DeFi vs CeFi - Key Differences to Count On!
Bitcoin prompted the emergence of an entire industry that revolves around blockchain technology. While some crypto experts claim that decentralized solutions would gradually replace TradFi services, it’s probably too early to make such claims. However, we can agree that an exciting competition is taking place between DeFi and CeFi within the crypto space.
In this article, we’ll discuss the key differences between DeFi and CeFi where the main difference between both industries is that DeFi involves decentralized infrastructures where all financial services are governed by the community members. Whereas, in CeFi, operations are managed by a single entity which could be the business owner or anyone having the true rights.
DeFi in Crypto
Before understanding the differences between DeFi and CeFi, you must understand each approach separately.
Well, DeFi represents a strong trend or movement that promotes blockchain-powered infrastructures and open-source software to create all kinds of financial services and products including the traditional ones.
Be it lending, trading, payments insurances, staking, asset management, or anything, DeFi can transform all traditional banking services into decentralized architectures.
The new DeFi ecosystem revolves around financial apps that are developed on blockchain networks. These are Decentralized Apps (DApps) that have integrated secure permissionless and trustless networks and eradicate central authority to manage the services.
CeFi in Crypto
As the name suggests, CeFi refers to centralized companies and institutions that store their funds to provide various services. Currently, most CeFi solutions offer cryptocurrency trading while implementing Know Your Customer (KYC) and Anti Money Laundering (AML) practices to abide by their respective jurisdictions’ rules. That means users will need to share their personal information!
As many CeFi services operate with custodial wallets that store users’ private keys, it’s prone to malicious activities and online attacks.
Whenever you trade on popular crypto exchanges like Coinbase or Binance, you deal with a CeFi service. These platforms are managed by the centralized entities that bring together the buyers and sellers making sure the rules are followed by everyone accordingly.
Besides trading services, CeFi companies also offer borrowing, lending, margin trading, and other financial services.
DeFi vs CeFi: The Similarities
DeFi and CeFi, both involve the same financial services. Sometimes the end-user wouldn’t even notice whether they are using a DeFi or a CeFi infrastructure.
Speaking of trading, both CeFi and DeFi platforms can create intuitive interfaces so that the crypto beginners could be easily onboarded and start their journey.
DeFi vs CeFi: The Differences
Here are the main aspects that differ DeFi and CeFi from each other -
1. The Controllability
As mentioned above, the CeFi projects are controlled by a single entity or group of entities that run every business aspect. Elsewhere, DeFi projects are governed by the communities via different mechanisms.
Some DeFi projects even offer their governance tokens that enable token holders to take part in decision-making processes. For example — BuddyDAO offers $BDY.
2. Features
CeFi and DeFi services have various distinct features that are unique for each group.
Most CeFi projects offer custody solutions and have dedicated customer service teams which is not usually available in DeFi.
On the other side, trading on DeFi platforms is done on the blockchain that includes several key features including automated market-making (AMM), liquidity pools, yield farming, and non-custodial swaps.
Usually, in DeFi, KYC is not required as the funds are stored in personal wallets. While some companies like Binance provide both centralized and decentralized exchanges, Binance is one such example.
Another great feature of DeFi is the tokenization of traditional assets that helps create digital units of any asset or investment.
3. Fees
Usually, CEX charges higher fees than the DEX platforms as with decentralized exchanges, there are no requirements of custodial services and team involvement in the governance process.
4. Liquidity
In CeFi, the platforms match buyers’ and sellers’ orders whereas, in DeFi, the entire trading is carried out automatically on blockchain. Hence, DEX platforms rely on AMMs that ensure that both sides of a trade are pre-funded by the liquidity providers incentivized to locate their funds.
5. Security
Even though CeFi platforms are no less in maintaining security, still, you can regularly find out about some significant exchange platforms being hacked. On the other hand, DeFi has no such risks.
The only thing users should pay attention to is the code and the consensus algorithm used within the DeFi project.
Which Platform to Invest In?
DeFi runs the show these days! There are many new platforms that have emerged in this sector. BuddyDAO is the world’s first guarantor-based DeFi lending and borrowing platform that works on an innovative concept of leveraging off-chain relationships and making the process easier and secure for everyone.
DeFi will thrive as it has the potential to make financial services accessible to everyone and so will BuddyDAO. Being an early investor in the DeFi platforms like BuddyDAO will result in huge profits. Make smarter choices!
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