DeFi vs CeFi — Understanding the Differences

Galina M
Sikka Money
Published in
5 min readNov 22, 2022

The decentralized finance movement has presented a revolutionary new opportunity for the financial industry. DeFi addressed a great number of issues since its inception but it still has a long way to go. As the current market cap of CeFi and DeFi protocols stands at over $400 billion and $70 billion, respectively, we’re just in the beginning of what is shaping to be a new paradigm in the way people invest, trade and transact.

As the use cases of cryptocurrencies continue to increase, two different phenomena, based on the same concept, receive attention from crypto enthusiasts and institutional investors: centralized finance (CeFi) and decentralized finance (DeFi).

While both revolve around the same goal (to enable ordinary people to use digital currencies for monetary activities), their methods to achieve this are different.

Let’s look at the core characteristics of CeFi and DeFi, so we can understand the advantages and disadvantages of both, and explore where these two worlds overlap.

Centralized Finance

The concept of centralized finance is similar to that of traditional finance, but the two aren’t the same. For instance, while it’s a type of financial transaction that’s commonly used by users, it’s not a traditional loan.

The term “TradFi” refers to legacy financial institutions that are about to enter the digital asset space. On the other hand, “CeFi” provides digital asset-related services.

There are various types of CeFi platforms, such as crypto exchanges, digital currency payment providers, and lending companies. They all provide their users with custodial hot wallets, which means that they possess the private keys of their users’ wallets. This means that they have the authority to control the assets of their users. Furthermore, they can suspend the accounts of their clients, or block their withdrawals.

CeFi companies have their own set of rules that they’re required to follow. This is similar to how private companies in the finance industry would typically set their own rules. For instance, they can decide which coins should be listed and what rules should be followed.

Before a user can start trading on a CEX, they usually have to complete the Know Your Customer (KYC) process.

Decentralized Finance

In CeFi, customers transact through intermediaries. DeFi however, removes these intermediaries and replaces them with smart contracts.

The concept of DeFi is a decentralized finance system that aims to increase the decentralization of the world of finance. It allows investors to trade digital assets across various platforms and protocols.

Through DeFi, peer-to-peer financial transactions can be conducted through decentralized applications that are designed to provide services on the blockchain. These applications are built on existing platforms such as Ethereum, BNB Chain, Solana, and Tron. The smart contracts used in these applications determine the rules that are in place for the DeFi protocol.

Similar to other financial services platforms such as CeFi and TradFi, DeFi offers various lending, trading, and borrowing services. However, its operations are carried out on a code-based basis. Also, users can interact with DeFi through non-custodial wallets, which gives them complete control over their crypto assets. Additionally, in DeFi there is no need to register an account or complete KYC requirements i.

Benefits of CeFi

Centralized exchanges (CEXs) are the most recognized products of CeFi. They build their operations around trust and various offerings such as OTCs, crypto loans, staking, margin trading, and more.

Through a combination of chains, CeFi allows end-users to manage their funds before they can exchange them for other currencies. This eliminates the need for them to perform manual transactions and provides them with a more simple and more intuitive experience when it comes to converting money.

Fiat-to-Crypto Conversions

One of the main advantages of using CeFi over DeFi is its ability to support both fiat money and cryptocurrencies transactions. Due to the nature of its ecosystem, it is very easy to sign up for its services. On the other hand, DeFi exchanges typically require a central authority to perform the conversion process.

Cross-chain services

Cross-chain services are offered by CeFi, and they allow users to perform various transactions on different cryptocurrencies. For instance, they can easily convert LTC to BTC or XRP without relying on blockchain technology. DeFi is not able to provide the same level of cross-chain services. For instance, atomic swaps can be very time-consuming and have high latency.

Benefits of DeFi

The main advantage of DeFi is that it eliminates the need for people to reveal their personal information and entrust the management of their funds with other people. This eliminates the risk of unauthorized access and use of your funds. It also allows people to manage their assets without restricting their access to a decentralized platform.

Liquid Staking

Several protocols allow crypto users to earn rewards by staking their assets. They tokenize their stakes and allow them to swap them back and forth between their original token and the one they’re holding. Liquid staking can be performed on multiple chains.

Collateralized Debt Position

Through a collateralized debt position (CDP), users can easily mint stablecoins. Some of the prominent platforms that provide this type of service include JustStable, QiDAO, and Abracadabra. These DeFi protocols are built on one or several blockchains.

Bridging

A bridging protocol connects blockchains and allows the movement of crypto assets. Some of these include Multichain, WBTC, JustCryptos, and Poly Network. Although DeFi protocols are available on multiple chains, they are still highly centralized. This means that they can deviate from more decentralized alternatives such as Aave or Uniswap.

Sikka Stands at the Crossroad of DeFi and StakeFi

CeFi and DeFi are both part of the broader crypto market and contribute to its development and evolution. To further promote financial sovereignty and privacy for users, we believe in bringing together the best features of CeFi and DeFi to reach the level of maturity where it is genuinely safe for investors.

In Sikka Protocol, CeFi and DeFi co-exist with components such as lending/borrowing, liquid staking, bridging and a collateralized debt position tied to a new stable asset that is governed by a monetary policy rather than a peg to a fiat currency.

The combination of elements from CeFi and DeFi has allowed for swift innovation in building a cutting-edge protocol and experimenting with new opportunities for yield generation on top of the Polygon chain. Sikka is a step above existing passive earning opportunities within DeFi that are prone to strong fluctuations and have high entry fees.

Liquid staking protocols have already shown tremendous growth in parallel with the greater DeFi movement. We see liquid staking as DeFi in its purest form and stable assets as the safest storage of value for growing and preserving wealth. But we believe it is only through the integration of CeFi into the broader DeFi trend that we can provide users with the sufficient liquidity they need to transact at an adequate rate.

Sikka takes the best from both worlds, letting users access vital DeFi services and deep decentralized liquidity while enjoying the security and accountability of CeFi space. By doing so, the protocol enables users to tap into multiple passive income-generating opportunities while allowing them to unlock the value of their staked assets without losing control over their funds.

We see DeFi as a promising alternative to centralized finance with the facility of better control over financial investments. But most important of all, the integration of certain aspects of CeFi has the potential of helping Sikka Protocol make lending, borrowing, staking and yield generating services accessible to the general public.

--

--

Galina M
Sikka Money

Technical Writer with a background and interest in DeFi, NFTs, Web3, blockchain, investments and interoperability.