DeFi vs. CeFi: What are they, and which is better?
The crypto industry is made up of two main sectors: centralized finance (CeFi) and decentralized finance (DeFi). Both sectors have been able to deliver exceptional cryptocurrency-related financial services over the past few years.
Due to the financial services they offer, both sectors have enjoyed mainstream adoption worldwide. 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 under 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. As a result, all crypto deposits on these platforms are explicitly managed by those running the CeFi platform.
Typically, CeFi platforms provide users with access to a host of financial services. These include conventional trading activities like crypto lending, derivatives trading, margin trading, and 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
CeFi platforms deliver products similar to those offered by organizations that offer traditional financial services. What's more, you'll enjoy many excellent features with CeFi companies. 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 fall under the CeFi sector, a central authority owns and operates these exchanges. Despite the rapid rise in the use of DEX platforms, centralized exchanges continue to play an essential role within 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 outside of other users’ custody. Nevertheless, they prove more vulnerable to threats, especially if the security measures in place prove insufficient or fail.
For this reason, centralized exchanges often get targeted by hackers, not only for their financial holdings but also for customer data. 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 into 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 support initiates a certain comfort level, enhancing the notion that the customer's funds are in good hands.
Yet, the irony remains the greater vulnerability such practices also bring. 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 iron-strong security features and has never been hacked.
The Flexibility of Fiat Conversion
What else do customers love about CeFi platforms? These centralized services come with more flexibility than decentralized services, especially when turning fiat into cryptocurrency and cryptocurrency into fiat.
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 onboarded. The CeFi ecosystem remains tremendously convenient, offering an overall better customer experience.
CeFi services support the trading of a variety of cryptocurrencies, including:
- Ripple (XRP)
- Litecoin (LTC)
- Bitcoin (BTC)
- Other coins issued on independent blockchain platforms
Due to the inherent complexity of performing cross-chain swaps, 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. The protocols and applications underlying this system allow people and businesses worldwide to access services that are financial in nature in a faster, cheaper, and more transparent way.
DeFi protocols and applications allow its users to enjoy a wide range of ground-breaking financial services. These include services like leveraged trading, stablecoins, asset exchanges, crypto-backed loans, and decentralized governance voting.
However, DeFi protocols deliver these financial services without requiring a centralized company or government institution to operate them. 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 codes 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 swathe 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:
- Nexus Mutual
Some of these decentralized protocols, like bZx, offer their users' margin trading and lending services. Others, like Kyber, are decentralized exchanges. There are even decentralized insurance tools today, such as Nexus Mutual.
Conclusion: DeFi vs CeFi
The DeFi space focuses on applying technological solutions to the financial process while eliminating central control and intermediaries. Under this system, automated technology performs all actions on the protocol without bias or prejudice. Tech executes every service offered through DeFi without room for human error.
On the other hand, users of CeFi platforms must place their trust in the central entity that operates their platform. Customers must rely on these individuals to manage their funds and execute necessary business services. 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 is 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.
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. Due to its inability to facilitate the development of decentralized protocols or applications, the Bitcoin blockchain is not suitable for DeFi applications.
Generally, DeFi protocols can only be built atop 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 designed to function without a centralized company or government institution running the process. 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.