10 Reasons why DeFi will outlive CeFi

Beginners guide
TLDR: DeFi is more secure, transparent, and accessible than CeFi.

Definitions:

Decentralized finance (DeFi) refers to a movement that aims to use decentralized technologies, such as blockchain, to enable financial transactions and services that are open, transparent, and accessible to all.

Some examples of DeFi applications include decentralized exchanges (DEXes), which allow users to buy and sell cryptocurrency assets without the need for intermediaries; decentralized lending and borrowing platforms, which allow users to lend and borrow cryptocurrency assets directly to and from each other; and decentralized insurance platforms, which allow users to create and buy insurance policies on a peer-to-peer basis.

Centralized finance (CeFi) within the cryptocurrency space refers to products that are centralized and controlled by a single entity, such as centralized exchanges (CEXs). CeFi systems are more regulated and have more established infrastructure, they may also be subject to central points of failure and may not be as transparent or accessible as DeFi systems.

DeFi and CeFi can both play important roles in the development and adoption of crypto-based financial technologies, and they are not mutually exclusive. DeFi protocols and applications may be built on top of CeFi infrastructure, and CeFi applications may incorporate elements of DeFi, such as the use of smart contracts or decentralized governance.

After the loss of tens of billions of dollars in customers’ funds in 2022 alone (Terra and FTX to name a few), DEXes have become even more relevant than before due to their innate decentralized and trustless nature.

Why DeFi will outlive CeFi:

1. Greater security: both DeFi and CeFi are built on top of a blockchain network, which makes it more secure than traditional finance. (Some CEXes are a hybrid, whereas some parts of the system are kept off-chain and others are on chain). Transactions are recorded on a distributed ledger, which makes it difficult for anyone to alter or tamper with the records. Users who prefer to have more control and security over their assets generally prefer to use a Decentralized Exchange (DEX), while those who are willing to trade off some control and security for convenience may prefer to use a Centralized Exchange (CEX).
2. Asset security: a user retains full control of their funds stored or traded on DEXes, which offer a higher degree of security than CEXes. DEXes allow peer-to-peer transactions directly from your noncustodial wallet, without going through an intermediary. However, a user is then responsible to safeguard their secret phrase which gives access to their funds.
3. Improved transparency: DeFi allows for a high degree of transparency, as all transactions are recorded on a distributed ledger and can be viewed by anyone. This creates a trustless system between users and reduce the risk of fraud or mismanagement.
4. Better alignment of incentives: In traditional finance, intermediaries such as banks and credit card companies often have conflicting incentives with their customers. DeFi protocols, on the other hand, can be designed to align the incentives of all parties involved, leading to more mutually beneficial relationships. For example: we do not really know how banks manage and store our hard-earned money; but we can always check what happens to our funds within a DeFi ecosystems.
5. Greater flexibility: DeFi allows for the creation of new financial instruments and products that would take longer time to develop within CeFi ecosystems. For example, DeFi protocols can enable the creation of custom financial instruments that are tailored to the specific needs of a particular user or group of users.
6. Increased accessibility: DeFi protocols can be accessed from anywhere with an internet connection, which can help to break down barriers to financial services and increase global financial connectivity. DeFi allows anyone with an internet connection and a wallet to access financial services, regardless of their location or financial status. This can help to increase financial inclusion and bring more people into the global economy.
7. Reduced dependence on intermediaries: DeFi allows for financial transactions to be conducted directly between users (P2P), without the need for intermediaries. This can help to lower fees and make the financial system more efficient.
8. Ability to adapt and evolve: Because DeFi protocols are transparent and decentralized, they can be more easily updated and improved upon than CeFi systems. This can help DeFi to stay relevant and adapt to changing market conditions. Increased competition can lead to lower costs and more innovative products for consumers.
9. Early bird gets the worm: Decentralized Finance at its current stage is like the internet in the 90s, it is better to be ahead of the game than playing catch up. Educating yourself and engaging with DeFi as early as now (as of 2023) gives an unequivocal competitive advantage.
10. Community: DeFi communities are substantially more inclusive, engaging and more diverse than their CeFi counterparts. The communities are full of passionate individuals who are about solving not only their own but collective problems. It is a source of inspiration and education for both: builders and traders alike.

DeFi has the potential to be a more flexible, efficient, and resilient financial system that is better aligned with the needs of its users.