At this point, anyone with a bit of knowledge of the cryptocurrency space understands the significant divide between it and the traditional finance industry. Crypto is the hot new thing that threatens to erase traditional finance and make it obsolete. Conventional finance firms are already shuddering at the thought of being replaced and rendered obsolete by cryptocurrencies.
However, even within the crypto space, another divide is brewing that threatens to upend how we view finance and interact with assets regularly. This is the divide between centralized finance (CeFi) and decentralized finance (DeFi).
The CeFi Structure
Before DeFi got introduced and experienced the recent surge in popularity, CeFi was the industry standard for just about everything we did regarding cryptocurrencies. With CeFi, all crypto transactions are being handled by centralized parties. Trading services handle trade orders, while exchanges handle transfers between parties and much more.
So, while you have greater access to your funds than what you would have gotten with the traditional banking sector, you would still need to trust a central party with your funds and other things.
Your reliance on these central parties can bring benefits and demerits. For one, central authorities provide greater security for funds, and many are insured. However, they also determine a great deal - including the coins they can list for trading, the fees incurred on trades and transactions, and other requirements.
Considering that these rules are subject to change based on the platforms’ whims, you remain at their mercy as things can literally change at the drop of a dime. If a cryptocurrency exchange or trading platform decides that all users would need to provide identification to enjoy its services, you have no choice but to comply. That seems like a rather steep price when you look into the grand scheme of things.
Then, we have DeFi - a structure that operates truly without any intermediaries. With DeFi, not even native crypto companies are behind operations. While companies operate and maintain protocols and have some sway over decisions, they have nothing to do with how these protocols run or what they do.
In DeFi, protocols’ operations run via automated applications that are developed on blockchains. Everything is fair and automated, allowing everyone to access equal opportunities with protocols in the long run.
The primary aim of DeFi is to develop an open-source and transparent financial ecosystem. So far, it has done an impressive job. DeFi protocols provide just about every financial service, from lending and borrowing to betting and asset purchases.
One of DeFi’s primary benefits is that users enjoy complete control over their assets and what they can do with them. Through these protocols, you get to literally control your financial future and chart whatever you want to do on your own. The space is still nascent and experiencing some growing pains, but there is no doubt that there is some promise here.
The Divide: What Separates CeFi and DeFi
CeFi and DeFi are primarily different in how they work and run. To understand this difference clearly, let’s look into some of their top features.
CeFi: Top 3 Features
Centralized exchanges As expected, centralized cryptocurrency exchanges are the top CeFi features. Names like Coinbase, Binance, Kraken, and more all fall under this category. They are the platforms most crypto users are familiar with, and users will need to open accounts and send funds to them.
While your funds are on a centralized exchange, they’re stored outside of your control. Essentially, they are pretty susceptible to security breaches and theft. However, most of these exchanges have insurance to safeguard your deposits.
Many centralized exchanges offer only transfers and transaction functionalities. However, top exchanges like Binance and Coinbase also provide services like trading, over-the-counter desks, custody, and more. So, they can satisfy more customers with their services
Cross-chain functionality CeFi services allow for the trading of different assets, all of which run based on separate blockchains. Bitcoin, Ether, XRP, bitcoin, and many more operate on independent blockchains, and CeFi platforms are the only ones with the strength to handle seamless trading. It’s why you can send Bitcoin and exchange it for Ether on a centralized exchange.
CeFi platforms will take custody of the assets in question from several chains to make this feature happen. Unlike DeFi, this process has most of its protocols on the Ethereum blockchain and is unable to make cross-chain asset transfers happen.
Flexible fiat conversions CeFi platforms are also more flexible than their DeFi counterparts. This flexibility is especially prominent when it comes to converting cryptocurrencies to fiat and vice versa. Up until now, this process will require a centralized body that can handle easy and quick transactions.
DeFi: Top 3 Features
Permissionless operation With DeFi, users don’t need to complete any identity verification checks. The centralized finance space is getting increasingly regulated, and most platforms now require that you complete know-your-customer (KYC) checks before you’re allowed to make or process any transactions.
DeFi allows you to access services without providing any of your personal information. Since services are accessible to all parties without hesitation or barriers, you’re free to do just about anything you want.
At the same time, developers looking to build on DeFi platforms can do that easily. The space provides optimal accessibility, and you can collaborate with community members.
Trustless systems Another main benefit of DeFi is that you don’t need to trust the other party to a transaction. DeFi protocols are automated, and they are run by smart contracts which compel both parties to operate as they should.
The speed of innovation DeFi is currently one of the most innovative parts of the crypto space. With protocols constantly being improved and developers doing their best to collaborate, the speed of innovation is impressive, to say the least.
When it comes to use cases where centralized services have done well, DeFi protocols are now blazing the trail with their innovation. For instance, solutions like WBTC have overcome problems of incomplete Bitcoin transfers for DeFi protocols and more. The future of DeFi looks bright, and some even believe that it could pose a threat to the traditional, centralized cryptocurrency space.