What is CeFi and DeFi?

CeFi Vs DeFi: Which is better?

If you aren't so much of an expert, you might have gotten confused and caught up amid the never-ending arguments about what the future of finance holds.

While some say that Traditional financial services can never be outlived, others argue that Decentralized finance, thanks to its integrity-protected Blockchain, is set to take over the landscape of the overall economic ecosystem. 

While the future is unfolding right before our eyes, we will be looking at two of these distinctive financial ecosystems, dissecting and learning all that there is to them. 

What is Cefi?

Before we go into the modern-day intricacies of Centralized finance, let's take a stroll down memory lane. During the 19th century, we witnessed many central banks spring up in many European countries, with centralized finance formally invented in Mesopotamia around that same period in time. 

Since its advent, humans have devised and used various items and assets to depict their form of currency. From land to livestock, Human beings had used these assets as a means of value for exchange until more recently when they started making use of fiat currencies. This gradual evolution of what "value" could be represented by simply shows that currency could either have intrinsic worth or be given an imputed value, with such being the case with fiat currencies. 

Man's desire to have a stable currency and financial system stem from way back, and every attempt at doing so have revolved around the concept of a centralized institution. If this is the idea of cefi in everyday economics, what does it mean in crypto terms?

cefi is you banking on Centralized companies and exchange platforms to keep your funds safe. Such companies include the likes of Libra and Coinbase, and they have certain policies in place, such as the Know Your Customer (KYC) policy and Anti Money Laundering (AML) Policy that further reassures you of your money's safety.

You get to create accounts with these platforms and use them to send, receive and exchange tokens. Additionally, you get offered other services besides crypto trading services, such as lending, borrowing, or margin trading services. 

Despite all of these, cefi crypto platforms have certain limitations too. With cefi crypto platforms, you do not have full authority and control over your crypto assets. Your crypto assets are managed outside of the scope of your control, and as a result, centralized exchanges have been targets of high-level cyber-attacks.

But customers on cefi platforms choose to keep their faith in these platforms as they believe their funds put into these exchanges won't be used for any illegal activity. cefi platforms go a step further to prove their credibility by having entire departments equipped to assist customers with any complaints they may have. 

Features Of Cefi(Centralized Finance)

1. Cross-chain swaps services: Centralized finance enables you to trade your cryptocurrencies using independent Blockchain platforms. With DeFi, you run into a roadblock as these atomic cross-chain exchanges are very complex and take longer to complete, but not with CeFi. 

With cefi, you get this problem solved as cefi obtains assets from multiple chains. Having this leverage against DeFi in this regard is significant for CeFi. 

2. Centralized Exchange: The name "Centralized Finance" should have given this away as one of its numerous features. With CeFi, you get to be in charge of your portfolio, no matter how vast it is, with your internal account, and you also help avoid incurring large transaction fees on the Blockchain. Your funds being on the exchange means you don't need to worry as they are managed centrally by the system and securely. 

3. Flexible Conversion: In this area, CeFi also has one up over DeFi. With CeFi, you convert your crypto assets into money and vice versa. This gives you the flexibility you won't usually get with DeFi.

Here, you get more accessible conversions, which has contributed to more consumers coming on board by the day, with top CeFi platforms such as Coinbase reporting as many as 98 million users as of early 2022. 

4. Efficient customer support: Every centralized exchange has an internal account where users' funds are managed covertly. To take it a step further, top CeFi platforms take good care of users' data and render support services through their customer service team, a move to engineer more trust between them and their ever-growing customer network. 

5. Interoperability: CeFi aggregates funds from multiple chains under their custody, enabling them to render various services to their customers simultaneously. With CeFi platforms, you can lend, borrow, trade, and use payment-based services all in one place. 

Top CeFi platforms include the likes of Coinbase, Libra, and Celsius, amongst many others.

What is Defi(Decentralized Finance)?

Decentralized finance, also known as DeFi, was innovated to bring much-needed transparency into the global blockchain market.

One of Blockchain's most powerful features is that you can trade high-volume financial assets without trusted intermediaries. DeFi capitalizes on this by utilizing smart contracts and cryptocurrencies.

The former has helped amplify financial technology, and now, you won't need the services of a financial institution in your transaction because your smart contract can do it all for you. 

With DeFi, you get to manage a plethora of services, including Over-the-counter trading, staking, asset management, financial data, and many more. And while DeFi is compatible with some of CeFi's products, such as leveraged trading and asset exchanges, three things set it apart: Its Transparency, how accessible it is, and the amount of control you, as the user, get. 

DeFi platforms have taken it upon themselves to erase any shady agreements or back deals that may dent their transparency, a worthy cue for their CeFi counterparts to follow. They also make their platforms accessible so that anyone with a decent knowledge of internet use can design and deploy DeFi goods.

They also give control to their users to ensure that nothing can be done to their crypto assets without their permission. 

In line with this is the absence of a central authority(who would approve or deny access) and the enablement of seamless peer-to-peer transactions with Blockchain and its group of miners handling all operations. 

Features of DeFi( Decentralized Finance)

1. Doesn't Require Permission Protocols: With DeFi, you can access its Blockchain without needing approval or permission. An upside to this feature is that you get to be a part of a community of like-minded traders where you interact and enjoy the greater accessibility it offers. 

