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A HOLISTIC COMPARISON BETWEEN DEFI AND CEFI

The traditional Centralised Finance (CeFi) ecosystem may appear complicated to non-experts since customers are often unaware of the underlying rules or agreements that govern financial assets and goods. Decentralised Finance (DeFi), on the other hand, is establishing its mark as an ecosystem that claims to provide transparency and control, thanks in part to the underlying integrity-protected blockchain, as well as higher financial asset yields than CeFi. However, the line between CeFi and DeFi may not always be that apparent. We look at the difference between CeFi and DeFi from different perspectives in this article.

Validation by the general public

Because of its openness, the new DeFi technology has an unrivaled ability to transmit trust. To be characterized as non-custodial DeFi, the execution and bytecode must be publicly verifiable on a blockchain. Therefore, unlike CeFi, DeFi users can see and verify that state changes will be made in a timely manner.

Control

Unlike CeFi, DeFi allows clients to directly control their assets at any time, without the requirement for bank participation. However, unless such insurance is insured, users are exposed to the bulk of technological dangers. As a result, centralised exchanges that function similarly to traditional custodians are becoming more appealing for keeping bitcoin assets.

Ease of handling

Permissionless blockchain users might participate in fee bidding competitions to affect transaction execution order. Order malleability has emerged as a result of no centralised body overseeing transactions. CeFi, on the other hand, place stringent requirements on financial institutions and services. This is achievable due to their consolidated structure.

Cryptocurrency trading

CEXs work in the same way as their traditional counterparts. Limit order books, which are off-chain recordings of outstanding orders placed by traders, are maintained by CEXs. DEXs, on the other hand, match the counterparties in a transaction using AMM (automated market-maker) protocols, and so operate in a fundamentally different way. AMMs use mathematical algorithms to calculate price based on transaction volumes.

Service charges

Service fees in DeFi, especially in blockchains, are crucial for spam protection. However, because CeFi financial institutions rely on client anti-money laundering (AML) screening, they may choose to provide free transaction services (or are compelled by governments to offer some services for free).

Anonymity

DeFi can only be used on blockchains with non-privacy-preserving smart contracts. As a result, these blockchains provide pseudo-anonymity rather than true anonymity. Because centralised exchanges bound to anti-money laundering legislation are sometimes the only practical option for converting fiat dollars into cryptocurrency assets, these exchanges have the capacity to divulge address ownership to law enforcement.

Arbitrage threats

An arbitrage should ideally work atomically to avoid price volatility. Unless arbitrageurs cooperate with exchanges to ensure execution atomicity, arbitrage on centralised and hybrid exchanges is essentially subject to market price volatility. If transaction costs are ignored, arbitrage involving two decentralised exchanges within the same blockchain could be considered risk-free. The atomicity of the blockchain enables traders to establish a smart contract that launches the arbitrage and reverts if the arbitrage fails. When two DEXs on distinct blockchains are arbitraged, it’s similar to a CEX and hybrid exchange.

Services that span multiple chains

CeFi services are often used to trade Bitcoin and other major currencies generated on different blockchains. Due to the complexity and time required to accomplish atomic cross-chain swaps, DeFi providers rarely provide these currencies. CeFi’s services deal with this problem by storing assets from many sources. Decentralised services, on the other hand, require tokens that adhere to Ethereum token specifications in order to be interoperable. Many of the world’s most valuable and frequently traded currencies are hosted on other blockchains that do not conform to interoperability rules, giving CeFi a substantial edge.

Freedom in Fiat conversion

Centralised services are generally more flexible than decentralised services in relation to transferring money from one currency to another. Because the money to cryptocurrency conversion needs a centralised institution, most DeFi providers, for example, do not enable fiat on-ramps. Customers may be onboarded more quickly in CeFi, resulting in a better customer experience.

CONCLUSION

CeFi platforms have a far higher user base and market share than DeFi platforms at the moment. This is because the CeFi industry predates the DeFi industry, giving it plenty of time to establish itself and acquire a big subscriber base.

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