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From CeFi to DeFi: Present and Future

Traditional financial services such as payments, loans and financing were previously only available through financial institutions and banks. But the field transformed with the introduction of blockchain technology. When the concept of crypto finance began to expand, the discussion moved to a new level: the debate about decentralized and centralized finance.

To understand the comparative advantages and disadvantages of CeFi and DeFi, we first need a better understanding of these two concepts.

What is centralized finance (CeFi)?

Before DeFi, centralized finance was the standard for cryptocurrency trading. With CeFi, all orders to trade cryptocurrencies are processed through a central exchange, with funds managed by special operations. This means that you do not have a private key giving you ownership of your wallet.

In addition, the exchange specifies which currencies they offer for trading or how much it costs to participate in trading.

Simply put, in CeFi realities, you don’t own the funds when you buy and sell them through a centralized exchange. In addition, you are subject to the rules that the centralized exchange imposes.

What is decentralized finance (DeFi)?

A decentralized exchange does not involve exchange platforms. The entire process works through automated applications built on blockchain platforms. Moreover, DeFi creates a fair and transparent financial system in which everyone can participate. It gives people without bank accounts access to financial and banking services using blockchain technology.

DeFi’s goal is to create an open-source, transparent, and permission-free ecosystem of financial services. The DeFi system offers staking, farming, credit encryption, asset storage, and more.

The advantage of using DeFi over CeFi is that you have full control over your assets and own your wallet. In addition, DeFi users use decentralized applications (dApps) built on blockchain platforms to access DeFi services.

CeFi Features

Using a traditional cryptocurrency exchange, such as Binance, Kraken or Coinbase, users send funds to the exchange to manage them in an internal account. Although the funds are stored on the exchange, they are outside the users’ area of responsibility and vulnerable to threats if the security measures adopted by the exchange do not work.

Because of this, centralized exchanges have become the target of security attacks. Customers of centralized exchanges do not mind sharing their personal information or investing money in these companies because they consider centralized exchanges trustworthy.

Moreover, large exchanges have departments with customer service teams to help users. The high level of support provides comfort and reinforces the feeling that their money is in safe hands.

Centralized services offer more flexibility than decentralized services in converting fiat to cryptocurrency and vice versa. Converting between cryptocurrency and fiat usually requires a centralized organization; DeFi services do not offer fiat as flexibly.

DeFi Features

Users do not need permission to use DeFi. In CeFi, users must comply with KYC to access services, which means sharing personal information or depositing money before accessing them.

DeFi users can access services directly with their wallet without sharing personal information or contributing money because DeFi is open to all, without barriers or discrimination.

Moreover, people who plan to create a project based on a decentralized platform are free to do so. DeFi protocols ensure a high level of accessibility and support collaboration with the community. Products developed within the DeFi ecosystem are designed to be mutually beneficial.

The main benefit of using DeFi services is that you don’t have to rely on the service working as advertised. Users can verify that DeFi services are working as intended by checking the code and using external tools like Etherscan to determine if a transaction was executed correctly.

Another critical advantage of DeFi is its high degree of innovation. The DeFi space is constantly evolving existing capabilities and experimenting with new ones. The nature of the DeFi space has evolved into a rich ecosystem integrated with innovative financial services.

In functions where CeFi services have worked well, DeFi works on alternative ways to solve the problem. For example, to fix DeFi’s inability to facilitate the transfer of incompatible cryptocurrencies such as BTC, solutions such as tBTC and WBTC, which support decentralized protocols, bridge the gap by behaving like tokens tied to the value of BTC. This allows users to access bitcoin through DeFi without using the token directly.

DeFi as an innovative alternative to CeFi

DeFi protocols don’t just copy standard CeFi services; they adapt them to the specifics of blockchain. For example, in DeFi, a new exchange system called AMM (Automated market maker) has replaced CeFi’s famous order book structure.

AMM is a smart contract that deprives providers of the liquidity of their assets. As a result, instead of dealing directly with liquidity providers, traders trade using the AMM smart contract. Transaction costs using the AMM architecture are lower than the CeFi order book because there are fewer market-maker interactions.

Today, however, traditional centralized financial markets outperform blockchain. Public stock trading is experiencing its golden era. The global stock market is valued at $95 trillion, while the entire cryptocurrency market is only about $2 trillion.

With the proliferation of mobile devices and IoT (Internet of Things — the concept of a data network between devices.) Fintech startups have democratized investment for the masses, literally putting financial instruments in the palms of their users. Nevertheless, most fintech companies provide services that remain dependent on central government and legacy practices, with all the inefficiencies and barriers to entry that follow.

Blockchain solves these problems by bringing a seamless, global, truly decentralized model to the industry.

DeFi aims to replicate the financial services of traditional finance without the need or control of a central authority, allowing anyone with a mobile device and an Internet connection to access these tools anytime, anywhere.

Today, some blockchain projects are beginning to develop DeFi replacements for traditional financial solutions. Indeed, to unlock DeFi’s potential on the blockchain, mass adoption on a global scale is necessary, and this means that the industry must expand at infrastructure and market levels.

Transitioning to the new truly decentralized economy requires replicating trillions of capital into blockchain and providing the infrastructure to support it. If only 1% of the stock is locked into DeFi, over $950 billion in capitalization could be added to the cryptocurrency markets.

Conclusion

DeFi and CeFi have the same goal. They intend to make crypto trading popular and increase revenues for crypto sphere users. However, how the two ecosystems achieve their goals is different.

CeFi’s model promises the security of funds and fair trading of these funds. Traders with traditional currencies can also participate in crypto asset trading. Moreover, CeFi offers customer support services that DeFi does not have. On the other hand, the DeFi model aims to make the space tamper-proof. It allows investors to pursue their own strategies without negotiating with an intermediary.

Both models have advantages and disadvantages. It depends on the investor and their needs. If you prefer transparency and privacy, DeFi is the suitable model. On the other hand, if your priority is risk sharing, flexibility and more investment opportunities, choose CeFi.

Either way, the world is witnessing a rapid transformation to a more sustainable, decentralized, blockchain-based economy. However, the transformation is far from complete; the process of adopting and developing use cases is just beginning.

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MarsDAO is a multifunctional decentralized platform designed for the use of crypto tools. https://daomars.com/