DeFi vs. CeFi
What are they, and which is better? On top of considering the yields and crypto assets, selecting the most suitable sector for you is down to your comfort level with risk.
The crypto industry is made up of two main sectors: centralized finance (CeFi) and decentralized finance (DeFi). Both sectors have delivered exceptional cryptocurrency-related financial services over the past few years.
Both sectors have become popular around the world because they offer financial services. Despite the common use of both terms today, many people still don't understand what CeFi and DeFi mean. With this problem in mind, let's take a few moments to dive into these two financial concepts.
What does Centralized Finance (CeFi) stand for?
Centralized finance refers to crypto-related services offered by a central entity. Platforms like these are typically operated by a group of people or by a company that deals with financial technology (fintech).
CeFi platforms are usually custodial in nature. So, the people who run the CeFi platform are in charge of all crypto deposits on these platforms.
Typically, CeFi platforms provide users with access to a host of financial services. These are things like crypto lending, trading derivatives, trading on margin, and making financial payments. However, users must comply with mandatory KYC requirements before accessing these services.
Popular CeFi Platforms
There are many centralized platforms operating within the crypto industry today. Some of the most popular CeFi platforms include:
Each of these companies handles its customers' crypto-financial needs, focusing on excellent service. For these reasons, customers often remain loyal and appreciative of the structure and authority provided by CeFi companies.
Popular CeFi Services
Traditional financial services companies offer products that are similar to those that CeFi platforms offer. Furthermore, CeFi companies provide many excellent benefits. These features include:
A centralized exchange (CEX)
Cross-chain services
The flexibility of fiat conversion
Here's what you need to know about each of these features and why they matter.
What are Centralized Exchanges (CEX)
Centralized exchanges are online platforms where traders can buy, sell, and swap their digital assets. Since they are part of the CeFi sector, they are owned and run by a central authority. Even though the number of DEX platforms is growing quickly, centralized exchanges are still an important part of the crypto industry.
What's so great about using a traditional cryptocurrency exchange like Kraken, Coinbase, or Binance? For starters, users send their funds directly to their exchange wallets. The exchange then manages these funds within an internal account.
Although funds get stored at the exchange, they remain out of other users’ custody. Still, they are more likely to be attacked, especially if the security measures in place are not enough or don't work.
Because of this, hackers often go after centralized exchanges, not just for their money but also for customer information. You see, customers of the CEX must place blind faith in the company they work with.
To sign up, consumers divulge personal information. They also put funds in the custody of a CEX company with little consideration of how trustworthy the company may or may not ultimately be.
What's more, the largest exchanges have substantial departments filled with customer service teams. Team members offer assistance to customers. This high level of customer service makes the customer feel at ease and gives them more confidence that their money is in good hands.
However, the irony is that such practices also increase vulnerability. After all, the risk of something going wrong increases with the amount of information you give away and the number of people accessing it.
That said, some CeFi platforms maintain stellar reputations. For example, Kraken boasts incredibly strong security features and has never been hacked.
The Flexibility of Fiat Conversion
What else do customers love about CeFi platforms? These centralized services are more flexible than decentralized services, especially when changing fiat money to cryptocurrency and cryptocurrency back to fiat money.
For streamlined conversion, it requires a centralized entity. This centralized entity is something DeFi services simply cannot provide. Another plus of having a centralized entity is how easily customers get on board. The CeFi ecosystem remains tremendously convenient, offering an overall better customer experience.
Cross-Chain Services
CeFi services support the trading of a variety of cryptocurrencies, including:
Other coins issued on independent blockchain platforms
Cross-chain swaps are difficult to do, so these tokens are not supported by DeFi services. CeFi surmounts this issue by getting custody of funds from multiple chains.
As a result, cross-chain services remain a significant benefit of using CeFi.
Why? Because so many frequently traded and highest-market-cap coins exist on independent blockchains. What’s more, they don’t implement interoperability standards.
What does Decentralized Finance (DeFi) stand for?
Decentralized finance is a new financial infrastructure built on blockchain technology. Protocols and applications that make up this system make it easier, cheaper, and more open for people and businesses all over the world to use financial services.
