DeFi or Decentralized Finance has been the buzzword within the crypto space for the last year or so. We have all heard that DeFi is probably going to revolutionise the banking sector and the traditional finance industry someday soon. But what exactly is the difference between DeFi and CeFi, or conventional centralized finance? Before we get into that, let’s start out with some definitions first.
What is CeFi
Financial services within the crypto space are offered to clients through a third party or centralized organisation or entity. Ultimately you do not own the keys to your tokens/coins within the exchange but grant custody of those assets to the centralized exchange that manages them on your behalf.
What is DeFi
A financial services app within the crypto space that is not run by any centralized entity. The terms of these financial services are managed by smart contracts on the blockchain itself. DeFi is permissionless, trustless and transparent.
Total Locked Value (TVL) in DeFi — (Source: DeFi Pulse)
The Difference Between DeFi vs CeFi
While there are many differences between DeFi and CeFi, it can be argued that both models ultimately aim to bring the same functionality to users at the end of the day, the approach of each is very different. The differences can usually be seen right from the start when interacting with the service. Within a typical CeFi platform users would have to first create an account, signup with an email address and password etc. Sometimes additional steps of verification of KYC (Know Your Customer) are required to perform certain functions.
Within the DeFi realm, this is not the case. Users will interact with the dApp (decentralized application) via a wallet such as Metamask for example. Users will have sole access to the secret keys of this wallet. They can then allow the wallet to connect to the DeFi dApp by giving it permission to do so.
CeFi
Verification/KYC ✅
Custody of Funds✅
Lending✅
Borrowing✅
Payments✅
Control Centralized✅
UI/UXHighly✅
IntuitiveSimple✅
Trust❌
DeFi
Verification/KYC ❌
Custody of Funds❌
Lending✅
Borrowing✅
Payments❌
Control Centralized❌
Customer Support✅
UI/UXHighly ❌
IntuitiveSimple❌
Trust✅
CeFi platforms offer a great user experience in general. Cross-chain transactions can be done seamlessly with the touch of a button and the user interface is usually very refined and aesthetically pleasing. DeFi interfaces are usually very simple with very limited functionality. And making complex cross-chain transactions can often be cumbersome and include many different steps to complete.
We have a more in-depth post on DeFi specifically and how it works here if you would like to know more.
UI and UX
In CeFI applications, users trust people to execute transactions or services offered on their behalf. These platforms also usually offer greater customer support to help users try and sort out whatever issues it is that they face. When it comes to DeFi, users are left to their own devices to ensure that their funds and transactions are being performed correctly. There is no customer support. Users trust the technology, in this case, smart contracts on the blockchain to perform the functions as requested.
Both models incorporate functions such as trading, borrowing and lending as well as margin trading. Although, both also have some unique functionality to them, such as being able to buy crypto with a credit card in some CeFi platforms for example.
Advantages of DeFi
- One of the major advantages for DeFi, is user control over their privacy and information. There is no need to create accounts or go through a lengthy KYC process.
- Users usually retain total control over their funds. Funds in DeFi are non-custodial.
- Because there’s no need for a third party, fees are often much lower than when compared to CeFi counterparts.
- Innovation is happening at a rapid pace because there are no regulatory hoops to jump through.
Advantages of CeFi
- Better user experience with one-touch functionality, as CeFi applications strive for excellent customer experience.
- CeFi platforms offer Fiat conversions. They are the perfect on and off-ramps from the fiat world we live in, into the cryptocurrency world.
- Funds are secured by a custodial and usually provide some sort of FDIC insurance.
- CeFi platforms are regulated, which also means customers are protected from scammers.
The Top 10 DeFi Protocols — (Source: DeFi Pulse)
Real World DeFi Examples
- AAVE- AAVE is the largest Decentralized lending platform.
- Maker DAO- A Decentralized stable coin minting and lending platform
- Uniswap — Unisawap is the largest DEX (Decentralized Exchange)
- Metamask- Metamask is a Web 3.0 wallet used to interact with Decentralized applications. Check out our Metamask How-To here.
Real-World Examples of CeFi
- BlockFi- BlockFi is a crypto staking and lending platform.
- NEXO- NEXO is another staking and lending platform. Check out our review, here.
- Celsius- Celsius is a crypto borrowing, payments and lending platform.
- Binance — Binance is the worlds largest crypto exchange.
- Coinbase- Coinbase is the largest crypto exchange in the USA.
Conclusion
The endless debate of whether DeFi is better than CeFi will probably still rage on for a while. At the end of the day, CeFi and DeFi ultimately perform most of the same functions. They provide us with access to the crypto world with better yields, improved speed of transactions as well as transparency of transactions.
Both of these models have their pros and their cons, it all depends on the needs of the end-user. At the end of the day, the vision for DeFi and CeFi are similar. One to promote the adoption of cryptocurrency use and two, perhaps even more important, to provide financial inclusion.
