Within the cryptocurrency sphere, there are two main types of finance that investors use to buy cryptocurrency, engage in protocols and store their cryptoassets. Unlike the regular banking system, which is completely centralized, cryptocurrency offers users a chance to delve into decentralized finance, to have complete ownership and unrivalled access to their funds. Here we will dive deeper into the main differences and advantages of each type of finance.
What Is DeFi?
DeFi, or decentralized finance, is a completely decentralized financial system running on top of transparent blockchains, where no centralized authority is involved. Applications and technology such as dApps run on top of the blockchains to allow trustless, permissionless access to anyone with an internet connection.
*DeFi is a relatively new concept, the first project ‘MakerDAO’ was created in 2015 using the Ethereum blockchain. The term DeFi was only coined in 2018 by Ethereum developers.
All applications inside DeFi aim to be open-source, allowing anyone to verify the code by themselves while simultaneously trying to provide all the services that CeFi provide such as lending, storage and borrowing.
When using decentralised finance, you will always be using a self-custodial wallet, unlike centralized exchanges, meaning the user has complete ownership offer their assets.
For example: If you utilize a decentralized exchange (DEX) such as Pancake swap, you will simply connect a self-custodial wallet to the exchange
Exchange
An exchange is known as a marketplace that supports the trading of derivatives, commodities, securities, and other financial instruments.Generally, an exchange is accessible through a digital platform or sometimes at a tangible address where investors organize to perform trading. Among the chief responsibilities of an exchange would be to uphold honest and fair-trading practices. These are instrumental in making sure that the distribution of supported security rates on that exchange are effectiv
An exchange is known as a marketplace that supports the trading of derivatives, commodities, securities, and other financial instruments.Generally, an exchange is accessible through a digital platform or sometimes at a tangible address where investors organize to perform trading. Among the chief responsibilities of an exchange would be to uphold honest and fair-trading practices. These are instrumental in making sure that the distribution of supported security rates on that exchange are effectiv
Read this Term, but never store any assets on the exchange itself.
The main aim of DeFi is to remove the power and control that centralized banks and institutions have on an individual’s access to money and financial products and services.
What Is CeFi?
CeFi, or Centralized Finance, is the way most cryptocurrencies are currently traded and exchanged. Within centralized finance, crypto investors will trade on a centralized exchange (CEX), where their cryptocurrency is stored in ‘hot wallets’ by the exchange themselves.
Unlike DeFi, when cryptocurrency is stored on a CEX, they do not have complete ownership over their cryptoassets as they do not solely own the keys to their wallet.
Users utilizing CEXs will be limited by the coins the CEX chooses to list and will be at the mercy of the rules and regulations that are set such as the trading fees or deposit and withdrawal fees.
Centralized Finance uses KYC (Know Your Customer) protocols, which allows each investor to be individually identified before they can utilize the exchanges properly. The KYC information is then shared with the government of that jurisdiction, such as HMRC for any UK traders.
KYC allows exchanges and governments to verify each user on the platform and associate transactions with each customer which can be used for tax or legal purposes, very similar to how traditional banks work.
For the moment, Centralized Exchanges are the main on-ramps for cryptocurrency. Meaning the easiest and safest way to convert fiat currency, such as the British Sterling or the US dollar into your cryptocurrency of choice.
So, What Are The Main Differences
Often the difference often associated between Centralized Finance and Decentralized Finance is what or who the user has to trust. In CeFi, the user has to trust the business and its workers that they will properly take care of the user’s funds, whereas in DeFi the user must trust that the technology will perform as quoted.
CeFi currently has a much larger market cap when compared to DeFi, as it is simpler for most users to use and similar to a traditional banking system to which investors have become accustomed.
The current total value locked (TVL) in DeFi protocols is around $200bn (US Dollars)
The first centralized exchanges came around in 2010, whereas DeFi only had its first recognized exchange in 2018 with Uniswap.
Features of CeFi
Centralized Finance provides cryptocurrencies' biggest fiat to crypto on-ramps through centralized exchanges, which since 2010 has helped the crypto-sphere grow exponentially, allowing individual and institutional investors to move large amounts of capital into the landscape, providing liquidity
Liquidity
The term liquidity refers to the process, speed, and ease of which a given asset or security can be converted into cash. Notably, liquidity surmises a retention in market price, with the most liquid assets representing cash.The most liquid asset of all is cash itself.· In economics, liquidity is defined by how efficiently and quickly an asset can be converted into usable cash without materially affecting its market price. · Nothing is more liquid than cash, while other assets represent
The term liquidity refers to the process, speed, and ease of which a given asset or security can be converted into cash. Notably, liquidity surmises a retention in market price, with the most liquid assets representing cash.The most liquid asset of all is cash itself.· In economics, liquidity is defined by how efficiently and quickly an asset can be converted into usable cash without materially affecting its market price. · Nothing is more liquid than cash, while other assets represent
Read this Term for major coin pairings. Without easy on-ramps such as CEXs, crypto may not be where it is at today.
