by Jacek Korneluk

These are all catchy terms I often like to use, but what they really mean for the everyday currency user. Do most people even know these terms exist? Let alone understand their meaning?

You do not need to be a crypto-native to gain some knowledge about cryptocurrency. Knowing is usually better than staying completely unaware.

At the end of the day, not everyone uses cryptocurrency, and not everyone even knows what the “fiat” term means, despite paying with it for shopping by card, phone, or even cash (for the old-school crowd).

Not paying by “face” yet, and certainly not with programmable money (yet again).

Happy times ahead! Let’s read and learn, so that we can make more informed decisions.

The financial world and digital ecosystem are undergoing a profound transformation ATM. I hope you all noticed, even if not fully participating in all of them.

Alongside traditional banks and capital markets, new financial models are emerging from the crypto and blockchain evolution. Terms like TradFi (Traditional Finance), CeFi (Centralised Finance), and DeFi (Decentralised Finance) have entered the discourse, but the boundaries between them often remain blurry to many.

In this article, I will try to clarify a bit these distinctions, explain their unique features, and explore how each is shaping the future of finance.

The finance all of us more or less participate. We are all making an impact, even not know that. So, let’s do it in a well-educated, controlled, and more aware way.

Traditional Finance, or TradFi, encompasses the well-established, heavily centralised financial institutions we have relied upon for decades. I mean commercial banks, central banks, stock exchanges, brokers, and insurers. Typically, “Bricks and Mortar” institutions use Web2 closed systems, central servers, and regulated gateways.

It is deeply embedded within a framework of national regulations, legal protections, and compliance protocols such as KYC (Know Your Customer) and AML (Anti-Money Laundering).

The money they use are issued by governments and often called Fiat money (do not mistake with the Italian auto brand).

You may notice that not everyone drives a Fiat, but we all use fiat money on a daily basis. Often without even knowing its name. It is pretty cool to know and even better to understand what you use and how the system works.

In TradFi, intermediaries (the middleman) play a pivotal role. For any transaction from buying shares to transferring money overseas, multiple layers of banks, custodians, and clearinghouses are typically involved.

This system prioritises stability, compliance, and consumer protection, but it comes at the cost of speed and transparency. For example, cross-border payments can take days and incur hefty fees, and the processes behind the scenes remain largely opaque to the average user.

Also, even a simple transaction may take a couple of days or more than a couple. The finance people call it T+3, T+2, T+1, and T+0. The numbers refer to the time in days in order to settle the transactions.

You can guess who likes which number and for what reason. But it is beyond the topic of this article.

It is all changing in the spirit of transparency and systems like blockchain.

CeFi, or Centralised Finance, represents the bridge between traditional financial structures and the digital asset ecosystem (ATM).  It is all evolving constantly and may soon change.

Platforms like Binance, Coinspot, Coinbase, Coinjar, Kraken, Independent Reserve, and others offer cryptocurrency services within a centralised operational model.

Users are transferring their Fiat funds from traditional banks to the CeFi platform to buy some crypto assets or just depositing their digital assets into these platforms. CeFi manages custody, security, and transaction processes much like a traditional bank would handle fiat currencies.

What makes CeFi appealing is its ease of use and accessibility. Users benefit from some customer support, intuitive interfaces, and direct pathways to convert fiat into cryptocurrencies.

CeFi has facilitated mass adoption by providing a familiar gateway to the crypto world, especially for those uncomfortable with the “technicalities” of blockchain wallets and private keys. (sounds scary, but it is not so difficult when you learn a bit)

However, CeFi is not without its pitfalls. Because it remains custodial, users must place their trust in the platform’s ability to safeguard assets. Several high-profile failures, such as the collapse of Celsius Network or FTX, for example have highlighted the vulnerabilities inherent in centralised custody.