Protocols and apps for DeFi make it possible for its users to use a wide range of new financial services. These services include leveraged trading, stablecoins, asset exchanges, crypto-backed loans, and voting for a decentralized government.
But DeFi protocols provide these financial services without needing to be run by a single company or government agency. Additionally, these platforms eliminate the role of third parties in the financial process.
In place of a central authority, DeFi protocols rely on lines of code called smart contracts to operate them. It is important to note that DeFi offers permissionless services to its users. Due to this feature, users have total control over their digital assets.
Initially, developers built the DeFi space to operate on the Ethereum blockchain. However, many new blockchains now support the creation of DeFi applications. The DeFi system ultimately provides a broad swath of services, including:
Yield farming
Crypto lending
Decentralized insurance tool
Decentralized exchange platforms
Decentralized predictions market
Asset storage
In contrast to CeFi platforms, DeFi protocols do not require user registration. Additionally, these platforms give their users complete control over their digital assets. DeFi users must rely on decentralized applications (Dapps).
Dapps are decentralized applications constructed on the blockchain. They offer access to the DeFi services outlined above.
Popular DeFi Companies Today
Currently, several applications allow users to access DeFi services. Some popular platforms in this space include:
Augur
Compound
Kyber
Nexus Mutual
MakerDAO
bZx
Some of these decentralized protocols, like bZx, offer their users' margin trading, lending services, and staking. Others, like Kyber, are decentralized exchanges. There are even decentralized insurance tools today, such as Nexus Mutual.
Conclusion: DeFi vs CeFi
The DeFi space is all about using technology to improve the way money is handled while getting rid of central control and middlemen. Under this system, all actions on the protocol are taken by technology that is not biased or skewed in any way. Tech executes every service offered through DeFi without room for human error.
On the other hand, people who use CeFi platforms must trust the central organization that runs them. Customers have to trust these people to handle their money and provide the business services they need. If you appreciate dealing with live customer service reps, this is your route.
DeFi and CeFi platforms are built to meet the cryptocurrency financial needs of users worldwide. However, selecting the most suitable sector for you comes down to your comfort level with risk.
Additionally, users need to consider the yields and crypto assets offered by these platforms. Most importantly, users must consider the safety features provided by these platforms.
FAQS
Is Coinbase CeFi or DeFi?
Coinbase can be classified as a CeFi platform since it is operated as a centralized crypto exchange. However, Coinbase also offers some DeFi-based services. For example, eligible users can earn DeFi yield on the stablecoin Dai.
Is Bitcoin DeFi?
Bitcoin is a digital asset that is primarily transacted on its own blockchain. The Bitcoin blockchain is not good for DeFi applications because it can't make it easier to make decentralized protocols or applications.
Generally, DeFi protocols can only be built on a much faster blockchain using simple programming languages like Rust or Solidity. For this reason, Ethereum and Solana are much more suitable for developing DeFi applications. Both blockchains are more malleable, faster, and easier to use.
What's the Difference Between DeFi and Crypto?
Decentralized finance and digital assets are two crypto-based terms with differing meanings. As previously stated, decentralized finance is a new financial infrastructure built on blockchain technology.
This financial infrastructure is set up so that it can work without a single company or government agency in charge. Additionally, these platforms eliminate the role of third parties in the financial process. In its place, the DeFi space is operated by lines of code called smart contracts.
On the other hand, crypto assets are digital assets that use public ledgers over the internet to prove ownership. These digital currencies allow users to make online payments without using third parties or intermediaries.
The DeFi space provides a platform for investors and traders to trade and earn interest on their crypto deposits.
Disclosures
The content is only provided for informational purposes. It is not meant to be tax or financial advice, and it does not recommend any particular investment plan. Every investment has risk, including the possibility of a cash loss. Past performance does not guarantee future results.
Bitcompare does not guarantee good investment outcomes. The way a security or financial instrument performed in the past does not show how it will perform in the future. Before investing in options, clients should carefully assess their financial goals and risk tolerance. Due to how important tax issues are in all lending situations, a customer who is thinking about borrowing money should talk to a tax expert to find out how taxes affect the outcome of any lending strategy.