There’s an argument that Decentralized Finance (DeFi) can take over Centralized Finance (CeFi), but there is much to say about the existence of both. While CeFi and DeFi can provide financial services such as crypto exchange, lending, borrowing, and staking, the execution of these services remains to be different. We’ll give you some poignant pros and cons between the two to help you decide which one is better for you.
First, let’s define the main topics:
Centralized Finance If you look at it from a beginner’s standpoint CeFi products and services look much like the traditional finance model. They both have a centralized point of authority, run with intermediaries or middlemen, and your money is kept by a custodian. CeFi and banks are also governed by regulations.
Decentralized Finance Decentralized Finance or DeFi is a newer concept that aims to take away the middlemen and the central authority. It wants you to have power over your money because you are the custodian. DeFi is governed by the shareholders or token holders and the decisions are made through them with the assets they hold acting as voting rights.
What are the differences between CeFi and DeFi?
Management CeFi relies on a central authority that governs its processes, much like the central bank having power over fiat circulation. The DeFi space can be ruled by governance tokens which act as voting rights when changes in the protocol are necessary.
Custodian CeFi exchanges, for example, use the custodial wallet model, wherein you entrust your assets to the exchange. DeFi, being trustless, can make use of a non-custodial wallet, wherein you are the only one who knows your private keys. You have total control of your assets in a non-custodial wallet, but it also means you are responsible for its security.
Access Before you access CeFi services, you will need to complete identity verification known as Know Your Customer (KYC). It requires personal information and documents such as proof of residence and identification cards. DeFi is more accessible to a wider audience because there is no need for these documents.
Security Security of your funds is tantamount. When you use a CeFi platform, you are also entrusting your funds to it, including the people in charge of it. In DeFi, you entrust your funds to technology. While DeFi platforms are created with robust security systems, there is still the possibility of infiltration and theft.
User experience Beginners are more inclined to use centralized finance products because they are easier to use and they usually have customer service who answer queries. CeFi makes your entry more seamless with beginner-friendly functions and services. Most even provide a learning section on their websites.
Regulation CeFi platforms are governed by the rules and regulations of the jurisdictions in which they operate. There are policies enforced such as the Anti-Money Laundering and Counter-Terrorism Financing. Regulators and observers are wary of the risks involved in DeFi because they are easy targets to hackers and it lacks investor protection.
In conclusion, CeFi and DeFi have their own benefits and disadvantages but CeFi is inarguably better for beginners in the crypto space. More advanced traders and investors may lean towards DeFi because it offers personal custody and more power over their own assets. DeFi also offers high leverage and outstanding yields, but to achieve these, one needs strong analytical and technical skills. DeFi is continuously growing and decentralized apps (dApps) are becoming more adaptable to the taste of the general crypto population.
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