There are a few ways to trade fiat currency for cryptocurrency straight into DeFi, but not without using Over The Counter trading (OTC) such as cryptocurrency ATMs, which are currently few and far between each other.
Centralised exchanges make it incredibly easy to convert a large amount of different currencies into cryptocurrency, making the interoperability of CEXs much higher than the current DeFi standard.
If I am a user of Binance, it is very easy for me to send my cryptocurrency to another exchange, such as Kucoin, to be stored there. The risk will be very limited and will occur almost instantaneously.
As DeFi is run by a group of smart contracts running on top of a blockchain, there is no one to call when something goes wrong. Centralized exchanges however act as normal banks would do, with around the clock customer service as the services they provide and ownership of your assets require them to provide support if something were to go wrong. You are trusting the centralized exchange, not the technology, which gives many users comfort in security.
DeFi, on the other hand, has no ability to give customer service, as there is no centralized authority overseeing transactions and wallets. Wallets are simply connected to the platform anonymously.
- Trading Options and Liquidity
Although DeFi does offer users some forms of leverage trading, centralised exchanges are king when it comes to the amount of trading options for day or swing traders. Users are able to access leverages of up to 100x their actual investment.
Also, CEXs will have a much higher amount of liquidity for most of their trading pairs, specifically because they decide which coins get listed on their exchange. Liquidity provides security for traders and investors, knowing their assets are easily sellable.
H2 Features of DeFi
- Trustless, permissionless
As mentioned before, Decentralized Finance is completely trustless and permissionless. Trustless means you do not have to trust a third party, such as the exchange in CeFi when participating in DeFi. Permissionless means there are no restrictions, such as KYC protocols, to determine whether or not someone can participate and contribute to the blockchain.
Asides from security, this may be the main driving point for DeFi users, knowing anybody with an internet connection has the ability to gain financial freedom away from the scrutiny of centralized authority which may not have their best intentions in mind.
When trading on a centralized exchange, they have access to your private keys, which keep the assets inside your wallet safe. In DeFi, each user is completely responsible for their own private keys as wallets are only connected to DeFi, not stored.
Benefits of having complete responsibility mean your assets cannot be seized or frozen by a central authority and only you have access. However, this also means that if mistakes are made in DeFi, such as being a victim of an exit scam or smart contract exploit, there is no one to recover your funds, they will be lost forever.
For this reason, DeFi has had and will have slower adoption than CeFi as the user learning curve is substantially higher. Regular users are not used to having complete ownership over their assets, we are used to central banking systems which we trust.
- Not Subject to Instant Change
DeFi protocols are all running on smart contracts, where the changes must be made. As there is no central authority, the governance system of the DeFi blockchain must vote to make certain changes which will take time and where all token holders will have a say in the presented changes by the community.
CeFi on the other hand has the ability to almost instantly make changes to any rules or features which are currently active, such as central exchanges limiting users’ ability to sell certain coins due to a multitude of factors.
Finally, DeFi is seen as the land of opportunity as almost all actions are possible. Any coin with an address can be traded on DEXs such as Uniswap or Pancake swap and DeFi only activities such as yield-farming, which we have an in-depth guide on here are possible.
Access to trade any coin will mean traders in small-cap coins may see their liquidity get stuck, unlike centralized exchanges which simply do not add that coin to their exchange.
Is CeFi Inherently Bad? Its limitations
So why, when DeFi and CeFi both serve distinct purposes inside the crypto community is CeFi villainized?
Put simply, many users inside the crypto space are anti-authority and anti-centralization even if CeFi has helped build the large crypto community we see today. Many of their arguments are based on multiple examples of centralized exchanges acting against the philosophical roots of cryptocurrency and even creating a false image of a ‘free market’, similar to what happened with Gamestop, always acting in favour of the powerful central authority.
An example of what DeFi users try to avoid is the recent seizure of crypto assets during the truckers' protest in Canada. Bitcoin wallets were added to blacklists and exchanges were told to not interact with him. The funds only got to the truckers through Decentralized Finance.
However, nowadays, many of the largest centralized exchanges such as Binance have great security systems and a reputation to uphold within the community, such as Kraken and Binance CEOs.
Conclusion: DeFi vs CeFi
The main takeaway from this debate between DeFi and CeFi is that they are both working towards the same main goal, main cryptocurrency mainstream through mass adoption. Therefore, the argument should not be Centralized VS Decentralized, but instead be Centralized Finance plus Decentralized Finance, to push the crypto community together as a whole. They are meant to co-exist, and that is what we should be aiming for.
