In recent years, the world economy has hit rock bottom due to pandemic, war, and rise in fuel prices. On the other hand, web3 evolution, blockchain, machine learning, and artificial intelligence technologies have made cryptocurrencies more accessible and familiar. As of today, the crypto and NFT space is flooded with updates, Defi and Cefi were introduced to augment the penetration of cryptocurrency and NFTs worldwide.
So what to expect from this blog? A sneak peek about Defi Vs Cefi, their functionalities, pros, cons and use cases.
Unlike the globally accepted standard currency, cryptocurrencies don’t have a regulatory body or authority. Therefore, Decentralized Finance, popularly known as DeFi and Centralized Finance (CeFi), came into play to regulate crypto operations.
Looking at the technical side: While both Defi and Cefi were introduced to manage crypto trades, with Cefi, the wallet ownership, the currency, and the private key belong to the centralized exchange which manages the transactions. In Defi, an intermediary is eliminated from the trade and transaction process.
But, what does the whole picture look like?
A centralized financial system works with a centralized exchange which is an intermediary to facilitate crypto transactions and related activities. Through this centralized exchange, users will be enabled to send and receive funds, trade, lend and borrow.
Sounds familiar, isn’t it? Just like the Federal Reserve System / Reserve Bank in any country with real world currency.
In the virtual world: If you own accounts on Binance, YouHodler, and CoinRabbit, then you must be familiar with these operations. Existing for quite some time, these CEXs are trusted by many individuals. However, the problem of data breaches and cyber-attacks prevails with Cefi.
Now let’s understand some features of Cefi in depth.
Within each Centralized Exchange, there exists an internal account to manage the users’ funds. As the CEXs are trustworthy and have been in operation for quite some time, the customers have trusted the company to manage their funds. Further, the personal account information is also shared with the company. Larger Cefi companies manage the data and provide assistance to their customers using a separate customer support wing, thereby increasing the level of trust.
To convert a fiat currency into a cryptocurrency or otherwise, there has to be a centralized entity. A Centralized Exchange can flexibly perform this operation in the Cefi, which is one of the very reasons why it is popular and preferred by customers.
The adaptability of Cefi has also favored onboarding more customers offering better services. For example, Coinbase is the centralized custodial service with 89 million users globally.
Cefi allows trading, borrowing, lending, and payment services between independent blockchains by leveraging funds that are in custody from different chains. High market-cap coins like BTC, ETH, and USDT exist on independent blockchains that don’t support interoperability. Thereby, this feature is beneficial to Cefi members in many ways.
These are some of the predominant features for people choosing Cefi. But, Cefi users lack the privilege of having autonomy over their funds.
Let’s look at the other side, Defi.
A decentralized financial system is an open-source financial service system. It does not involve any exchange or intermediary, but the transaction and trading process happens through applications that are built on blockchain. Through Defi, individuals can borrow, lend cryptos, store their digital assets, yield the farmed NFTs (digital assets), and beyond.
People prefer Defi to have complete control over the digital assets. Here, the individual gets access to the private key, which can be stored in their own wallets.
The open-source nature of Defi has made it different from Cefi. Here users need not complete any KYC process or share their personal information to access a service. In Defi, a wallet can be created and accessed without any hassle. Transactions, trade, and lending happen through this wallet.
You can very much relate this to transactions on marketplaces like OpenSea, SuperRare, and Rarible where creators are collectors who sign-up to buy and sell NFTs. Learn more about NFT Marketplaces account setup and security here.
Built on the self-reliant blockchain technology, Defi and the apps designed to support a Defi ecosystem perform as projected. There are certain gaps in Defi that are found advantageous with Cefi, yet, new applications are being developed to increase the system’s capabilities. This nascent stage system has a lot of potential and room to be the up and thriving financial services system shortly.
For instance, in Defi, there are critical issues with the digital assets sold in marketplaces like Rarible and Opensea. Price Inflation is one among them. As Ecosystem Guardians, bitsCrunch has stepped up to build an application that addresses this price surge of digital assets.
If you may ask, how will this affect the owners or their assets? A digital asset that’s washtraded once or more cannot be pledged if the creator/user wishes to borrow using his NFT/Digital Asset as collateral. Consequently, this will also affect the trade of digital assets.
Lack of safety and accountability has kept Defi volatile to date.
Now, this information might give you an edge about Defi over Cefi. Here’s more to it.
Cefi and Defi exhibit similarities with certain features like cross-chain services, crypto trading, fiat to crypto conversion, stable coin support, and limited liquidity.
There are a few differences between the two that can help individuals and companies decide on choosing the one for their crypto investments. Additionally, understanding these differences will also bring awareness about the complete working of each system, the setbacks, and the scope.
Now let’s check some factors that help decode the difference between Defi Vs. Cefi.
In Defi, the codes are open source and publicly verifiable. A user can observe the execution of the entire transaction process; therefore, Defi is transparent.
However, with Cefi, a middleman is involved, and the process remains ambiguous.
Operations in a Defi ecosystem are atomic – the process either completely succeeds or fails. This is due to the sequential process and financial transactions happening on a blockchain.
But with Cefi, the process is meticulous, involving documentation.
The Defi projects are created and managed by anonymous individuals worldwide. For instance, Defi transactions use distributed ledger technology to record transactions.
Cefi processes and transactions have lesser anonymity when compared to Defi.
The owner directly controls their assets in Defi subject to technological hazards.
Central exchanges control customer data in Cefi, which is also being used for crypto-asset custody.
Trading in Defi happens through Automated Market Makers to power liquidity.
Cefi performs trades with orders published by traders off the chain.
Defi aims at minimal or no transaction charges but for spam control.
Cefi can opt to offer services at no cost, but activities like AML Verification of customers demand effort and resources.
Defi markets are open round the clock as they operate on a blockchain.
Cefi markets are time-bound. PS: Tips to bypass the Ethereum gas fee.!
The smart contracts in Defi stored on a blockchain are pseudo-anonymous.
Conversely, the exchanges in Cefi have the right to reveal the wallet address of the user owing to AML Policies.
Defi is evolving at a drastic pace. As you know, decentralized exchanges have gained more traction, and DAOs have developed apps for credit services using NFT as collateral. Speaking of DAOs, many Decentralized Autonomous Organizations have been established, and you’d be surprised to know it’s more than 9,78,000 as surveyed by Consensys.
Blockchain Application-oriented processes connect the Defi world with the community and Decentralized Autonomous Organization. To perform an activity in Defi, one has to access dApp. For instance, Chainlink connects smart contracts with off-the-chain data and services, MakerDAO offers credit services on Ethereum, etc.
Due to anonymity, security has been a major concern to a lot of Defi companies; we at bitsCrunch are offering NFT securing services through our wide range of products. If you are a Defi company and looking for tools to protect your digital assets, you have landed on the right site. Be one of those Defi Companies that boasts of secured services!