From CeFi to DeFi: Present and Future

Traditional financial services such as payments, loans and financing were previously only available through financial institutions and banks. But the field transformed with the introduction of blockchain technology. When the concept of crypto finance began to expand, the discussion moved to a new level: the debate about decentralized and centralized finance.

To understand the comparative advantages and disadvantages of CeFi and DeFi, we first need a better understanding of these two concepts.

What is centralized finance (CeFi)?

Before DeFi, centralized finance was the standard for cryptocurrency trading. With CeFi, all orders to trade cryptocurrencies are processed through a central exchange, with funds managed by special operations. This means that you do not have a private key giving you ownership of your wallet.

In addition, the exchange specifies which currencies they offer for trading or how much it costs to participate in trading.

Simply put, in CeFi realities, you don’t own the funds when you buy and sell them through a centralized exchange. In addition, you are subject to the rules that the centralized exchange imposes.

What is decentralized finance (DeFi)?

A decentralized exchange does not involve exchange platforms. The entire process works through automated applications built on blockchain platforms. Moreover, DeFi creates a fair and transparent financial system in which everyone can participate. It gives people without bank accounts access to financial and banking services using blockchain technology.

DeFi’s goal is to create an open-source, transparent, and permission-free ecosystem of financial services. The DeFi system offers staking, farming, credit encryption, asset storage, and more.

The advantage of using DeFi over CeFi is that you have full control over your assets and own your wallet. In addition, DeFi users use decentralized applications (dApps) built on blockchain platforms to access DeFi services.

CeFi Features

Using a traditional cryptocurrency exchange, such as Binance, Kraken or Coinbase, users send funds to the exchange to manage them in an internal account. Although the funds are stored on the exchange, they are outside the users’ area of responsibility and vulnerable to threats if the security measures adopted by the exchange do not work.

Moreover, large exchanges have departments with customer service teams to help users. The high level of support provides comfort and reinforces the feeling that their money is in safe hands.

DeFi Features

DeFi as an innovative alternative to CeFi

AMM is a smart contract that deprives providers of the liquidity of their assets. As a result, instead of dealing directly with liquidity providers, traders trade using the AMM smart contract. Transaction costs using the AMM architecture are lower than the CeFi order book because there are fewer market-maker interactions.

With the proliferation of mobile devices and IoT (Internet of Things — the concept of a data network between devices.) Fintech startups have democratized investment for the masses, literally putting financial instruments in the palms of their users. Nevertheless, most fintech companies provide services that remain dependent on central government and legacy practices, with all the inefficiencies and barriers to entry that follow.

Blockchain solves these problems by bringing a seamless, global, truly decentralized model to the industry.

DeFi aims to replicate the financial services of traditional finance without the need or control of a central authority, allowing anyone with a mobile device and an Internet connection to access these tools anytime, anywhere.

Today, some blockchain projects are beginning to develop DeFi replacements for traditional financial solutions. Indeed, to unlock DeFi’s potential on the blockchain, mass adoption on a global scale is necessary, and this means that the industry must expand at infrastructure and market levels.

Conclusion

DeFi and CeFi have the same goal. They intend to make crypto trading popular and increase revenues for crypto sphere users. However, how the two ecosystems achieve their goals is different.

CeFi’s model promises the security of funds and fair trading of these funds. Traders with traditional currencies can also participate in crypto asset trading. Moreover, CeFi offers customer support services that DeFi does not have. On the other hand, the DeFi model aims to make the space tamper-proof. It allows investors to pursue their own strategies without negotiating with an intermediary.