DeFi vs. CeFi: Understanding Decentralized Finance and Centralized Finance

The digital finance industry is never complete without the two most popular trends, DeFi and CeFi. Aside from being traditional to the crypto and blockchain space, they make up most of the ecosystem’s present and future.
The current market cap of CeFi and DeFi protocols stands at over $400 billion and $70 billion, respectively. These are huge figures, coupled with the outrageous daily trade volumes in decentralized and centralized exchanges (DEXes and CEXes).
In this article, we’ll find out what DeFi and CeFi are all about and what benefits and solutions they pose to the crypto community and the world at large. Let’s go.

What is CeFi?

CeFi is a portmanteau meaning “centralized finance.” Until the introduction of decentralized finance protocols, CeFi was the industry standard in the crypto space.
One thing that stands out in centralized finance is that your activities can be checked and monitored, and most times, you may encounter issues with KYCs, withdrawals, deposits, and trading fees.
Centralized finance protocols have recently merged with the decentralized finance module to form what is known as centralized and decentralized finance (CeDeFi).

What is DeFi?

DeFi simply means “decentralized finance.” By decentralization, it means you are in absolute control of your funds, and you’re not limited by how you hold or spend your crypto assets.
DeFi came into play to tackle the limitations experienced in the CeFi space, and above all, bring the trustless and permissionless protocol, which are the core propositions in blockchain technology.
Since the introduction of DeFi, the authorities have been on the lookout, and to an extent, most governments do not accept it due to KYC and AML policies issues. However, DeFi has been at the forefront of core innovations in the crypto sphere.

Benefits of CeFi over DeFi

While both DeFi and CeFi have their perks, there are a couple of ways CeFi betters DeFi. Here are some benefits of CeFi over DeFi:

#1. Fiat-to-Crypto Option
In CeFi, there is a thin line between depositing and spending fiat and crypto interchangeably. Some exchanges allow you to deposit fiat and withdraw crypto. You may also deposit crypto and withdraw fiat money. The flexibility in using traditional and virtual currencies in centralized finance is high, and there are pair options of cryptocurrencies against fiat.

#2. Cross Chain protocols
Cross-chain protocols are standard in CeFi. In CeFi protocols such as centralized exchanges, there is a bridge between cryptocurrencies of different smart contracts and blockchains.
However, with DeFi, you may have to seek alternative options to withdraw or interconvert your crypto. DeFi exchanges solve this by providing bridges between cross-chain tokens such as BEP-20 and ERC-20 tokens.
Although, with the introduction of “wrapped cryptocurrencies” such as WBNB, WBTC, etc., interoperability of cross-chain tokens becomes easy in DeFi platforms

#3. Centralized Exchange

Centralized exchanges (CEX) are products of CeFi and build their operations around trust and many offerings such as OTC, crypto loans, margin trading, and more. 

Because you trust a centralized exchange such as Binance or Coinbase, you can willingly give out your information and altogether entrust your funds to them.

When you inject funds into a centralized exchange, you are not in the custody of them, meaning that any vulnerability could lead to losses on your end.

Some Typical CeFi Platforms include: 

• Cryptocurrency exchanges for OTC, futures, margin trading: Binance, Coinbase, Kraken, etc
• Crypto lending and borrowing platform: BlockFi, Huobi Global, Ledn, Nexo, Celsius, etc.
• Crypto Payment Platform: Celsius, Coinbase, Binance, etc.

Benefits of DeFi over CeFi

Even as CeFi has its advantages over DeFi, decentralized finance still trumps it on several levels. Here are some benefits of DeFi over CeFi:

#1. Transparency
DeFi protocols offer more transparent offerings than CeFi. In DeFi, it is easier to monitor your transaction and how it performs, unlike CeFi, which has control of the fund and may choose to close it down on slight suspicion of activities against its policies.

#2. Decentralized Exchange
Decentralized Exchanges are applications of DeFi protocol. They run on smart contracts such as Ethereum, Binance Smart Chain, or Polkadot. The smart contract protocol offers DEXes the shelter to run a host of operations and validate transactions within the platforms.

#3. Trustless Services
DeFi services are trustless, unlike CeFi, where you may want to have a review check or know what others are saying about the exchange or platform. DeFi platforms only require you to trust the protocol such as audit measures, whitepaper, or smart contracts they run on. You can quickly check your transaction or activities using tools like Etherscan, etc.

#4. Permissionless Protocols
You do not need KYCs to get started on DeFi platforms. You can get started without even needing to sign up. A well-funded wallet with crypto should get you started. Moreso, DeFi protocols assure you of privacy. No one can trespass or use your information because it is secured and recorded on the blockchain instead of a database as in the CeFi platform.

#5. Innovative Ecosystem

The creative atmosphere in the DeFi ecosystem makes it stand out from its CeFi counterpart. Markets in the DeFi space keep growing faster than the CeFi’s because of the favorable environment given to developers through smart contracts, fundings, and adoption. Other products and relative platforms in the DeFi Space include:

• Decentralized Exchanges (DEXes): Uniswap, Pancakeswap, Kyber Network, Airswap, etc.
• Yield Farming: Yearn Finance, Dot.Finance, etc.
• DeFi Tokens: Aragon (ANT), DAOStack (GEN), Enzyme (MLM), etc.

Staking and Staking Solutions in DeFi

Staking is the process of holding crypto in wallets to validate transactions on blockchain networks using Proof of Stake protocols. Investors earn rewards in return, either in the same crypto staked or in multi-assets.
CeFi and DeFi platforms allow staking protocols, but developers must develop a solution to create a decentralized, open, innovative, and permissionless protocol to increase massive adoption.
One top staking solution pick is YeFi.one. It is an intuitive, indigenous, and secure staking solution. Investors earn higher APYs when compared to other DeFi or CeFi staking modules. Plus, YeFi.one is DeFi and properly audited, assuring investors of total control and security of assets.

What is a Derivative in DeFi?

A derivative is a contract that allows you to tokenize real-world assets depending on the underlying value of the items or options. It could be an asset, bond, website, commodity, stock, interest rate, index, or currency. The performance of the contract depends on the value of the assets.
Premia.Finance is a DeFi solution that allows you to mint derivatives and options on its Meta Vault and sell them on marketplaces. Plus, developers and investors can leverage its protocol to build intuitive decentralized applications, hedge risks, and earn rewards holding its native token.
Since security is of utmost priority in the DeFi space, Premia seeks to use its Bug Bounty incentive to create an interactive space to secure its software and those of DeFi products and applications built around it.

Conclusion

One thing that is paramount in CeFi and DeFi protocols is trust. Although DeFi offers a trustless proposal, it still needs trust from the crypto community to get adopted. While you trust the brand or company to get started in CeFi, you authorize the protocol, Whitepaper, or proposition to get started in DeFi.