2. Endless Innovation: The innovations in Blockchain technology never stop, with every new day being a unique opportunity to test and develop new capabilities. The DeFi ecosystem is laden with various innovative financial services even at its early stages, an excellent sign of a bright future. 

3. Trustless: This feature enables you to authenticate everything for yourself. You don't need to bank on the system to perform as advertised; you can simply audit their code and use tools like Etherscan to verify if your transaction was properly executed.

Examples of Decentralized platforms include the likes of Augur, cyber, and Totle, to mention a few. 

Defi Vs. Cefi: What Differentiates these two?

We can say two of them have the same goal but take two different routes. The goal is to get the world to adopt Blockchain, but while they look to achieve that, there are prevalent differences between these two.

1. Atomicity: The Blockchain is set up to allow actions to be performed sequentially. Due to the vast volume of financial transactions carried out per minute, transactions are rendered atomic, leaving behind two possible options: Either the transaction gets completed as a whole or fails altogether. 

This attribute of the Blockchain is only attainable in Defi as CeFi currently doesn't have it. There is hope that certain legal agreements get signed amongst the cefi platforms to enforce atomicity in the nearest future.

2. Custody: Unlike CeFi. DeFi grants the user sole control over his assets without relying on nuances from any financial institution. While this is commendable, it comes with its challenges and responsibilities. Users of Defi platforms are left at the mercy of technological hazards. This con of Defi has led to the popularity of cefi platforms in this regard, as they act as custodians to keep and manage Cryptocurrency assets on behalf of their teeming customers.

3. Transaction costs: This is an ordinary occurrence in the world of DeFi, and transaction costs are set to avoid spam. On the other hand, CeFi can choose not to charge transaction costs simply because of their KYC and AML policies put in place.

4. Security measures: On multiple occasions, the security structures of CeFi platforms have been breached, which is not due to a lack of effort by these platforms to amp up security measures, though.

With DeFi, their users only have to worry about the code(s) and consensus algorithm used to set up the decentralized finance project.

5. Conversion flexibility: cefi has the upper hand here. Trading Cryptocurrencies into fiat currencies is easier on cefi because these conversions require a centralized institution, and cefi platforms provide that. Most Defi providers do not have that, which has led to significant onboarding on the part of cefi platforms and a better customer experience. 

6. Cross-chain services: Another aspect where CeFi has the upper hand. DeFi services do not support trading Bitcoin and other primary crypto tokens due to the time taken and how hard it is for them to complete atomic cross-chain exchanges. cefi platforms obtain assets from multiple chains, which helps them solve cross-chain exchanges' problems.

7. Malleability of Execution Order: Users working on permissionless Blockchain often share the details of their transactions with their peer-to-peer network. This order malleability has opened up the Defi world to numerous manipulation tactics; this doesn't hold in CeFi networks.

What the regulatory organizations do is put in place stringent and binding requirements that help regulate financial institutions and the services they offer. This has been made possible by the centralized nature of CeFi's financial intermediaries. 

8. Anonymity: There is more anonymity among users using DeFi than those using CeFi platforms. When making transactions on CeFi platforms, such as converting fiat currencies to cryptocurrencies and vice versa, you can do so because of the current AML policy.

This Anti-Money laundering policy put in place by the exchange bequeaths them the power to reveal address ownership to law enforcement agencies in the case of any illegal activity. Defi projects such as non-privacy-preserving smart contracts are handled by individuals who are granted pseudo-anonymity by the Blockchain. 

9. Working/Market Hours: It's All gas, no brakes for Defi platforms, partly due to the nonstop nature of blockchains. Defi markets are open round the clock, round the year. This means there is no pre or post-market trading, whereas, in cefi, we see markets experience regular outages. A Prominent example is the Nasdaq stock exchange, which only works during weekdays through the hours of 9:30 am to 4:00 pm (EST)

10. Inflation: While inflation might mean the devaluation of an existing currency supply brought about by the injection of a new supply of that currency, it doesn't mean it always happens that way. 

There are instances when the money supply increases without triggering a hike in the inflation rate. In the cefi World, governing financial institutions, i.e., central banks, are the ones in charge of printing the fiat currency. The value of a representative basket of consumer products is often used to determine the inflation rate, a phenomenon known as the consumer price index. 

On the flip side, the supply of Cryptocurrency assets is subject to change due to their limited availability. This, in turn, means there will be periods where they will be a scarcity in the currency, and due to its absence of a block reward, it is susceptible to security instabilities. 

Whether Bitcoin and other major crypto tokens will suffer income disparity is left to be seen, but there is no indication that cryptocurrencies will solve this problem. 

Conclusion:

Let's be clear on a few things; The perfect world occurs when these two co-exist, and ultimately they have the same goal: to power the economy while providing top-tier financial goods and services.

They both have their pros and cons, and there has been no method proven just yet to combine them rather than to allow them to take their respective place in modern-day financial architecture. 

CeFi promises that your funds will remain safe and that you get fair compensation and returns whenever you trade. On the other hand, Defi brings to you the blueprint of a middle-man-free Blockchain space, a world where an investor can come in with his strategy and get to implement it right away without having to deal with any intermediary body. 

Whichever side of this divide you choose to camp on is now on you. If you want a high sense of transparency and privacy, you can choose DeFi, but if you want more flexible options, more opportunities to invest, and, ultimately, a network you can trust, you should choose CeFi.