DeFi vs CeFi: Key Features and Differences

What is CeFi?

CeFi has a history of thousands of years, when integrated centralized systems were designed to handle currencies and transactions. Traditionally, people employed various commodities as money such as livestock, land, precious metals, and even more contemporary forms of money such as fiat money.

With respect to cryptos, CeFi simply means centralized finance. Centralized crypto exchanges provide a way to route all crypto trading orders to a central exchange. These exchanges are used by candidates to exchange tokens and gain access to services such as lending, borrowing, or trading on margin. However, funds on these exchanges are stored outside of the users’ custody and can be vulnerable if the exchange lacks proper security measures.

How Does CeFi Work?

CeFi stands for Centralized Financial System where all types of financial transactions are regulated by a central authority. This model uses reliable third parties to custody financial assets, respond to clients’ requests, and navigate legal requirements.

What is DeFi?

DeFi started with the implementation of blockchains and subsequent decentralized and permissionless networks. Using cryptocurrencies and smart contracts, DeFi projects cut out middlemen and offer direct access to financial services. In DeFi, traditional financial intermediaries are replaced with smart contracts. These are the self-executing contracts coded on the blockchain.

How Does DeFi Work?

DeFi provides access to lending, borrowing, asset swapping, leveraged trading, decentralized voting, and other functionalities without the need for an intermediary. It is noted that users retain ownership of their assets and all transactions are open and can be verified by any party. Since DeFi platforms are built to replace centralized organizations, transparency and users’ authority are improved.

DeFi vs CeFi

Custody

In DeFi, people are fully in charge of their belongings. They are expected to control their own private keys and to secure their wallets. This provides flexibility but leaves a lot of responsibility to the user as far as security is concerned.

In contrast, in the case of CeFi, the platforms are responsible for holding the user’s assets. Users rely on these platforms to protect their funds. And, while this makes it easy for users, there are concerns if the platform gets hacked.

Public Verification

In DeFi, the execution of code is public and can be verified by anyone. The details of transactions and smart contracts are recorded in a blockchain, which makes them easily accessible to the public.

Whereas, in CeFi, the customers depend on the platform’s reliability. Transaction details are usually not disclosed and users rely on the platform to successfully and correctly record financial transactions.

Regulation

DeFi platforms are essentially unregulated, which raises many legal issues. On one hand it opens opportunities to find new solutions, but on the other hand it has many potential risks for the users.

CeFi is subject to certain rules, to include KYC (Know Your Customer) and AML (Anti-Money Laundering) protocols. This gives a certain measure of protection, but at the same time, infringe on privacy rights.

Intermediaries

In DeFi, smart contracts are used to remove intermediate links and integrations. Contracts are digitized. Also, the process of entering into contracts as well as performing agreed terms are handled by smart contracts and are cost effective and time effective.

CeFi, however, usually works with middlemen like banks, brokers, and exchanges to help with the exchange of assets. This can require additional layers of planning, which can increase expenses and required time for particular financial activities.

Atomicity

In DeFi transactions are atomic. This means making the particular changes in a transaction completely successful, or rolled back completely when it is being rolled back. It improves reliability and reduces risks possible in the multiple and intricate transactions.

On the other hand, CeFi’s atomicity is not programmable. Thus, transactions could be only partially executed or may never complete, thereby introducing some degree of inconsistency.

Malleability of Execution Order

DeFi has some weaknesses including susceptibility to market manipulations arising from order flexibility. Some market manipulations may be achieved by controlling the way that many transactions are sequential, which means that the order in which those transactions are executed can also be controlled.

In this regard, controlled trading environments like CeFi solutions and other institutions leave little room for such actions and create a much more stable environment for trading.

Transaction Cost

In DeFi, gas fees are usual and depend on certain parameters, like traffic in the ETH network or the demand for its services. These are aspects that are expensive and the users should be prepared to incur these costs each time they are engaging in any form of transaction.

CeFi solutions typically arrange trades at least cost or lower than the competition.

Cross-Chain Services

DeFi platforms usually do not support cross-chain tokens. This means that in terms of trade or use, cross-chain tokens have some restrictions regarding assets of different blockchains.

In contrast, CeFi often serves as a bridge between two chains. This offers the ability to trade and manage assets on a variety of platforms.

Fiat Conversion Flexibility

DeFi is still not as lenient as CeFi when it comes to conversion of fiat. Exchanging cryptocurrencies to fiat could be a more cumbersome process, and less comfortable in decentralized finance interfaces.

In contrast, in CeFi, it is easier for the users to trade fiat currencies. They integrate certain procedures and gateways for enabling conversions from fiat to cryptocurrencies or vice versa.

Security

In DeFi, the users have to safeguard the code and the consensus algorithm employed must be also secure enough. It all boils down to the smart contracts used and the trustworthiness of the blockchain technology it is built upon.

On the other hand, central platforms seek to remain secure, yet hacks threaten their well-being. There is a dependency on the platform’s security mechanisms and procedures to secure their money from fraudsters and cyber criminals.

DeFi and CeFi Compared

Key Features of DeFi

• Permissionless: Unlike where one has to ask for permission to have a form of monetary access; be it capital or currency, anyone from anywhere can participate in DeFi platforms. This brings accessibility to financial services since there is an open access to all.
• Trustless: The DeFi system requires no trust in any central authority or other parties to mediate its operations. Here, smart contracts enforce business rules for transactions and the system can be checked by the users on their own.
• Continued Innovation: DeFi is an emerging trend that seems to be advancing at a very high speed in terms of developing new products and services in the financial industry. This creates a vibrant and cultivating environment as it encourages competition and the development of unique ideas.

Key Features of CeFi

• Seamless Customer Support: Customer support is a beneficial and unique feature provided by most CeFi platforms that increase customer confidence and serve as a safety backup should there be some challenges in the system.
• Flexible Conversion: With CeFi, it becomes easier to convert fiat to cryptocurrency and vice versa. The use of the flexible cloud platform increases the number of users and allows for easy transition between tangible and intangible capital.
• Services for Cross-Chain Swaps: The trading of any cryptocurrencies that can function well on various blockchain platforms is supported by the CeFi platforms. This eradicates the challenges experienced in the DeFi for cross chain swapping.
• Centralized Exchange (CEX): CeFi users can manage portfolios within an internal account. These exchanges also eliminate the cost of blockchain fees for asset management.