CeFi vs DeFi
A Comparison Between Centralized Finance and Decentralized Finance
What is Centralized Finance (CeFi)?
CeFi is the term used to describe the traditional banking and financial systems controlled by a single authority such as a bank or government agency. In centralized finance, money is held by banks and third parties who facilitate money movement between parties, with each charging fees for using their services. A credit card charge starts from the merchant and moves to an acquiring bank, which forwards the card details to the credit card network.
What Is Decentralized Finance (DeFi)?
Decentralized finance (DeFi) is a new financial system built on secure distributed ledgers comparable to those used by cryptocurrencies. DeFi threatens the traditional and centralized financial system by giving people access to peer-to-peer digital trades. DeFi does away with the usage fees that banks and other financial institutions impose. Anyone with an internet connection can use DeFi, and users can store money in a safe digital wallet and transfer them quickly.
Features of Decentralized Finance (DeFi)
Permissionless: Decentralized financial platforms can be used by anybody, anywhere, without requiring any authorization or acceptance.
· Trustless: DeFi’s main benefit is its lack of trustworthiness. If you want to verify that your transaction was successful and that services are operating effectively, you can easily audit the code using programs like Gato scan.
· Continuous innovation: is full of examples of new capabilities being tested. With its white-label solution blockchain, the Gato chain is one of these examples.
What Distinguishes DeFi From CeFi?
Although DeFi and CeFi have numerous distinctions, the dilemma of whether users should trust people or technology remains one obvious one. Users of DeFi have confidence in the technology’s ability to deliver the services as promised. Contrarily, CeFi consumers put their trust in a company’s employees to handle money and provide services.
What Are the Benefits of DeFi Compared to CeFi?
Public Attestation. Even if DeFi code may not always be available open source, its execution must be open to public inspection to qualify as a non-custodial DeFi. This means that, in contrast to CeFi, any DeFi user can watch the execution of DeFi state changes and later confirm it.
Atomicity. A blockchain transaction makes it possible to carry out successive tasks. It is possible to make these operations atomic, meaning they will either succeed all at once or fail. CeFi does not have this configurable atomicity component.
Unidentified development. Users who utilize centralized finance have less anonymity than those who use decentralized finance.
Custody. DeFi gives its customers total control over their assets, unlike CeFi. This gives them the ability to control all the technical risks and saves them from being subjected to unfavourable financial laws that are mandatory for users of CeFi.
Why DeFi Is a Preferable Option to Use
Secure, decentralized, and open. A single organization does not manage applications. Instead, smart contracts accessible to everyone are used to power DeFi apps. You may also participate in DeFi apps’ governance by casting your vote on specific platforms. In a nutshell, the DeFi environment is open and regulated by participants in the community like you!
· DeFi provides you with complete command over your possessions. The central organizations in charge of traditional financial services have tight control over them. Such gatekeepers, however, have several drawbacks, including high intermediaries’ costs, slow transaction latency, entry restrictions, and more.
· DeFi offers a variety of accessible financial services. DeFi’s capacity to offer more straightforward, international financial services drive its widespread acceptance. A variety of financial services are covered by DeFi applications, including payments, decentralized exchanges, stablecoins backed by reliable fiat currencies like the US dollar, loans, borrowing, prediction markets, insurance, derivatives, yield farming, and many more.
Negative Aspects of CeFi
Risks of hacking. One of CeFi’s most significant shortcomings is that centralized systems are a magnet for cybercriminals. They attempt to take advantage of the high liquidity of CEXs and employ illegal methods to hack crucial data, allowing them to steal money from clients.
High transaction fees. As a result of the fact that there are so many intermediaries in CeFi, transaction prices inevitably increase. People are drawn to DeFi due to lower transaction fees.
Lack of transparency. CeFi is a regulated financial system. However, there is a lack of transparency because users cannot check a ledger to confirm transactions. DeFi runs on smart contracts, which give both parties to the transaction total transparency and confidence. Centralized finance has been known to experience certain realities that have proven its unreliability. Take, for example, the collapse in 2022 of big entities like FTX, Celsius, 3AC, and BlockFi.
