When it comes to buying, engaging and storing hard-earned cryptocurrencies and crypto assets, you face the following options: CeFi and DeFi: Centralized finance and decentralized finance.
This debate over centralization is more than ever for investors looking to expand their portfolio and get the most out of their money.
CeFi is the leading medium for cryptocurrency transactions. However, DeFi is rapidly gaining popularity as investors are beginning to shy away from centralized exchange management, unity and authority.
Given that the DeFi market reached a whopping $ 274 billion in November 2021, it’s worth investigating.
What is centralized finance?
Centralized finance, CeFi, is a traditional form of finance that most people are accustomed to dealing with money. With CeFi, the central authority controls the financial system and includes all crypto trading orders processed through the central exchange.
This central authority could be a government, a bank, or another financial institution. CeFi usually relies on fiat currency, which is money that is not backed by physical commodities.
This was the most common way to trade cryptocurrencies before DeFi was invented and had a good grasp of the cryptocurrency market.
Funds are managed by the central exchange, which determines which coins to trade and which fees to pay.
If you use CeFi, you don’t completely own the cryptocurrencies-instead, they are held by the exchange. In addition, the rules set by the exchange apply. This rule is subject to change at any time without notice.
What is decentralized finance?
In the public blockchain space, decentralized finance (more commonly referred to as DeFi) is a collective term for financial products and services built on blockchain technology. Simply put, DeFi is an open, global financial system that provides transparency and accessibility to the global market.
With DeFi, you can not only manage and visualize your money, but also take advantage of global alternatives to local currencies or banking options. An internet connection is required to access the DeFi service. Once connected, you’ll have the opportunity to make money online, including borrowing, harvesting farms, and lending.
In a distributed system, there is no central authority to block or deny access. Instead, DeFi technology enables peer-to-peer transactions without the need for third parties.
The launch of Ethereum opened the door to maximizing the potential of DeFi in the financial industry, thereby encouraging businesses and businesses to build and deploy projects that will shape the DeFi ecosystem.
By leveraging decentralized technologies such as smart contracts to securely monitor processes, DeFi can provide trust to all involved. DeFi provides a robust financial system that can be used anytime, anywhere.
What is the difference between DeFi and CeFi?
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Now that we have a little more understanding of the two main types of crypto finance options, let’s take a closer look at the differences between CeFi and DeFi.
In the CeFi system, the exchange is responsible for protecting consumer money. DeFi, on the other hand, assumes that smart contracts, contracts between two parties that apply specific rules / negotiation conditions when specific / specific conditions are met, guarantee the success of the transaction.
Basically, DeFi allows users to control their funds and actions, but CeFi also allows exchanges to set limits and block users’ transactions.
To better understand these differences, let’s take a closer look at some of the features of CeFi and DeFi.
Centralized exchange (CEX)
Centralized exchanges allow you to manage your portfolio within your internal account, avoiding blockchain transaction fees. Your funds are stored on the exchange, but they are not under your direct control because the exchange controls your funds.
For example, if you want to buy or sell cryptocurrencies, you need to order through a centralized exchange. The CeFi exchange then matches the order with another user who is trying to buy or sell the same cryptocurrency.
After that, the transaction is completed, the CeFi exchange manages the funds and finally records the transaction on the blockchain.
Fiat conversion flexibility
The more centralized the service, the more flexibility you have in moving money between fiat and cryptocurrencies. However, these conversions between cryptocurrencies and fiat money often rely on centralized exchange (CEX).
For example, if you use CeFi to buy Ethereum in US dollars, you need to find a CEX that offers this type of pairing offer.
CeFi also offers more traditional financial products and services such as loans, savings accounts and credit products.
Cross-chain swap service
The CeFi service enables trading of LTC, XRP, BTC, and other cryptocurrencies based on an independent blockchain platform.
For example, if DeFi is lacking due to the delay and complexity of performing cross-chain swaps, CeFi can make up for it by getting asset management from a large number of chains.
The biggest advantage of CeFi is that many of the most frequently traded and market capitalized coins are decentralized blockchains with no interoperability standards, so they are much wider than other exchanges.
No permission required
Anyone, anywhere, can use the DeFi system without the need for initial permission or approval.
For example, users must complete the KYC (Know Your Customer) procedure in order to use CeFi. This includes sending personal information or depositing money to access the service.
On the other hand, users of different types of DeFi networks can access the service without disclosing personal information or requesting access. All stakeholders are open and free to use DeFi without restrictions.
In addition, the decentralized platform is highly accessible and facilitates community interaction. Within the DeFi ecosystem, goods are created to benefit each other.
No trust required
The most important advantage of using a DeFi system is that it does not require the trust of users.
For example, you can audit your code and use additional tools such as Etherscan to check if the transaction completed successfully and to ensure that the DeFi service runs as described above. This is in contrast to centralized exchanges where users need to trust third parties to execute transactions on their behalf. With DeFi, it’s strictly peer-to-peer.
Another important feature is the rapid speed of innovative DeFi development. The DeFi platform is constantly developing current features and testing new features. Therefore, the decentralized movement has evolved into a complex ecosystem full of innovative financial services.
In an industry where centralized financial services are successful, the DeFi sector is also trying to offer a variety of ways to address these issues.
For example, consider that there is no DeFi feature that facilitates the transfer of incompatible cryptocurrencies such as Bitcoin (BTC) and Ethereum (ETH). Using a solution compatible with DeFi protocols such as tBTC and WBTC solves the problem by fixing other tokens to the price of Bitcoin.
This allows DeFi users to access BTC without using the Bitcoin network directly. Unlike Ethereum, Bitcoin does not support smart contracts, so you need WBTC or another form of tokenized Bitcoin to use the DeFi application.
Frequently Asked Questions
With CeFi, the central institution controls the financial system. CeFi contains all crypto trading orders processed through the Central Exchange.
In the field of public blockchain, DeFi is a general term for financial products and services built on blockchain technology.
In a centralized system, exchanges are responsible for protecting consumer money. DeFi, on the other hand, assumes that smart contracts guarantee successful transactions.
- CeFi features: CeFi features include centralized exchange (CEX), flat conversion flexibility, and cross-chain swap services.
- DeFi function: DeFi features include: No permissions required, no trust required, constant innovation to improve the user experience.
So which do you choose, CeFi or DeFi? The answer may depend on your individual needs and goals. One thing is certain: the future of DeFi is gaining momentum.