DeFi vs CeFi: definitions, differences, advantages and disadvantages

Centralized finance (CeFi) and decentralized finance (DeFi)! These are two concepts that we tend to confuse, even though everything opposes them. Indeed, these two concepts cover different realities. Better, although they may both be relative to the world of cryptomonnaies, they do not call on the same actors. Do you want to know everything about CeFi and DeFi? You are in the right place !

What is centralized finance (CeFi)?

Before decentralized finance, the world knew only one form of finance: centralized finance or CeFi. With this form of finance, everything is concentrated in the hands of an entity, an institution.

This operating mode is reminiscent of that of the traditional banking sector. People can earn interest, get loans, and they can use their digital assets as a form of collateral with lenders.

Concretely, the individual or the company entrusts its funds to a management company. She plays the role of lender and is responsible for the assets entrusted to her. However, it can use it in order to generate profits for its own activity, as a traditional bank would.

What are the characteristics of CeFi?

Since centralized finance follows the same mode of operation as the traditional banking sector, it presents similarities with it. When you entrust your funds to a bank, that bank becomes responsible for it. If by misfortune it goes bankrupt or is the victim of a robbery, it has the responsibility to reimburse its customers, even to pay them interest.

The principle remains the same in the case of centralized finance (CeFi). The platform – Binance, Coinbase, SALT, and Celsius are just a few examples – to which digital assets are handed over bears the risks relating to its management. Whether it is a victim of hackers or loses its capital in some other way, it must bear all the risks associated with its activity.

Moreover, in the case of CeFi, the centralized exchange platform that offers its services must improve them over time. For good reason, it is in a highly competitive environment. Customer service, teams dedicated to security, various ranges of services … The company deploys a whole arsenal of tools to meet the expectations of its customers.

There is another factor that should be emphasized in the area of ​​centralized finance. This is the ability for business customers to convert fiat currency (euro, dollar, etc.) into digital currency. The process is done quickly, which makes CeFi even more convenient than DeFi.

But what is decentralized finance (DeFi)?

Decentralized finance (DeFi) does not follow the same rules as centralized finance (CeFi). There is no intermediary company to entrust funds to, as is the case with the banking system classic. That said, there are some similarities between this system and DeFi.

For example, people who opt for decentralized finance have the option of receiving loans, borrowing money, and depositing money.money to get rewards. However, with DeFi, there are additional services, such asagriculture yield, flash loans, insurance, derivatives, etc.

To be honest, in decentralized finance, individuals do not trust a company or a person, but rather a code. Let us cite a few examples: MarkerDAO, dYdX, Uniswap, Balancer, etc. DeFi has grown exponentially since last year. Indeed, according to statistics, more than $ 6 billion has been locked into protocols.

What are the advantages of CeFi and DeFi?

Good question ! Let’s start by presenting the advantages of CeFi. Remember we said it works just like the traditional banking system. As a result, users benefit from optimal security of funds.

Of course, security is not always complete; the level of guarantee does not always reach 100%. Nonetheless, CeFi users can be reassured that their funds are well protected. In this regard, many platforms implement various techniques. Binance and Coinbase, for example, appeal to many users not only because of their seniority, but also because of the techniques they use.

Another important point: CeFi’s platforms generally offer an intuitive and easy-to-use interface. Because of this, even beginners can quickly take their first steps with digital assets. Newcomers can benefit from the same services as old customers, without much difficulty.

On the DeFi side, the main advantage is that the user has full control of his funds, because he does not transfer ownership. In addition, it suffices to use the interface of a protocol in order to carry out various activities: exchange, loan or change of tokens.

CeFi and DeFi: the disadvantages

Even if CeFi has remarkable advantages, it is not without drawbacks. The main drawback is that centralized platforms always attract the attention of hackers. The latter want to take advantage of the high liquidity available to the platforms. So, they use prohibited computer techniques to hack the data, and therefore they offer themselves the opportunity to collect funds from clients.

What about decentralized finance (DeFi)? The situation is not more advantageous. Since this is code that users trust, even the smallest error in the code can result in a bug which can be fatal. Money can quickly and easily be lost.

In addition, in decentralized finance, the user is the only one to manage his risks. No company is doing it for him and he lacks coverage. It is for this reason that DeFi has difficulty convincing many people; beginners can quickly lose a lot of money. To illustrate, we can take the case of the YAM protocol.

With the YAM protocol, more than $ 600 million had been deposited by users. But when a bug appeared in the unverified protocol, they had to do a quick removal.

Another disadvantage of DeFi is that applications Decentralized units generally do not have a smooth interface and they do not provide a great browsing experience for users.

Centralized finance (CeFi) and decentralized finance (DeFi) cover different realities. While the former offers relatively optimal security for users, the latter is somewhat less reliable. The fact remains that it allows full control to the user and that the latter manages his risks. CeFi or DeFi, what form of finance will dominate the landscape in the coming years? Just wait & see!