The entire boom in the crypto market these days revolves around centralized finance, CeFi, and decentralized finance, DeFi. But what is it really about? Today we will explain the differences between DeFi and CeFi.
The crypto ecosystem is full of terms and technicalities that scare the novice. And even the most expert in the market had to learn every detail that makes the crypto environment so interesting.
Therefore, in CryptoTendency we will explain everything you need to know to differentiate these concepts, which are a fundamental knowledge in the crypto world.
The rise of financial technology advancements
The technological and financial advances of the crypto world have not only revolutionized our environment. If not they have allowed new concepts and innovations to be created for users. And part of these new discussions are focused on making the difference with traditional finance.
And, is that in recent months decentralized finance (DeFi) has not done more than grow. Its increase has been so exponential that it is already compared to the ICO boom at the end of 2017. However, everything deserves to have relevant competition. And in this case it is centralized finance (CeFi).
Although, both parties have the same mission in common, which is to allow people to use cryptocurrencies for financial services. They clearly differ in the roadmap that each one has to reach the goal.
What is Centralized Finance?
It is important that we start by explaining what centralized finance is. Since the original concept of how finance is done globally is closely related to CeFi.
If we are looking for an exact concept, it is that they are centralized companies that are the guarantors of the execution and success of their financial products. With CeFi, users trust the people and institutions that store funds to manage them ethically.
It is mainly focused on neobanks, those digital banks without branches. Basically, technology companies that provide digital and mobile financial solutions.
The main benefit of using CeFi services is that there is a greater degree of flexibility with users, as to how a common banking entity could function.
Some benefits derived from this flexibility include fiat conversions, cross-chain swapping, and the ability to get help from customer service.
However, they have their disadvantages and that is that although these companies may be implementing a new type of cryptocurrency, there is very little innovation in terms of structure and financial freedoms, which is one of the key elements of DeFi.
The private companies that implement CeFi are some such as Crypto.com, Celsius, Cred, BlockFi and Nexo.
What is Decentralized Finance?
DeFi is considered one of the most relevant technological advances in digital finance. Since the concept of decentralization of a process is something that has revolutionized the market to this day.
A clear definition of DeFi is that users can transact without relying on a single centralized authority, such as a corporation.
Thus, users are confident that the technology will work as intended. Technology that will allow user interaction with the platform directly, leaving behind a central executor.
Something that has finally been possible thanks to the emergence of blockchain technology. This due to its ability to generate self-sustaining ecosystems. All while maintaining the security, privacy, and trust of the system.
Another element of innovation that DeFi brought with it are Smart Contracts, which allow developers to create decentralized applications or dApps.
As its name indicates, dApps are applications based on the blockchain, which are similarly managed with this idea of not being controlled by a centralized entity.
However, the DeFi also have their stumbling block. Well, most decentralized services categorized as DeFi do not include the change from crypto to Fiat money.
They also do not offer cross-chain solutions and are currently a technology that is barely growing in terms of liquidity.
Who will win in the market?
We already know the differences between DeFi and CeFi, so this question remains to be answered. Time will tell what kind of platform will win “War for the future of finance”.
Because while CeFi has been around long before cryptocurrency started to gain traction. DeFi, has managed to make a place of relevance in the crypto environment.
Which of these finances do you think the crypto market should use faithfully, DeFi or CeFi? Leave your opinion in the comments.