Additionally, CeFi platforms are subject to regulatory pressures, varying widely across jurisdictions, which can affect the availability of services. Some individuals use VPNs to minimise those problems, but responsibility still exists. Blockchain is immutable and transparent in the vast majority of cases. So be aware that you are not totally invisible, and the time may come (or not) that someone or something may come after you.

Decentralised Finance (DeFi) is a wholly different proposition. Built on public blockchains like Ethereum, Solana, or Avalanche, DeFi operates without intermediaries. No “greedy” middleman involved at all.

Instead, smart contracts, which are sort of automated, self-executing programs on the blockchain facilitate financial services such as lending, borrowing, trading, and staking. Similar with swapping or exchanging as well.

In DeFi, users retain full custody of their assets through non-custodial wallets like MetaMask, Trezor, or Ledger. There is no need for a middleman; everything happens automatically and transparently on-chain.

DeFi is inherently permissionless. This way, anyone, anywhere, with an internet connection can participate without requiring approval or identity verification.

Sounds good and works well, but occasionally mishaps happen.

This model offers several distinct advantages. Transactions are typically faster (T1 or TO) and more cost-effective than in TradFi.  The transparency is unparalleled, with all activities traceable on public ledgers. DeFi also helps new ideas grow fast, with developers creating new financial instruments and protocols through open-source collaboration.

Yet, this frontier comes with significant risks. The absence of central oversight means users are fully responsible for their security.  Also, smart contract bugs, exploits, rug pulls, and scams can lead to substantial losses, and there is little legal recourse if things go wrong.

Moreover, DeFi remains in a regulatory grey zone, leaving both users and developers exposed to future policy shifts.

Nevertheless, developers and most users love it.

When studying blockchain at RMIT University, I dedicated one of my Cryptofinance assignments to the topic of DeFi and then used it as a framework for writing an article. I titled it “Exploring the Existence of Decentralized Finance”.

Although it was written in July 2023, it might still carry some value and the spirit of DeFi, I suppose. Feel free to give it a read.

To summarise it all in practical terms:

• In TradFi, when you deposit your Fiat money in a bank, the bank holds your funds, controls transactions, and assures security under regulatory scrutiny. Processes are stable but slow and costly.

• In CeFi, you keep cryptocurrencies with a centralised platform. The platform manages custody and services, often with faster processing than TradFi, but you must trust the company to keep your assets safe and compliant.

• In DeFi, you hold your assets in your own wallet and interact directly with protocols via smart contracts. There are no intermediaries, giving you full control and transparency, but also full responsibility for any risks involved.

Interestingly, the boundaries between these models are not static. TradFi institutions are increasingly exploring blockchain through permissioned networks that aim to improve efficiency while maintaining regulatory compliance. For instance, JPMorgan’s Onyx project leverages blockchain for interbank settlements. Central banks worldwide are also piloting Central Bank Digital Currencies (CBDCs) to modernise the monetary system with blockchain-like efficiencies.

Moreover, CeFi platforms are beginning to integrate DeFi elements, such as providing access to yield farming or staking through regulated interfaces. This hybridisation could offer the best of both worlds: the user experience and regulatory protections of CeFi, combined with the transparency and innovation of DeFi.

Rather than viewing TradFi, CeFi, and DeFi as isolated or competing, it is more accurate to see them as complementary layers in a transforming financial ecosystem. Each serves distinct user needs:

• TradFi for stability and trust within established financial laws.

• CeFi as a transitional gateway between fiat and crypto.

• DeFi for borderless, permissionless innovation and autonomy.

Understanding these distinctions is critical not only for financial professionals but also for anyone keeping up with the evolving world of digital finance.

Consequently, as technology, regulation, and user preferences continue to evolve, the interplay between these models will shape the future of global finance. For financial professionals, investors, and everyday users alike, understanding this trio is no longer optional.

It is wise to become familiar with the evolving landscape of digital finance and to do so with informed confidence.

Oryginally published on:

https://spektrumlab.io/defi-cefi-tradfi-explained-understanding-the-finance-trio/