Introduction to Centralized vs Decentralized Finance
What’s Best For Trading Crypto?
It used to be that services such as borrowing, lending, or payments were only available through established financial institutions. Blockchain technology was a pioneering attempt to change that. Alongside the rise of new cryptocurrencies, a new consideration has emerged: decentralized finance (DeFi) or centralized finance (CeFi)?
Before the idea of DeFi came into existence, centralized finance was the standard for trading assets. In a centralized finance model, “all trade orders are handled through a central exchange. Funds are managed by specific running of the central exchange”. In a cryptocurrencies context, this is equivalent to you not owning the private keys. The exchange makes all of the important decisions: which coins/assets to list, for how much, what are the fees, what are the general trading rules. Centralized exchanges often require KYCs and identity checks, and it is their prerogative to refuse someone a trading account, if they feel it is necessary.
When it comes to decentralized exchanges when trading assets, there is no central authority. The process takes place via automated applications. It aims to create a fair, transparent, open-source, and permissionless system, especially interesting for those parts of the world where people have limited access to financial services.
This decentralized financial system offers many services, including borrowing, yield farming, crypto lending, asset storage and more.
“The benefit of using DeFi over CeFi is that you have full control over your assets and own the key pair for your wallet. Moreover, users who want to participate in DeFi need to use decentralized applications (dApps) built on the blockchain platforms to access DeFi services”, said Akash Takyar, CEO of LeewayHertz and expert in the area.
How is DeFi different from CeFi?
The main issue here is the technology vs.people dilemma. With DeFi, users trust the technology. On the other hand, with CeFi, users must trust the people that run a given exchange.
Both DeFi and CeFi deliver a wide range of financial services, including cryptocurrency-related options. Let’s discuss some of the features and functionalities of both the ecosystems that differentiate them from each other.
Features of CeFi
Some of the most popular centralized exchanges are Binance, Coinbase, Kraken, etc. Users can transfer and exchange funds, but also lend, borrow, or even margin trade.
One must remember that due to their established nature, these platforms will require users to share intimate and confidential information about themselves. Data breaches can occur, Kraken was a target of a cyber attack in the past.
“One of the advantages of Centralized Finance over Decentralized Finance is that they support cross chain exchange for multiple cryptocurrencies, although these cryptos are generated on individual blockchains, thus displaying interoperability of cryptocurrencies. CeFi exchanges also enable the conversion of fiat currency to cryptocurrency and vice-versa in an easy and seamless manner”, was mentioned by long-running magazine Blockchain Simplified.
Features of DeFi
As Decentralized Finance (DeFi) is hosted on a Blockchain platform like Ethereum, smart contracts are designed to automatically execute transactions when a particular condition is fulfilled. Since smart contracts are automatic, users can be fully assured that transactions will never fail and will be properly executed. Users do not require any permission to join a Decentralized Finance exchange since it is permissionless, which is not the case in Centralized Finance platforms.
Thus, DeFI is the leader when it comes to the protection of users’ personal data. Users are the sole owners of the data.
Some of the main examples of decentralized exchanges include: Kyber, Totle, MakerDAO.
DeFi platforms are open-source and subject to a quick rate of innovation. One example can be that in functionalities that centralized financial services are best at, DeFi space has worked tirelessly to deliver alternative solutions. For instance, to overcome “the DeFi’s inability to facilitate the transfer of incompatible cryptocurrencies such as BTC, solutions like tBTC and WBTC, that are compatible with decentralized protocols eliminate the gap by behaving as tokens pegged to the value of BTC”.
Remittance Market Solution
DeFi will have an immensely positive impact on the remittances market; the market where millions of dollars are sent across the borders by workers that are working in foreign countries.
With DeFi, it will be possible to “cut the cost associated with sending money by 50% and more”.
Rise to Popularity
Even though Blockchain is more than a decade old, there was not much mainstream popularity of DeFi until 2019. DeFi requires the Internet for connectivity, and before that time, a lot of people were still unable to access it. Thus, it is likely that now, with the advances in technology,DeFi will become more mainstream by 2025.
“The Internet is growing rapidly and is becoming more affordable than ever. India has also seen tremendous growth when it comes to mobiles and internet connectivity”.
CeFi vs DeFi: Real Use Cases
Some of the most prominents crypto use cases of CeFi includes:
Coinbase — A cryptocurrency exchange that facilitates trading, borrowing, margin trading, native stablecoin, lending, payments and more.
Fairlay — It is a Bitcoin Prediction Market and Exchange that runs on the CeFi model.
BlockFi — A cryptocurrency and fiat borrowing and lending platform.
Celsius — A cryptocurrency borrowing, payments and lending platform.
Ledn — An insured Bitcoin to DAI borrowing and lending platform.
Libra — A global financial infrastructure and cryptocurrency layer.
On the other hand, real use cases of DeFi are starting to pick up quickly, such as:
Totle — An aggregator of decentralized liquidity with automatic price optimization.
Augur — A decentralized predictions market.
Nexus Mutual — A decentralized insurance tool.
Kyber — A decentralized exchange.
What’s best for trading crypto: CeFi or DeFi?
Both centralized finance and decentralized finance aim to achieve the same objective — to make crypto trading popular and increase the trading volume, however, through different means.
Both systems have their benefits and drawbacks. It depends on the individual investor, on what they value more. If their main goal is to maintain their privacy, DeFi is the way. If safety, sharing of risks, increased options to invest, and flexibility are your concerns, go for CeFi.
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