DeFi and CeFi: Key Differences

Bitcoin introduced to the world a whole new set of blockchain-based financial applications. CeFi (centralized finance) has been around since the advent of the flagship cryptocurrency. However, a new trend has now emerged in the form of DeFi (decentralized finance), which has attracted a lot of attention over the past year. While some industry experts and analysts believe that DeFi will eventually take over CeFi, it is too early to say with certainty.
What is decentralized finance (DeFi)?

DeFi, or decentralized finance, is a form of blockchain-based finance that does not rely on central financial intermediaries to offer services. Instead, they use smart contracts. A smart contract is an automated code that runs on a blockchain network and cannot be changed. Transactions that take place in a smart contract are handled by the blockchain without any third-party intermediary.

DeFi platforms allow people to borrow money, speculate on price movements using derivatives, trade cryptocurrencies, earn interest on funds and more. At the moment, DeFi applications mainly revolve around the following functions: providing peer-to-peer or pooled lending and borrowing platforms, as well as enabling DEX (decentralized exchanges), tokenization and forecasting markets.

DeFi and CeFi: Key Differences

What is centralized finance (CeFi)?

Private organizations run CeFi services, such as centralized crypto exchanges. Most CeFi service providers tend to abide by rules set by the local authorities where they operate. These rules require centralized financial institutions, such as exchanges and trading platforms, to implement Know Your Customer (KYC) and anti-money laundering (AML) practices.

In CeFi, centralized companies and institutions store user funds in their custodial wallets. These cryptocurrency wallets store users' private keys. In turn, these services provide customers with various services. Cryptocurrency trading is currently one of the most common solutions provided by centralized funding. In addition to trading, companies covered by CeFi provide their clients with services such as borrowing, lending, margin trading and a number of others.
DeFi's advantages over traditional finance and differences from CeFi

DeFi offers several advantages over traditional financial services. The use of smart contracts and distributed systems makes the deployment of a financial application or product less complicated and more secure. Overall, the DeFi movement moves traditional financial products into a decentralized, open-source world, bringing financial freedom worldwide and eliminating the need for intermediaries, reducing overall costs and significantly improving security.

In terms of financial services, there are a number of differences between DeFi and CeFi. However, the two types of money have many similarities.
Centralization

In a centralized financial environment, exchanges or trading platforms are owned by one person or corporation. They provide various services to make cryptocurrency more accessible to their customers. However, centralized exchanges are responsible for everything from user registration to establishing ground rules, among other things. DeFi applications, on the other hand, aim to decentralize ownership and transition to community ownership. Each user can influence how the app should work as long as its code is managed and maintained by the community.

Authorization

In centralized finance, users must register and obey KYC rules. This is often done to prevent criminal activity, such as money laundering, and to comply with crypto rules. In DeFi, with a non-storage cryptocurrency wallet, users do not need to send a KYC or register an account.
Trust

In centralized finance, users have no choice but to trust the exchange and another centralized application with their assets. In DeFi, you never have to trust anyone with your assets.

One of the main drawbacks of most decentralized platforms is the lack of functionality compared to centralized services. As decentralization technology continues to evolve, we can expect decentralized exchanges to offer a wider range of products and features. Also, DeFi platforms execute transactions in the blockchain network, which means that transactions can be slow and expensive when the network is congested.
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