With the rise of Decentralized Finance in the crypto world, the debate between CeFi and DeFi has become very heated. The discussion mostly revolves around decentralization, which is an essential aspect of the cryptocurrency ecosystem.
Despite the fact that Bitcoin ushered in a global shift toward decentralization, certain aspects of the environment have exemplified centralization. Credit, interest, a secure currency, exchanges, and assets are all resources provided by both systems. They, on the other hand, take a different approach.
Let's take a look at the differences between the two financial structures.
Centralized Finance
Users trust the people behind CeFi to handle funds and carry out the services that the company provides. The key benefit of is that it provides versatility, allowing for fiat conversions, cross-chain trading, and the ability to directly assist customers by managing funds.
Most people struggle to control their own money, resources, goods, and possessions... They make rash decisions and fall into clever traps (Scams). Then they need someone to complete/repair it for them so that they can sleep soundly. Banks and centralized exchanges are two examples.
Decentralized Finance
Users of DeFi have faith in the technology's ability to carry out the services being provided. DeFi allows users to use smart contracts based on the Ethereum blockchain to access financial instruments. DeFi allows users to lend and borrow money, as well as take out short-term loans, insurance, derivatives, and permissionless trading.
Users can get the most out of their money by using smart contracts to manage it. They will lend and borrow at significantly lower rates than the centralized platforms. Decentralized exchanges (DEx) and smart contract-based lending platforms are two examples.
Difference
Custody: CeFi is a custodian since it stores consumer data and funds. Users lock their funds in smart contracts to access financial services, making DeFi non-custodial.
Cross chain services: CeFi facilitates trading of common cryptocurrencies such as BTC, LTC, XRP, and others that are issued on their own blockchain. DeFi does not accept these coins due to the difficulty and latency of executing atomic cross-chain swaps.
Fiat to Crypto: Because centralized services provide a lot of versatility, converting fiat to cryptocurrency and vice versa is a lot easier. Although most DeFi services do not allow for fiat to cryptocurrency conversions, there are a few exceptions.
Trust: In CeFi, the consumer must put their confidence in a third-party to deposit their funds. DeFi, on the other hand, is trustless since users can track DeFi services and transactions using external tools like EtherScan.
Verification: To use CeFi's services, users must first provide personal information or make a deposit. Users of DeFi will simply use a wallet to access the services.
Governance: Corporate management will be in charge of making decisions in both the present and future states of the businesses in CeFi. In DeFi, the networks will be managed by groups made up of network governance token holders.
Interest Rates: The CeFi platforms are in charge of determining interest rates. The DeFi platforms, on the other hand, depend on market data as well as proprietary data obtained from market participants. The governance token holders will then vote on interest rate adjustments.
Oracles: Centralized oracles function as a single entity that provides data from a third-party source to a smart contract. Decentralized oracles in DeFi, on the other hand, depend on several external sources to ensure the reliability of data given to smart contracts.
Conclusion
CeFi was in the market well before cryptocurrencies were common. DeFi, on the other hand, is a newcomer to the industry that is quickly gaining traction. Both have a solid foundation in the cryptocurrency movement. DeFi and CeFi have appealing yields, quicker transactions, and infrastructure that supports open finance.
