DeFi vs CeFi- A fad or a precursor to more innovation in the cryptocurrency space?
Once again it feels like 2017, the ICO craze. But this time, it is something different, it is an innovation, an idea, one that portrays one of the tenets of cryptocurrency- Decentralization. Decentralization at its core takes power away from the centralized body and gives it to the people. It shuns at every possible human centered or corporate body-controlled system. It is not surprising that once again the very thing that birthed collective belief in bitcoin is now in full rage converting and reviving those who had succumbed to the dictates of centralization to the glaring reality of decentralization through the Decentralized Finance (DeFi) system.
For so long, the battle has been between traditional finance system and cryptocurrency, but the tide has shifted to a rather interesting debate within the crypto space itself which is the concept of Centralized Finance vs Decentralized Finance (CeFi vs DeFi).
CeFi vs DeFi
Centralized finance (CeFi) describes finance products that are secured by individuals managing the business. These individuals are responsible for the services and offerings given out to users. While on the other hand, Decentralized finance (DeFi) is based on collective trust in technology.
There are many interesting opinions on each and depending on which side of the divide you are on, know that the end goal is the same but the means by which the goal is achieved is just the difference
CeFi
CeFi services which is mostly dominated by exchanges offer a great deal of flexibility when it comes to finance. And as such centralization to an extent offer some sort of safe haven for the non-tech savvy. The degree of flexibility are evident in the broad range of services like easy fiat-to-crypto conversion, wallet custody, interoperability etc. Newcomers tend to favor this because of it’s simplicity and less worry about the need for technical knowledge of how wallets and private seeds works.
More features of the Centralized Finance can be found in its:
Ease of use: Newcomers onboarding to centralized financial services are not faced with the daunting task of keeping and remembering seed phrases or being their own security . All that is needed is the trust in the CeFi provider maintaining and managing their wallets on their behalf. The downside to this could be severe when the central service provider gets hacked and funds are stolen.
Attractive Interests: Centralized finance systems pay more attractive interest rates than their decentralized counterparts. Companies like Nexo, Crypto.com, Celsius pay an annual average of 10%- 12%. This is a really cool deal for newcomers who just want passive income without actually doing anything.
Ease of borrowing and lending: With CeFi, lending and borrowing are more flexible. Corporations behind the service are responsible for setting the rates and they make it as interesting and as favorable as possible.
DeFi
Defi’s goal is actually simple, it is to create an open-source permissionless and transparent financial system. It is to create an ecosystem that is goverened by technology and smart contratcs that anyone from any part of the world can participate in without the intervention of any central authority so far that person is connected to the internet. What’s interesting is all the services available on any typical finance system, whether centralized or traditional are also present in the decentralized world. Just this time, it is governed by code.
Like the CeFi, Decentralized Finance (DeFi) has got its upsides too:
Trust and Security: Basically, DeFi prides on security and trusts in a smart contract code. By trust, users don’t need any third party to carry out your transactions. Absolute control is maintained by the user. The security in DeFi is top notch as there is hardly any single point of failure compared to CeFi.
Transparency: DeFi system is open source as it allows everyone to have access to records on the blockchain. This again supports the first point of trust. When individuals can access the financial records of what they are involved in, it lends more credence to the system.
Innovation: Defi since it became so known in the last couple of months has been experiencing several innovations in different niches. The growth has been so rapid that it grew from almost nothing to a market capitalization of more than $2.5 billion and currently, it looks like there’s no stop in sight.
In conclusion
Decentralized finance is worth taking a look at as it is currently the rave of the moment. The truth is no smart money would want to overlook these interesting moments in DeFi because the motivation behind it this time is huge — Catering for the percentage of population unbanked or who lack access to financial services.
But one question still begs an answer. Are all crypto projects eventually going the way of DeFi? This in essence demands serious deliberation as most “crypto entrepreneurs” are already branding their projects as DeFi even though it lacks all the features of a DeFi.
More bothering is what is the fate of DeFi when CBDCs start gaining recognition with the rise of crypto regulations in countries across the world? Would DeFi also stand their ground with the prominent development of private stable coins also? Or is what is happening at the moment a precursor to greater innovation in the cryptocurrency space? Interesting times ahead
