The Great Divide in Cryptocurrency: CeFi vs DeFi
A comparison of centralized and decentralized financial services in the cryptocurrency space and how Totle bridges both sides together
By now the divide between traditional finance and cryptocurrency is well known. But within the cryptocurrency space another great chasm separates centralized finance (CeFi) and decentralized finance (DeFi).
While both sides share the same goal — to enable people to use cryptocurrency for financial services — they differ in how they achieve this goal.
What is the Difference Between CeFi and DeFi?
Although there are many subtle differences between CeFi and DeFi, at the core of the divide is the question of whether users should trust people or technology.
With CeFi, users trust the people behind a business to ethically manage funds and execute on services the business is offering.
With DeFi, users trust that the technology will function as intended to execute on services being offered.
CeFi and DeFi both deliver a wide range of cryptocurrency-related financial services. The graphic below shows many of the services available and where the two sides differ.
Other Important Differences
To better understand the distinction between CeFi and DeFi, and how Totle helps bridge the gap, let’s take a closer look at each of these two systems.
CeFi
The benefit of using CeFi services is that there is a higher degree of flexibility. Some advantages derived from this flexibility include fiat conversions, cross-chain exchange, and the ability to directly help customers by handling funds. CeFi services commonly provide holistic solutions and can quickly adapt to the needs of customers.
Here are some key ways in which CeFi differs from DeFi:
Centralized Exchange (CEX)
When using a traditional cryptocurrency exchange, such as Binance, Coinbase, or Kraken, users send funds to the exchange to manage them within an internal account. While funds are on the exchange, they are stored outside of users’ custody and are therefore vulnerable to threats in the event that the security measures put in place by the exchange fail. Because of this, centralized exchanges have been the target of numerous attacks.
Many exchanges are dedicated solely to providing cryptocurrency trading functionality, but larger ones like Coinbase and Binance support borrowing, lending, margin trading, OTC, and more. This enables these exchanges to satisfy a wide range of customers' needs through a single account. Many of these customers do not mind giving up their personal information or placing funds into the custody of these companies because they are considered trustworthy entities. Additionally, large exchanges have entire departments with customer service teams providing assistance to customers, should a problem or frustration occur. This high level of customer support offers customers a certain level of comfort, reinforcing the feeling that their funds are in good hands.
Cross-Chain Services
CeFi services commonly support trading of BTC, LTC, XRP, and other popular coins issued on independent blockchains. Due to the complexity and latency of performing atomic cross-chain swaps, DeFi services typically do not support these tokens. CeFi services overcome this issue by taking custody of funds from multiple chains (whereas decentralized services require that tokens follow Ethereum token standards to achieve interoperability). This is a big advantage for CeFi because many of the highest-market-cap and most frequently traded coins exist on independent blockchains and don’t follow interoperability standards.
Fiat Conversion Flexibility
Centralized services commonly demonstrate more flexibility, as compared to decentralized services, when it comes to converting fiat to cryptocurrency and vice versa. To date, conversion between fiat and cryptocurrency has required a centralized entity so most DeFi services do not provide fiat on-ramps. Onboarding customers in CeFi is much more convenient and can lead to a better customer experience.
Some Examples of CeFi include:
Binance: A cryptocurrency exchange facilitating trading, margin trading, borrowing, lending, futures, and more.
Coinbase: A cryptocurrency exchange facilitating trading, margin trading, borrowing, lending, futures, a native stablecoin, payments, and more.
Libra: A global cryptocurrency and financial infrastructure layer.
Fairlay: A Bitcoin exchange and predictions market.
Celsius: A cryptocurrency lending, borrowing, and payments platform.
Nexo: A cryptocurrency lending and borrowing platform.
BlockFi: A cryptocurrency and Fiat lending and borrowing platform.
Ledn: An insured Bitcoin to DAI lending and borrowing platform.
DeFi
The benefit of using DeFi financial services is that you do not need to give up personal information or custody of your funds. This greatly reduces the risk of your information being used without your consent, or having your funds stolen. DeFi empowers people to independently manage their funds without missing out on any of the services available in CeFi and beyond.
