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.
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 they will include in their inventories for trading or which fees users will pay to use the functionality of this exchange.
You do not have authority 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.).
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, meaning it connects buyers and sellers directly, without involving any third-party intermediation 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 all over the world, 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 ground-breaking financial services of DeFi allowing you to make money on correct forecasts of future events).
DeFi solutions have one remarkable edge over centralized counterparts: with DeFi, you have full authority over your digital assets, and the private key to your wallet belongs only to you. 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 whom users tend to trust more: the technology or humans.
With DeFi, users trust 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.
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.
Centralized Finance (CeFi) platforms support different independent blockchain technologies and allow you to trade various crypto assets and altcoins such as BTC, XRP, 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.
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 they have to share your private information or make a deposit with fiat before being able to use CeFi services.
In DeFi space, users can directly perform financial operations using the wallet without sharing any personal info or depositing 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 benefit from each other. For this reason, DeFi applications are also called money legos where one project stems from another.
The biggest benefit of using DeFi services is that you don’t have to trust 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.
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 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 fashion (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 saving them from a financial loss.
- DeFi margin trading. Some decentralized lending platforms allow using borrowed funds to trade a 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.
Financial Services of DeFi and CeFi Compared
The comparison of a business model of both ecosystems is presented in the table below:
|Partly possible thanks to WBTC
|Revealing personal information
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 reality, 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 currency.
Pros of DeFi
- DeFi platforms rely on permissionless protocols to ensure that no external party participates 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 foundation 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 authority over their funds.
- CeFi provides no solutions for nearly two billion unbanked people in the world who are unable to take advantage of many financial opportunities due to their inability to enter any financial system that has strict regulatory requirements.
Crypterium Unites DeFi and CeFi under One Roof
Crypterium is a multi-purpose digital wallet coming with a bevy of essential tools to ensure your virtual holdings never sit idle but work and bring you gains. Crypterium takes the best from both worlds, letting you access vital DeFi services and deep decentralized liquidity while enjoying the security and accountability of CeFi space. By doing so, we enable our customers to stay compliant with applicable laws and regulatory requirements in their jurisdictions, while allowing them to harness the potential of cryptocurrencies.
The wallet enables you to set up a savings account with high interest rates and earn up to 15.6% APR on your virtual savings. You can also easily spend crypto right from your wallet by sending it to others, speculating on crypto exchanges that come embedded in Crypterium, accessing a cheap crypto loan, or just paying with tokens with the same ease as with fiat money.
Users can access CeFi and DeFi liquidity for popular tokens like Bitcoin, Ethereum, USDT to name a few at the greatest price available.
Crypterium can achieve this by integrating with the 10 world’s most popular exchanges (both DeFi and CeFi) to connect makers with takers to meet the demand. An AI-powered market tracker allows you to keep an eye on the price movements of your favorite coins to make weighted trading decisions.