeFi services need to utilize decentralized applications (DApps) hosted on the blockchain.
How DeFi differs from CeFi
When comparing DeFi and CeFi ecosystems, the question is who would users tend to trust more: the technology or humans.
With DeFi, users rely on blockchain technology to carry out and control services offered by decentralized protocols. On the flip side, with CeFi, users entrust people to do business on their behalf: to manage funds and handle transactions. Yet, both industries offer a broad spectrum of cryptocurrency-related financial services.
Features of CeFi
Centralized Exchange (CEX)
There is no shortage of centralized finance exchanges on the market. Large centralized exchanges include Binance and Coinbase. With a CEX, members send funds to the exchange, so it manages people’s money on an internal account. Although the funds are held on the exchange, they are not fully controlled by the user and exposed to stealing if the security measures taken by the exchange fail.
Due to their custodial nature, CeFi platforms often make lucrative targets for hacker attacks. To be able to access CeFi services, users need to provide plenty of personal information, and when users send funds, they virtually give control over their money to the CeFi exchange.
Large exchanges have full-fledged departments with customer service teams that are eager to provide a helping hand to the clients that have issues. Easily accessible customer support of a CeFi cryptocurrency exchange gives clients peace of mind that their assets are in safe hands.
Fiat-to-Crypto Conversions
An unbeatable advantage of CeFi space over DeFi is that it supports fiat-to-crypto (and vice versa) transactions. Conversions between cryptocurrencies and fiat money usually involve the mediation of a centralized authority (such as a bank or a credit organization). However, DeFi exchanges, generally, do not offer such flexibility. Onboarding customers into the CeFi ecosystem is easy and typically ends up with a positive user experience.
Cross-chain services
Centralized Finance (CeFi) platforms support different independent blockchain technologies and allow you to trade various crypto assets and altcoins, such as BTC, XRP, and LTC among others. Due to the slowness and complexity of cross-chain transfers, DeFi services often do not support tokens issued on different blockchains. CeFi can solve this problem by getting custody of coins from multiple chains. This is a huge perk of CeFi because many trendy coins with a high market capitalization exist on independent blockchain systems and are not interoperable.
Features of DeFi
The greatest allure behind DeFi is that you don’t have to reveal your personal information or trust the management of your funds to others. This minimizes the risk of using your information without your consent or stealing your funds. DeFi enables people to self-manage their assets without limiting their abilities to access services offered by a decentralized platform.
Key traits of DeFi include:
Decentralized Exchange (DEX)
The work of a decentralized exchange is ensured by a set of smart contracts deployed on some publicly distributed ledger like Ethereum. Smart contracts are programmed by a set of rules to autonomously execute transactions. The coded logic makes sure that it is only the users themselves and intelligent contracts that can be involved in the fulfillment of exchange operations.
Permissionless
You require no permission to access DeFi. With a traditional cryptocurrency exchange, you will need to go through a KYC (Know Your Customer) procedure to access financial services, which means you have to share your private information or make a deposit with fiat currency before being able to use CeFi services.
In DeFi space, users can perform financial operations directly by using the wallet and do not share any personal info or deposit money. This is because DeFi is openly accessible to all participants, without any barriers or discrimination.
Moreover, developers can easily design their applications on top of a decentralized platform. DeFi provides high availability and collaboration within the community. Products developed in the DeFi ecosystem are designed to take advantages from each other. For this reason, DeFi applications are also called money legos where one project stems from another.
Trustless
The biggest advantage of using DeFi services is that you don’t have to make sure that the service will perform as claimed. Users can confirm that DeFi services are working as needed by auditing their code and using external tools to determine if the transaction was completed correctly.
Rich ecosystem
DeFi users can access a vast diversity of services and products to cover their everyday needs. Along with decentralized exchanges where you can buy and sell cryptocurrencies in a peer-to-peer manner, there is a bevy of other platforms offering vital DeFi financial services.
· Lending platforms. A crypto lending platform employs smart contracts to offer lending services without middlemen.
· Prediction markets. Taking classic betting to the next level, a decentralized predictions market allows you to wager on the outcome of future events and make money if your prognosis turns out to be correct. Such services are delivered without centralized mediation as well.
· Yield farming: it is the way to earn interest on your crypto holdings by lending or staking your coins.
· Insurance. A decentralized insurance tool makes insurance more affordable, efficient, and transparent. With the automation delivered by smart contracts, coverage becomes less expensive and payout claims are processed quicker. The circumstances to decide on the claim can be put into the contract’s logic to avoid errors and disputes.
· Borrowing. DeFi borrowing platforms offer crypto loans in a trustless manner (without middlemen) and allow DeFi users to enlist their digital assets on the platform to earn interest from lending. Borrowers pay some interest upon returning a loan, and they also need to lock their collateral. If the loan is not paid off, a borrowing platform will confiscate the collateral and send it to the lender, thus saving him from a financial loss.
