DeFi and CeFi Differences

DeFi and CeFi Defferences – Crypto within financial sector never be separated from decentralized finance (DeFi), which offers the future of the world of banking that is open to use by anyone with a transparent system.

However, the widespread of crypto in the community also cannot be separated from the role of centralized finance (CeFi), which is convenience for new users who are just starting their journey in the crypto world.

So, what are the differences between DeFi and CeFi? 

What is DeFi ?

DeFi stands for Decentralized Finance, a blockchain-based financial application that operates without a centralized authority. This means DeFi can also be use for various financial services such as loan, exchanging assets, just like a normal financial services. However, DeFi can operates directly, without any interference from third party like banks.

DeFi applications was basically initiated by Ethereum blockchain and its smart contract technology. A smart contract is a term for a computer program written on top of the Ethereum blockchain.

With DeFi, all transaction processes were carried out by an open-source and transparent codes written in smart contracts. Users can verify the code from the application themselves. Thus, they have a complete control over their funds.

DeFi basically provides alternative financial services instead of the traditional financial system.

What is CeFi ?

CeFi stands for Centralized Finance, which means a financial services with centralized structure. In other words, CeFi has third party interferences like banks or traditional financial institutions.

CeFi also provides various financial services such as crypto exchange, interest from deposited crypto assets, loan, and so on. However, CeFi runs by a company in general and not using an open-source smart contracts.

By using CeFi means, we seek a company help to make DeFi transactions and pay a fee for their services.

What is a Differences Between DeFi and CeFi ?

They are both financial services with their own respective advantages and functions.

However, CeFi is sometimes misinterpreted with TradFi, which stands for traditional finance a financial service we are familiar with, including Banks.

If you’re still wondering the differences between the three of them, check out the example below :

Function	DeFi	CeFi	TradFi
Spot Trade	UniSwap	Coinbase	New York Stock Exchange, NASDAQ
Derivatives trade	dYdX, GMX	Bybit, FTX	Chicago Mercantile Exchange
Asset management	The Index Co-op, Yearn	Galaxy, Grayscale Bitcoin Trust	BlackRock
Lending	Aave, Compound	Celsius, Nexo	Bank of America

Source : https://www.coindesk.com/learn/defi-vs-cefi-in-crypto/

Risk of DeFi and CeFi

Both DeFi and CeFi are related to each other. Although they have their own respective excess, they cannot avoid financial risk.

For example, It’s just happened recently in May 2022.

Terra Protocol, a blockchain that produces algorithmic stablecoins with TerraUSD (UST) as the main stablecoin. One of the most used DeFi applications on Terra blockchain is Anchor Protocol, a decentralized savings account, which is promises high “interest”.

LUNA (Terra blockchain coin) crash 100% to the level 0.0002 USD, It’s happened due to the stablecoin algorithmic system which forces Terra to continuously create new LUNA to keep the value of UST (Terra stablecoin) at $1.

Three Arrows Capital (3AC), invested in Terra and borrowed billions dollars worth of crypto from various CeFi companies. CeFi companies trust 3AC and provide loans without adequate collateral. When the crypto market crashed, 3AC was unable to repay the loan and also affected all of the CeFi companies.

Read Also : The Worst Crypto Coins in History

References

DeFi vs. CeFi: Comparing decentralized to centralized finance, Cointelegraph
Ekin Genc, DeFi vs. CeFi in Crypto, CoinDesk