CeFi vs DeFi : Explained
As the concept of cryptocurrency has grown with time, the debate has now shifted to a new set of considerations — DeFi (decentralized finance) and CeFi (centralized finance). Although they offer a wide range of financial services related to cryptocurrencies, DeFi and CeFi differ from each other.
But wait! Let us start with what a centralized and a decentralized market mean in general.
How do DeFi and CeFi differ when it comes to the custody of digital assets?
One of the biggest differences between centralized and decentralized finance is that in the case of consolidated finance, the system is regulated, while in the case of decentralized finance, it is the other way around. In the case of centralized finance, the exchanges are entrusted with the custody of client funds.
DeFi, on the other hand, assumes that transactions occur as a result of smart contracts. These are agreements between two parties that enforce certain terms when certain conditions are met.
In other words, users are responsible for their own finances and activities. CeFi allows users to restrict trading and set limits on their accounts. However, such a situation is not possible in decentralized finance.
CeFi stands out in two ways: First, it allows fiat money to be quickly and smoothly exchanged for cryptocurrencies and vice versa, and second, it facilitates cross-chain exchanges of numerous cryptocurrencies, demonstrating the interoperability of cryptocurrencies.
Let us take a look at the common features of Defi vs Cefi
Verifiability by the general public:
While the DeFi application code may or may not be open source, the execution and bytecode on a blockchain must be publicly verifiable to be classified as non-legal DeFi. Therefore, unlike CeFi, any DeFi user can monitor and verify that DeFi state changes are executed in a timely manner. Because of this transparency, the new DeFi technology has an unparalleled ability to build trust.
Centralized Exchanges (CExs) are based on the same principles as their conventional counterparts. Centralized Exchanges maintain limited order books, which are off-chain records of outstanding orders submitted by traders. Decentralized exchanges (DEXs), on the other hand, operate in a fundamentally different way, using automated market maker (AMM) protocols to match counterparties in a transaction. AMMs use mathematical algorithms to determine prices based on transaction volume.
Flexibility to convert to fiat currencies:
Centralized services tend to be more flexible than decentralized ones when it comes to transferring money into bitcoin and vice versa. Most DeFi providers do not offer fiat onramps because converting fiat to cryptocurrencies requires a centralized facility. In addition, CeFi allows customers to be engaged more quickly, which contributes to a better customer experience.
In conclusion, CeFi and DeFi ecosystems achieve their goals in different ways. Both models have their own merits and pitfalls. It all depends on the requirements of the investor. DeFi is the appropriate option if you value openness and privacy. On the other hand, if you value trust, risk sharing, flexibility, and more investment alternatives, CeFi is the right choice for you.
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