· DeFi margin trading. Some decentralized lending platforms allow using borrowed funds to trade the financial asset that forms the collateral for the loan taken from the liquidity pool.
Fast Technological Advancements
Another big advantage of DeFi is its swift innovation. The decentralized finance ecosystem is constantly building on cutting-edge technologies and experimenting with new opportunities, expanding the horizons of how crypto can be leveraged.
In areas where CeFi prospers, DeFi is working to find alternative solutions to tackle issues. For example, to overcome DeFi’s inability to facilitate the transfer of incompatible cryptocurrencies like Bitcoin, solutions like tBTC and WBTC that are compatible with DeFi protocols bridge the gap by acting as electronic tokens tied to the value of BTC. It allows DeFi users to access Bitcoin through decentralized platforms without using the token directly.
Crypto Assets Liquidity: Where DeFi and CeFi Coincide
In the perfect scenario, CeFi and DeFi are supposed to provide users with the sufficient liquidity they need to transact at an adequate rate.
But in the real world, enough liquidity is what both DeFi and CeFi exchanges currently lack. When a user wants to trade, there may not be any existing trade orders in the liquidity market that meet the user’s requirements. In addition, most of the liquidity in CeFi and DeFi is split across multiple exchanges.
Pros and Cons of DeFi and CeFi
DeFi (decentralized finance) solutions offer decentralized protocols, platforms, and services that have completely removed the power of traditional intermediaries like banks and government-controlled financial institutions from any type of transaction.
Centralized finance (CeFi) offers banking services aimed at bridging the gap between legacy finance platforms and the fledgling economy of virtual assets. CeFi does not replace the role of intermediaries when dealing with both digital coins and fiat currencies.
Pros of DeFi
· DeFi platforms rely on permissionless protocols to ensure that there are no external parties participating in a peer-to-peer transaction. In traditional finance, transactions are subject to authorization by the relevant banks or financial organizations. DeFi networks are also open to anyone to join without the need to apply and obtain permission from a centralized body.
· Thanks to the use of distributed ledger technology, DeFi services make all transactions publicly viewable for members. This ensures a high level of transparency.
Cons of DeFi
· The absence of centralized governance makes DeFi platforms suffer from a lack of accountability and makes them a good cornerstone for fraud. The loss of a personal wallet address or private keys results in the loss of assets due to the lack of intermediaries who could assist in recovery.
Pros of CeFi
· Thanks to the control from central authorities, centralized exchanges and platforms can offer an intuitive and comfortable user experience.
· CeFi can offer a wider range of traditional banking services, such as direct support for fiat-to-crypto purchases.
· CeFi crypto lending platforms offer storage solutions to manage risk while ensuring that the recovery phrases, wallet addresses, and private keys of their users are well-protected.
· Since CeFi employs compliance requirements similar to a conventional banking sector, it dominates the cryptocurrency market, leaving DeFi a bit behind.
Cons of CeFi
· In CeFi platforms, users cannot have full control over their funds.
· CeFi provides no solutions for nearly two billion unbanked people worldwide who are unable to take advantage of many financial opportunities due to their inability to enter any financial system that has strict regulatory requirements.
Choise.com Unites DeFi and CeFi under One Roof
Choise.com is the innovative crypto solution that combines all the advantages of CeFi and DeFi (centralized and decentralized finance) services in one system. This bridge between CeFi and DeFi user bases will greatly simplify user exposure to DeFi products, making the process easy, reliable, and fool-proof. At the heart of Choise.com is a new, in-house DeFi ecosystem Charism, a suite of products (non-custodial wallet, cross-chain bridges, transaction builder, decentralized derivatives, and other solutions).
Such integration will allow anyone — even the newest crypto novice — to take advantage of farming, decentralized exchanges, liquidity pools, and other goods at the press of a button.
The internal protocol will make it possible to implement previously unavailable solutions, all without requiring users to switch blockchains or install endless amounts of applications. Everything is available in a single customizable app interface. Charism marks the reveal of Crypterium’s Choise.com ecosystem, as it enables users to choose between methods of use.
Advantages of Choise.com
For CeFi users
- Hassle-free access to DeFi assets
- Saving up to 50x on transaction costs
- High Yield DeFi instruments at a click of a button
- Seamless transition between CeFi and DeFi wallets
- Easy access to the coin that you never met at CEX
For DeFi users
- Single entrance point for the variety of DeFi protocols and blockchain networks: DeFi full aggregator
- Simple cross-chain interactions: Charism bridges
- CHO token additional APY
- Never Lose your Funds — get your assets recovered
- Simplified user experience accompanied by DeFi advantages
- Deep integration with CeFi fiat services: easy onramp& offramp
Follow Choise.com on social media and join our Telegram Community and Telegram News channels!
Social Media
Twitter — https://twitter.com/ChoiseCom
Discord — https://discord.gg/gkcrQjcEFY
Telegram Community — https://t.me/Choise_com_Chat
Telegram Announcements — https://t.me/choise_com