Within the cryptocurrency sphere, there are two main types of finance that investors use to buy cryptocurrency, engage in protocols and store their cryptoassets. Unlike the regular banking system, which is completely centralized, cryptocurrency offers users a chance to delve into decentralized finance, to have complete ownership and unrivalled access to their funds. Here we will dive deeper into the main differences and advantages of each type of finance.
What Is DeFi?
DeFi, or decentralized finance, is a completely decentralized financial system running on top of transparent blockchains, where no centralized authority is involved. Applications and technology such as dApps run on top of the blockchains to allow trustless, permissionless access to anyone with an internet connection.
*DeFi is a relatively new concept, the first project ‘MakerDAO’ was created in 2015 using the Ethereum blockchain. The term DeFi was only coined in 2018 by Ethereum developers.
All applications inside DeFi aim to be open-source, allowing anyone to verify the code by themselves while simultaneously trying to provide all the services that CeFi provide such as lending, storage and borrowing.
When using decentralised finance, you will always be using a self-custodial wallet, unlike centralized exchanges, meaning the user has complete ownership offer their assets.
For example: If you utilize a decentralized exchange (DEX) such as Pancake swap, you will simply connect a self-custodial wallet to the exchange
Exchange
An exchange is known as a marketplace that supports the trading of derivatives, commodities, securities, and other financial instruments.Generally, an exchange is accessible through a digital platform or sometimes at a tangible address where investors organize to perform trading. Among the chief responsibilities of an exchange would be to uphold honest and fair-trading practices. These are instrumental in making sure that the distribution of supported security rates on that exchange are effectiv
An exchange is known as a marketplace that supports the trading of derivatives, commodities, securities, and other financial instruments.Generally, an exchange is accessible through a digital platform or sometimes at a tangible address where investors organize to perform trading. Among the chief responsibilities of an exchange would be to uphold honest and fair-trading practices. These are instrumental in making sure that the distribution of supported security rates on that exchange are effectiv
Read this Term, but never store any assets on the exchange itself.
The main aim of DeFi is to remove the power and control that centralized banks and institutions have on an individual’s access to money and financial products and services.
What Is CeFi?
CeFi, or Centralized Finance, is the way most cryptocurrencies are currently traded and exchanged. Within centralized finance, crypto investors will trade on a centralized exchange (CEX), where their cryptocurrency is stored in ‘hot wallets’ by the exchange themselves.
Unlike DeFi, when cryptocurrency is stored on a CEX, they do not have complete ownership over their cryptoassets as they do not solely own the keys to their wallet.
Users utilizing CEXs will be limited by the coins the CEX chooses to list and will be at the mercy of the rules and regulations that are set such as the trading fees or deposit and withdrawal fees.
Centralized Finance uses KYC (Know Your Customer) protocols, which allows each investor to be individually identified before they can utilize the exchanges properly. The KYC information is then shared with the government of that jurisdiction, such as HMRC for any UK traders.
KYC allows exchanges and governments to verify each user on the platform and associate transactions with each customer which can be used for tax or legal purposes, very similar to how traditional banks work.
For the moment, Centralized Exchanges are the main on-ramps for cryptocurrency. Meaning the easiest and safest way to convert fiat currency, such as the British Sterling or the US dollar into your cryptocurrency of choice.
So, What Are The Main Differences
Often the difference often associated between Centralized Finance and Decentralized Finance is what or who the user has to trust. In CeFi, the user has to trust the business and its workers that they will properly take care of the user’s funds, whereas in DeFi the user must trust that the technology will perform as quoted.
CeFi currently has a much larger market cap when compared to DeFi, as it is simpler for most users to use and similar to a traditional banking system to which investors have become accustomed.
The current total value locked (TVL) in DeFi protocols is around $200bn (US Dollars)
The first centralized exchanges came around in 2010, whereas DeFi only had its first recognized exchange in 2018 with Uniswap.
Features of CeFi
Centralized Finance provides cryptocurrencies' biggest fiat to crypto on-ramps through centralized exchanges, which since 2010 has helped the crypto-sphere grow exponentially, allowing individual and institutional investors to move large amounts of capital into the landscape, providing liquidity
Liquidity
The term liquidity refers to the process, speed, and ease of which a given asset or security can be converted into cash. Notably, liquidity surmises a retention in market price, with the most liquid assets representing cash.The most liquid asset of all is cash itself.· In economics, liquidity is defined by how efficiently and quickly an asset can be converted into usable cash without materially affecting its market price. · Nothing is more liquid than cash, while other assets represent
The term liquidity refers to the process, speed, and ease of which a given asset or security can be converted into cash. Notably, liquidity surmises a retention in market price, with the most liquid assets representing cash.The most liquid asset of all is cash itself.· In economics, liquidity is defined by how efficiently and quickly an asset can be converted into usable cash without materially affecting its market price. · Nothing is more liquid than cash, while other assets represent
Read this Term for major coin pairings. Without easy on-ramps such as CEXs, crypto may not be where it is at today.
