DeFi vs. CeFi: Exploring the Differences

Cryptocurrency is no longer a term that a selected few are aware of. These days it is not just organizations showing an inclination towards the cryptocurrency market but a large number of retail investors are open to investing in cryptocurrencies. With the concept of cryptocurrencies expanding with the passage of time, the discussion has now shifted to a new set of considerations – DeFi (decentralized finance) and CeFi (centralized finance). Though both DeFi and CeFi offer a wide range of cryptocurrency related financial services, they are different from each other. This article will throw light on – "DeFi vs. CeFi: Exploring the differences".

What is DeFi?

DeFi is a collective term for financial products and services, built on blockchain technologies, in the public blockchain space. In simple terms, DeFi is an open and global financial system. With DeFi, you not only have control and visibility over your money but also have exposure to global markets and alternatives to your local currency or banking options. A strong internet connection turns out to be a critical aspect here. Yet another remarkable feature of this decentralized finance is that the markets are always open and there aren't any centralized authorities who can block payments or deny you access to anything.

The launch of Ethereum paved the way for maximizing the potential of DeFi within the financial industry thereby encouraging the businesses and enterprises to build and deploy projects that formed the ecosystem of DeFi. With DeFi, what became a reality was a plethora of opportunities to bring about a transparent and robust financial system. All in all, DeFi offers services, including borrowing, yield farming, crypto lending, asset storage and a lot more.

What is CeFi?

The main idea behind a centralized exchange is that all the crypto trading orders are routed through a central exchange in centralized finance (CeFi). Binance, Coinbase, etc. are quite familiar terms in the world of cryptocurrencies. What happens here is that the users create an account with these companies and use the very same platform to primarily transfer and receive funds. However, this is not all. These exchanges, in addition to providing crypto trading services also support other services like lending, borrowing, margin trading etc.

Major differences between DeFi and CeFi

One of the biggest differences between decentralized finance and centralized finance is the fact that the system is regulated in case of CeFi whereas exactly the opposite is the case with DeFi. In centralized finance, the responsibility of safeguarding the money of the users is with the exchanges. On the other hand, the assumption behind DeFi is that the transactions would be successful as a result of smart contracts (an agreement between two parties that enforces certain rules/terms of negotiation when a particular/specific condition is met). In simple terms, the users are themselves responsible for managing their own funds and activities. In CeFi, it is possible to prevent trade and impose limitations on users. However, the same is not possible in case of decentralized finance. Decentralized finance is permission-less whereas this is not the case with CeFi. There are two areas where CeFi stands apart – One, wherein the CeFi exchanges enable the conversion of fiat currency to cryptocurrency and vice-versa in an easy and seamless manner and the other where it supports cross-chain exchange for multiple cryptocurrencies, thus displaying interoperability of cryptocurrencies.