Centralized CeFi finance has been around a long time ago, while DeFi is very recent.
In this article, we will discuss both of these types of financing, what they are, and the most prominent differences between them.
CeFi conventional finance:
When we think about traditional financial systems, the image of banks is formed for us.
Banks act as a trusted third party that takes care of our financial requirements, with great confidence in them.
Banks, in keeping with the technical progress that is happening, have updated their systems and become more user-friendly.
However, it has some inherent problems that have not been solved until now, and many global financial crises that fall within these problems can be mentioned, such as the Great Depression in 1929, following the great decline in stock prices in the United States.
And many global financial crises followed after that, the most recent of which was the financial crisis that occurred in 2007-2008, with the decline in the value of the mortgage market.
The investment bank Lehman Brothers collapsed, leading to job losses, throwing people into poverty and destroying entire families.
The matter did not stop at these crises, but the effects and financial problems caused by central banks are still continuing until the moment, the last of which is printing money and pumping it after the spread of the Corona crisis, as it has faced these problems by pumping more money, which is famous for the "Brrrr!" On Twitter which has a direct impact on inflation.
Source: Economicshelp
Disadvantages of the traditional CeFi financial system:
Centralization: a central authority that manages and organizes the supply and demand of currencies, meaning there is no voting mechanism to reach consensus and take a collective decision. Rather, quick decisions are used that offer short-term solutions but cause long-term problems.
Inefficient monetary policies: Monetary policies are often politically motivated and not uniform, meaning that they change according to geopolitical scenarios, as well as changes in governments, which causes delay in progress.
Control: The central bank can freeze your account at any time, as the central banks and the government control interest rates, recovery policies, etc., and accordingly we have no control over how banks use our money.
Can DeFi solve such problems? We'll see below.
Definition of decentralized finance DeFi:
DeFi projects and ecosystems are open source and consist of protocols, cryptocurrencies, dApps, and smart contracts.
Everything mentioned is based on blockchain technology, as there is no possibility of failure.
Multiple computers store immutable records over peer-to-peer networks, in a transparent, auditable form and everyone can review transactions.
Advantages of DeFi Financing:
Decentralization: decentralized financing projects are a network of smart contracts, as they work side by side to perform a specific financial activity, as there is no central institution, and users are the ones who have complete control over their money.
Relying on Blockchain: Conventional Banks Can Fail! In a blockchain, each node maintains a copy of the transactions, the higher the number of nodes, the more difficult it is to penetrate the network.
Ease of deployment: DeFi applications operate as modules and can be easily copied and deployed when needed.
Reaching out to non-bankers: Easy access to decentralized financing applications DeFi makes them available in the most remote geographical locations, where all the user needs is the internet and a mobile phone.
Low cost: Decentralized financing is low cost due to lower overheads, as it is a smoother financial system.
Transparency: Most decentralized financing projects have open source auditable code. Traditional financial policies may not be the case, which makes DeFi projects more transparent.
Scope: A DeFi can consist of a network of dApps with different functions, covering multiple geographic regions.
Challenges Associated with DeFi Financing:
Security: Decentralized finance projects remain vulnerable to hacking, so users need to keep their keys securely, and storing large key phrases is a challenge, and many DeFi projects are not fully decentralized and thus have more points of failure.
Standards: Lack of standards created low building qualities so there were a lot of failed projects.
Analytics: Since the sector is new, the data samples and the number of users are small, and therefore appropriate standards are not available.
Regulations: Many geographic regions need legal regulation, as a large part of the industry is still unregulated, which means a lot of fraudulent operations.
Fragmented Market: There are many projects that operate independently, which means that there are overlaps and gaps, which creates a segmented market.
The future of decentralized finance DeFi:
Many blockchain-based financing products remain centralized.
Automated smart contracts make up a percentage of the structure.
The use of the word DeFi is still very vague, as pure decentralization remains the holy grail around which these projects revolve, and many projects seek to direct towards it.
Although several DeFi projects such as MakerDao and Compound have achieved great success, there is room for improvement in multiple areas.
In the future, cryptocurrency wallets will play a larger role, and the work of decentralized financing projects will be improved to become more organized and easier to use.
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