Bitcoin introduced the world to a whole new set of blockchain-based financial applications. CeFi (Centralized Finance) has been around since the time Bitcoin first emerged.
However, a new trend has come into view in the form of DeFi (Decentralized Finance), which has garnered a lot of attention since 2020.
A lot of people are not aware that there’s a major difference between Decentralized Finance (DEFI) and Centralized Finance (CEFI) such as Banks, Insurance, Stock Markets etc, with a central controlling authority.
DeFi vs CeFi – These two acronyms might sound similar but they have different meanings.
They performed different tasks.
What is DeFi?
Defi is an umbrella term for a variety of applications and projects in the public blockchain geared towards distracting the traditional finance world.
It’s an ecosystem of financial applications developed using blockchain technology. It operates transactions without allowing third-party involvement.
It implements a peer-to-peer network to establish a decentralized environment where everyone can freely connect and manage their assets.
What is CeFI?
Centralized finance is a structured and specialized financial service that allows people to get loans or earn interest on their cryptocurrency by lending or borrowing it through a central exchange. Examples of CEFI are coinbase, binance, OkeX.
Centralized entities run CeFi services like centralized crypto exchanges. Most CeFi service providers tend to abide by regulations outlined by the local authorities where they operate.
These regulations make it mandatory for centralized financial institutions such as exchanges and trading platforms to implement Know Your Customer (KYC) and Anti Money Laundering (AML) practices.
Differences between CeFI and DeFI
1. Trust
In centralized finance, you have no other choice but trust exchanges and other centralized apps with your assets. In DeFi, you never have to trust anyone with your assets or if you want to trade them using a peer-to-peer swap or anything.
2. Centralization
In a centralized finance setting, exchanges or trading platforms are owned by a single entity or often a corporation. They provide a variety of services to make crypto more accessible to their customers.
However, centralized exchanges are in charge of everything — right from onboarding users and setting up ground rules, among other things.
DeFi applications, on the other hand, aim to decentralize ownership and become community-owned. Everybody has a say in how the application should function while its code is run and maintained by the community.
3. Permission
In centralized finance, users must sign up and submit to KYC (Know Your Customer) regulations. It is often to prevent criminal activities like money laundering and abide by crypto regulations.
In DeFi, as long as you have a non-custodial crypto wallet like MetaMask, you don’t have to submit to KYC or sign up for an account.
4. Cheap Transaction
Defi is cheaper as the only cost involved is the network fee while in Cefi multiple intermediaries charge hefty fees.
Conclusion
Both CeFi and DeFi provide related concepts, the approach is very different.
The medium-term future is bright for both DeFi and CeFi, as the financial crisis will highlight the importance of refuge assets with low correlation to traditional markets.
It will also stress the importance of blockchain solutions for all kinds of financial services that governments should not manipulate.