There are a few ways to trade fiat currency for cryptocurrency straight into DeFi, but not without using Over The Counter trading (OTC) such as cryptocurrency ATMs, which are currently few and far between each other.
Centralised exchanges make it incredibly easy to convert a large amount of different currencies into cryptocurrency, making the interoperability of CEXs much higher than the current DeFi standard.
If I am a user of Binance, it is very easy for me to send my cryptocurrency to another exchange, such as Kucoin, to be stored there. The risk will be very limited and will occur almost instantaneously.
As DeFi is run by a group of smart contracts running on top of a blockchain, there is no one to call when something goes wrong. Centralized exchanges however act as normal banks would do, with around the clock customer service as the services they provide and ownership of your assets require them to provide support if something were to go wrong. You are trusting the centralized exchange, not the technology, which gives many users comfort in security.
DeFi, on the other hand, has no ability to give customer service, as there is no centralized authority overseeing transactions and wallets. Wallets are simply connected to the platform anonymously.
- Trading Options and Liquidity
Although DeFi does offer users some forms of leverage trading, centralised exchanges are king when it comes to the amount of trading options for day or swing traders. Users are able to access leverages of up to 100x their actual investment.
Also, CEXs will have a much higher amount of liquidity for most of their trading pairs, specifically because they decide which coins get listed on their exchange. Liquidity provides security for traders and investors, knowing their assets are easily sellable.
H2 Features of DeFi
- Trustless, permissionless
As mentioned before, Decentralized Finance is completely trustless and permissionless. Trustless means you do not have to trust a third party, such as the exchange in CeFi when participating in DeFi. Permissionless means there are no restrictions, such as KYC protocols, to determine whether or not someone can participate and contribute to the blockchain.
Asides from security, this may be the main driving point for DeFi users, knowing anybody with an internet connection has the ability to gain financial freedom away from the scrutiny of centralized authority which may not have their best intentions in mind.
When trading on a centralized exchange, they have access to your private keys, which keep the assets inside your wallet safe. In DeFi, each user is completely responsible for their own private keys as wallets are only connected to DeFi, not stored.
Benefits of having complete responsibility mean your assets cannot be seized or frozen by a central authority and only you have access. However, this also means that if mistakes are made in DeFi, such as being a victim of an exit scam or smart contract exploit, there is no one to recover your funds, they will be lost forever.
For this reason, DeFi has had and will have slower adoption than CeFi as the user learning curve is substantially higher. Regular users are not used to having complete ownership over their assets, we are used to central banking systems which we trust.
- Not Subject to Instant Change
DeFi protocols are all running on smart contracts, where the changes must be made. As there is no central authority, the governance system of the DeFi blockchain must vote to make certain changes which will take time and where all token holders will have a say in the presented changes by the community.
CeFi on the other hand has the ability to almost instantly make changes to any rules or features which are currently active, such as central exchanges limiting users’ ability to sell certain coins due to a multitude of factors.
Finally, DeFi is seen as the land of opportunity as almost all actions are possible. Any coin with an address can be traded on DEXs such as Uniswap or Pancake swap and DeFi only activities such as yield-farming, which we have an in-depth guide on here are possible.
Access to trade any coin will mean traders in small-cap coins may see their liquidity get stuck, unlike centralized exchanges which simply do not add that coin to their exchange.
Is CeFi Inherently Bad? Its limitations
So why, when DeFi and CeFi both serve distinct purposes inside the crypto community is CeFi villainized?
Put simply, many users inside the crypto space are anti-authority and anti-centralization even if CeFi has helped build the large crypto community we see today. Many of their arguments are based on multiple examples of centralized exchanges acting against the philosophical roots of cryptocurrency and even creating a false image of a ‘free market’, similar to what happened with Gamestop, always acting in favour of the powerful central authority.
An example of what DeFi users try to avoid is the recent seizure of crypto assets during the truckers' protest in Canada. Bitcoin wallets were added to blacklists and exchanges were told to not interact with him. The funds only got to the truckers through Decentralized Finance.
However, nowadays, many of the largest centralized exchanges such as Binance have great security systems and a reputation to uphold within the community, such as Kraken and Binance CEOs.
Conclusion: DeFi vs CeFi
The main takeaway from this debate between DeFi and CeFi is that they are both working towards the same main goal, main cryptocurrency mainstream through mass adoption. Therefore, the argument should not be Centralized VS Decentralized, but instead be Centralized Finance plus Decentralized Finance, to push the crypto community together as a whole. They are meant to co-exist, and that is what we should be aiming for.
