The concept of Centralised finance (Cefi) is the very commonly known aspect of finance that has dominated the market for the longest period. Cefi and Defi deliver a wide range of cryptocurrency-related financial services.
But over a decade the financial world has significantly sketched a river of novelty that completely revolutionized the ecosystem.
The introduction of Blockchain and cryptocurrencies paved a way for the emergence of Decentralised Finance (Defi) which strengthened the trading and derivative aspects of cryptocurrencies.
The discovery and existence of innumerable notions in the crypto market have created the space for the execution of these for various financial services. Thus, to manage these financial services majorly there are two platforms in the role.
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Centralized Finance (CeFi) and Decentralized Finance (Defi)
What is Centralized Finance (CeFi)?
Centralized Finance (CeFi): It is a financial practice in the crypto sphere where the users trade on their digital assets by acquiring a loan and earning interests too through ac centralized framework.
Under such a framework, an individual or group usually under the jurisdiction of prevalent financial technology manages the operations.
It basically serves as a custodian for managing the transactions of crypto environs regulating the activities of users.
What is Decentralized Finance (Defi):
Defi-based financial services utilize the concept of smart contracts& algorithms to bring their services to execution. Decentralized finance is a financial practice that utilizes a set of smart contracts and algorithms to execute its services.
Defi becomes the automated generated intermediatory which runs on the Ethereum network and blockchain technology. These are the non-custodial network where the funds, users, and transactions are managed using contracts without any access to any individual or company.
Thus, the role of the third party gets eliminated which further gives rise to the domination of technology and autonomy of trading to users.
Points of Distinction
- Mode of Exchange: As it is known that Defi considers the smart contracts and blockchain network which allows only involved users to execute swaps as it is backed by autonomous protocols whereas the CeFi being the centralized framework does not ensure autonomy in trade.
- Cross-chain services
- CeFi generally supports complex and latent trading of BTC, LTC, XRP, etc by taking custody of funds sourced from various chains.
- On the contrary, Defi does not enhance this service efficiently as it requires tokens to adhere to certain network standards to ensure affinity. Hence, CeFi gains an advantage as it does not need to comply with interoperability standards and exists independently on the blockchain.
Permission:
The users do not require permission and much formality to use Defi whereas CeFi users need to adhere to frequent KYC processes which further fetches the personal information and details.
Defi facilitates users to use the services just by accessing the wallet which is open to all. It mitigates the ability of the firms to make a profit using personal information.
Trust:
The Defi users can verify the services and practices by auditing their respective codes & tools like Etherscan and Quantstamp to check the authenticity of the transactions in the network.
The reliability of services just in advertisements is reduced. The case is completely contrary to CeFi where the verification process is non-reliable and makes it less trustworthy.
Fiat Conversion Flexibility:
The centralized services reflect more flexibility in terms of fiat conversion to cryptocurrency and another way round too. Generally, the process of fiat and cryptocurrency conversion requires a centralized entity where Defi fails to act actively on-ramp.
- Thus, the users feel more convenient in CeFi in comparison to Defi as it is not regulated by any centralized framework.
- Rapid Innovation: The success of Defi owes a lot to its continuous innovation which tries to bridge the gap that makes it stand odd in the crypto ecosystem whereas the CeFi norms and notions once developed stand rigid which shrinks their scope of being inactive trade for a long run.
Overlapping aspect
The decentralized and centralized format of finance being contrary to each other holds the least vibrant similarity adhering to the basic features of trading. The liquidity aspect is the major role-player in the successful working of cryptocurrency.
Both CeFi and Defi provide users with the necessary liquidity to complete transactions by associating with multiple exchanges. Both platforms are unfortunately witnessing struggles on liquidity aspects to enable smooth and flawless trade.
There exists a certain co-relation in two practices on the basis of margin and derivatives trading, payment mechanism, the stability of coins, and lending and borrowing mechanisms too.
Conclusion
It can be configured that both the non-symmetrical aspects of CeFi and Defi aim towards the common objective of facilitating the users to ensure wider use of cryptocurrencies for the financial transactions, just the execution of the two varies.
The talked practices and platforms hold certain distinction which bridges the cons associated with each up to a great extend whereas similarities strengthen the existing feature of each which makes it more far-reaching and convenient for the users.