Here are some key ways in which DeFi differs from CeFi:
Decentralized Exchange (DEX)
Decentralized exchange is facilitated by a system of smart contracts hosted on a decentralized protocol, like Ethereum. The smart contracts are encoded with a set of instructions with the sole purpose of autonomously fulfilling exchange orders. This means that only the exchange’s users, and smart contracts are involved in executing swaps. Users can make trade requests without needing to move funds outside their wallet; the funds are only transferred when the trade executes successfully on the exchange smart contract.
Trustless
A big advantage of using DeFi services is that you do not need to trust that the service will perform as advertised. Users can verify that DeFi services are operating as intended by auditing their code and using external tools like Etherscan to determine if a transaction was properly executed. Professional services such as Quantstamp, an organization of smart contract experts, will also assess and verify that smart contracts have been properly built to securely execute services.
Permissionless
Users do not need to request permission to use DeFi. With CeFi, users are frequently required to complete a KYC process to access services, which means that they have to provide personal information or deposit money, prior to being given access to services. With DeFi, users can connect directly to services using just a wallet and without divulging personal information or depositing funds. This is because DeFi is designed to be openly accessible to all parties, without any discrimination or barriers. This design has the additional benefit of mitigating the ability of companies to use or profit from your personal information.
Additionally, individuals or groups who decide to build on top of a decentralized protocol can do so freely. This offers a high degree of accessibility and promotes collaboration within the community. Products built within the DeFi ecosystem are designed to interact and benefit from each other; this is why DeFi products are commonly referred to as money legos.
Rapid Innovation
Another noteworthy advantage of DeFi is its rapid rate of innovation. The DeFi space is constantly building upon current capabilities and experimenting with new ones. The build-centric ethos of the space has transpired into a rich ecosystem filled with ground-breaking financial services.
In areas where centralized services have thrived, such as cross-chain exchange, DeFi has been working to deliver alternatives. For example, to compensate for DeFi’s inability to facilitate the transfer of incompatible cryptocurrencies like BTC, solutions such as WBTC and tBTC, which are compatible with decentralized protocols, fill the gap by acting as tokens pegged to the value of BTC. This allows DeFi users to access BTC through DeFi without needing to directly use the token.
Entirely new assets have been invented in DeFi as well. Users can passively earn interest by holding a token that represents the interest on funds lent out in a lending market. Compound pioneered this new asset with cTokens. These types of innovations only recently began to appear, and variants are already beginning to pop up.
Some Examples of DeFi include:
Kyber: A decentralized exchange.
Totle: An aggregator of decentralized liquidity with automatic price optimization.
MakerDAO: A decentralized lending and stablecoin minting tool.
Compound: A decentralized cryptocurrency lending and borrowing tool.
bZx: A decentralized margin trading and lending platform.
Augur: A decentralized predictions market.
Zerion: A decentralized DeFi services aggregator.
Nexus Mutual: A decentralized insurance tool.
Where CeFi and DeFi Overlap: Liquidity
A crucial attribute of CeFi and DeFi services is the ability to provide users with the liquidity necessary to complete trades — and at a good price.
Unfortunately, this is something both CeFi and DeFi are still struggling to improve because many cryptocurrency assets have limited liquidity. When a user submits a transaction, there may not be existing trade orders on the market that meet the user’s order requirements. Additionally, much of the liquidity in CeFi and DeFi is fragmented across multiple exchanges.
Bridging CeFi and DeFi with Totle
By adding the Totle API to CeFi or DeFi services, companies can access deep decentralized liquidity for popular ERC-20s like Dai at the best pricing available. This, in turn, enables them to offer smooth and reliable transactions to their users.
Totle is able to achieve this by aggregating decentralized liquidity sources and connecting market makers and takers together to meet high-demand. Additionally, by leveraging a suite of smart contracts, Totle automatically combines and optimizes trading routes to acquire the best pricing across the decentralized exchange market.
Access Deep Decentralized Liquidity with Totle
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