To put CeFi in a nutshell, it is the finance world that we were used to before DeFi came in. However, centralized finance can also be defined as the financial activity in which individuals can earn interest and obtain loans on their crypto assets through centralized exchanges. An individual’s private keys to their crypto assets would be transferred to their favored third-party company in order to conduct their preferred payments and coin orders. The main goal of CeFi is to optimize the performance and cost-efficiency of transactional services along with ensuring fair exchanges.
The most popular CeFi examples are the crypto exchanges like CoinDCX; where users can make use of the crypto investment app after completing their KYC.
Beyond the world of crypto, Centralized Finance can also be equated with other asset investment options; like stock market trading or investing in a mutual fund.
One of the first and the most important feature of a centralized exchange is the ability to make use of a CEX. They are traditional crypto exchanges where users send funds to the exchange and manage them within an internal account. As convenient as this feature is for the ever-evolving crypto space, it is also due to this, centralized exchanges have been the target of various situations in recent times. Moreover, these are just a few flaws that have been taking place due to unplanned handling of funds by people, and not the technology; as mentioned by many crypto natives and the Ethereum CEO, Vitalik. The large crypto exchanges have complete departments with customer service teams offering assistance to customers; 24*7.
With such changes happening, where Web2 ecosystem is changing to become compatible with Web3 space requirements, centralized services are the more comfortable handshake for the transition. CeFi represents more flexibility than decentralized service when turning fiat to crypto assets and vice versa. This feature of conversing crypto assets and fiat usually requires a centralized entity. In contrast to CeFi, DeFi services do not offer fiat that flexibility. This makes onboarding customers in the Centralized Finance (CeFi) ecosystem more convenient and as a whole, has the ability to offer a better customer experience.
In contrast to DeFi, CeFi services can support the trading of on-chains like LTC, XRP, BTC, and other coins that are often issued on independent blockchain platforms. Due to the latency and complicatedness of performing cross-chain swaps, DeFi services do not support these tokens and they are yet to overcome the smoothness of the activity. CeFi has the ability to overcome this issue by getting custody of funds from multiple chains. This feature is a significant benefit for CeFi as many of the frequently traded and highest-market-cap coins exist on independent blockchains and don’t implement interoperability standards.
Read more: How to choose a Safe Crypto Exchange?
Decentralized Finance is a new financial terrain where investors from all around the world explore different financial solutions to check the best fit for their financial needs or goals. DeFi applications are built on open source peer to peer networks that offer good TPS – transaction per second speed, decentralization (for easy traceability of funds) and security.
Read more on: Decentralized Finance Explained for Beginners
Open lending protocols are maybe one of the most popular use cases in DeFi. Open DeFi lending and borrowing have many advantages; quick settlement, no KYC, zero to fewer collateral requirements for borrowing, and no requirement for credit checks. Lending and borrowing on DeFi protocols mean that these transactions take place on a peer to peer blockchain that requires zero trust and is open source making it a safe and quick platform to trade on.
Monetary banking service is a commonly featured use case of DeFi as it offers easy mortgaging services, issuance of stablecoins and insurance. As the blockchain industry is improving, the need and demand for creating fiat-backed stablecoins have increased. Traditional mortgaging services require intermediaries which can be expensive and time-consuming. Underwriting and legal fees can be drastically reduced by using smart contracts on a public or permissioned blockchain.
Decentralized marketplaces or exchanges are the most popular use cases of DeFi. Commonly called as DEX, traders can easily sign up on a decentralized exchange and lend, borrow or trade their crypto assets without any intermediary. Some popular DEXs are Uniswap and Pancake Swap.
Read more: Decentralized Exchange vs Centralised Exchange
DeFi applications can be used to automate and optimize the compound of yields gained from staking, pooling, and other interest-bearing investments. Yield optimization is a process that uses data analytics and optimization techniques. In DeFi yield optimization is carried out by applying algorithmic techniques to fetch the best rates on crypto transactions.
Yield optimization is referred to as Yield farming as well. In yield optimization, a smart contract carries out the process of using your crypto rewards to re-invest in order to help you receive optimized returns.
Being decentralized, there is no requirement for permission to use DeFi. While with CeFi, users need to complete a KYC process before they are able to access services, which means they have to share their personal information or deposit some money before accessing services. In contrast to CeFi, DeFi users can directly access the DeFi services using a wallet without providing personal information or depositing money beforehand. It is because DeFi is openly accessible to all parties, without any barrier.
The most significant benefit of using DeFi services is you don’t need to trust that the service will perform as promoted. Users can authenticate that DeFi services perform as intended by auditing their code and using external tools such as Etherscan to identify if a transaction was correctly executed.
The more innovative advantage of DeFi is its quick rate of innovation. The Decentralized Finance Ecosystem is constantly building on the current capabilities and experimenting with new capabilities. The constant nature of the DeFi space to create something new has transformed the DeFi space into a rich ecosystem embedded with ground-breaking financial services. In functionalities where centralized financial services have thrived, DeFi space has been working to deliver alternative ways to solve the issue.