Introducing CeFi and DeFi

There is no doubt that the introduction of blockchain democratised financial access. Blockchain has also been a hotbed for innovation due to its distributed existence. Newer and more interesting solutions emerge, especially in finance, presenting both challenges and risks to the legacy financial industry.

There are two broad categories of major players in the decentralised ledger technology and cryptocurrency industries. CeFi and DeFi stand for Centralised Finance and Decentralised Finance, respectively.

Let's start with some basic definitions for these terms.

CeFi apes the traditional finance industry by encouraging people to collect interest or take out loans using their cryptocurrencies as leverage. In a nutshell, companies serve as lenders and hold the funds/assets of their clients by using them to generate interest for the lenders. The important thing to remember here is that lenders are transferring risks to these businesses. Big exchanges like Binance and Coinbase, as well as smaller exchanges like Celsius and SALT, are good examples.

The application of smart contracts to financial instruments is referred to as DeFi, and it eliminates the need for users to trust a middleman or company. Flash loans, derivatives, permissionless trading and margin calls, insurance, and other services are available through DeFi. Users trust a protocol rather than a corporation or an individual in DeFi, which means they trust codes to deliver on behalf of some human or agency. MakerDAO, Compound, dYdX, Uniswap, Balancer, and others are examples. Over the last year, there has been an unprecedented increase in this sector of the industry.

Although CeFi platforms have had their time and continue to be popular in the industry, DeFi has been rapidly rising as well. More than $6 billion has been locked up by DeFi enthusiasts through several protocols. Maker, Aave, Curve, Compound, and a few others are at the top of the leaderboard.

DeFi and CeFi have a lot of advantages.

Both methods have their own set of advantages. Risk-transfer is one of CeFi's most significant advantages. CeFi companies guarantee both protection and returns for their customers, similar to traditional banking facilities where banks and lending institutions insure depositor funds. The obvious explanation is that they are in charge of the children. Although there may not be a 100 percent guarantee, as most T&Cs state, CeFi users should rest assured that their funds are in safe hands. Binance, Coinbase, and other long-established crypto banks go to great lengths to ensure that consumer funds are secure. perform admirably in this region. CeFi platforms, on the other hand, typically have a rather user-friendly and intuitive gui. Newcomers can quickly learn how to use these tools and benefit from their offerings. The aim is to reach as many people as possible with cryptocurrencies. In this regard, CeFi platforms excel.

DeFi, on the other hand, has the apparent benefit of being non-custodial. Users of decentralised protocols have complete control over their funds. To carry out their operations, which include but are not limited to trading, lending, and even swapping from one token to another, they only need to communicate with a protocol's interface.

The most common disadvantages of CeFi vs DeFi

Although both have benefits, they also have drawbacks. The greatest drawback or risk associated with these sites, according to CeFi, is custody. Hackers are still on the lookout for centralised networks with high liquidity. The famous mantra "not your keys, not your coin" is often the first point made by proponents of full decentralisation to victims whose funds could have been compromised under any centralised system.

In the case of DeFi protocols, since users do not have to trust individuals or humans but code, a mistake in the code may spell disaster. You are also liable for the risk if you use non-custodial financing. While anyone can argue that this is an important concept in personal finance, newcomers who are unaware of the inherent risks of a protocol can be burned if a bug occurs. A recent example is the YAM protocol failure, in which users deposited up to 600 million USD in an unaudited protocol and were forced to initiate a panic withdrawal after discovering a fatal error. Furthermore, many decentralised systems lack an appealing user interface and experience (UI/UX). Perhaps this is one of the reasons why the DeFi industry took so long to take off, as we recently saw.

What can we expect in the future in terms of DeFi vs CeFi?

The overall environment will improve over time as the industry progresses and tackles problems such as hacking. Both DeFi and CeFi have important roles to play in the cryptocurrency world. They have appealing returns, quicker transactions, and infrastructure that encourages more open finance. Both of these dreams will change, which is the end aim of most financial applications.

Regardless of whether you prefer DeFi or CeFi, the developments would almost definitely spell the end of conventional banking as we know it. It's still a net positive for everyone, particularly cryptocurrency enthusiasts, no matter how you look at it.