“CeFi vs. DeFi: The Key Differences”

 

At this point, it would be difficult not to know about – let alone understand – the divide between traditional finance and cryptocurrency. The latter’s popularity has increased in this era of technological advancements. However, within the crypto space, there is another notable divide. That being the one between decentralized finance (DeFi) and centralized finance (CeFi).

 

Who to trust

 

Smaller differences aside, the core divide between CeFi and DeFi boils down to a specific question. That being whether users should place their trust in people or technology.

 

In the case of DeFi, users have faith in the technology performing as proposed to carry out offered services. In contrast, users of CeFi trust the people of a business to handle funds and perform the business’s services.

 

Offered features

 

DeFi and CeFi both provide a wide variety of services for crypto-related finance. For instance, to name a few, centralized exchanges offer the following:

 

  • Cross-chain solutions: There is latency and complexity in performing cross-chain swaps, thus DeFi services cannot support these tokens. CeFi is able to overcome this by obtaining custody of funds from an assortment of chains. This is beneficial for CeFi because many of the commonly traded and highest market capitalization coins reside on independent blockchains. Moreover, they don’t normally implement interoperability standards.
  • The ability to move funds to assist customers. With traditional cryptocurrency exchanges, users send funds to the exchange. This way, they can manage them in the confines of an internal account.
  • The conversion from fiat to crypto. Centralized services demonstrate more flexibility when it comes to transforming fiat currency to cryptocurrency and vice versa. Generally speaking, a successful conversion between crypto and fiat needs a centralized entity.

 

DeFi, on the other hand, offers the following:

 

  • Permission is not required. There is no form of permission required for people to use DeFi. Those who use CeFi need to complete a KYC process if they want to access services. This means they have to disclose personal information or even deposit money.
  • It is a trustless system. This is arguably the most significant benefit of using DeFi services. You don’t necessarily need to trust that the service will perform as advertised. Users can validate the DeFi services’ operations by auditing their code and utilizing external tools
  • The quick rate of innovation. The DeFi system is always developing current capabilities, as well as experimenting with new ones. The space’s build-centric nature has created a rich ecosystem consisting of innovative financial services.

 

Different systems, a similar objective

 

Both decentralized and centralized finance have the same goal in mind. They aspire to increase the popularity of crypto trading and improve the trading volume. In spite of this similarity, the way these two systems carry out their objectives is what differentiates them.