We are well beyond the phase where cryptocurrency was merely a fascinating concept for the majority of the global population. Over 300 million users are in crypto as of now, and the number is expected to reach 1 billion by 2022-end. While decentralization is at the core of the crypto industry, assuming that we have achieved complete decentralization would be unperceptive. The existence of centralized exchanges within the ecosystem is a major hurdle on the way to complete centralization. But the demand for complete autonomy makes it a DeFi vs CeFi. However, the emergence of decentralized finance (DeFi) has brought to light the advantages of decentralization.
What is Centralized Finance (CeFi)?
Centralized Finance is a fairly old concept that emerged as a replacement for the barter system several centuries ago. The goal was to bring uniformity in transactions by institutionalizing a common currency. In the crypto industry, centralized finance or CeFi is a setup where an exchange has total control over all the crypto transactions. In Centralized Finance, a centralized exchange manages all your funds. You don’t have to manage a private key to access your wallet.
In such a setup, exchanges decide which tokens they want to list. Exchanges have the authority to decide on the gas fees (trading fees). The absence of autonomy is the biggest downside of centralized finance.
Downsides Of CeFi
- Absence Of Autonomy: Centralized Finance (CeFi) seems to contradict the idea for which crypto stands. One of crypto’s key motives is to put people in control of their money. But with the involvement of centralized exchanges, that’s unlikely to happen. In centralized finance, exchanges control your assets. They can suspend withdrawals and de-list or list tokens as per their wish.
- High Risk: The crypto market is extremely volatile. Those who have been in the industry for quite some time would know how rapidly a dump can come. A lot of exchanges suspend trading or withdrawals in case of a major dump. This may leave your gains in jeopardy. Also, exchanges may face cyber attacks leading to the crypto assets being stolen. In such a case, those using the exchange may lose their entire portfolio.
- Lack Of Anonymity: The popular belief is that crypto transactions are anonymous. But using this as a blanket statement is false. The regulation of the crypto industry across the world means close collaboration between financial institutions and exchanges. While the aim of the regulation is to curb illicit transactions, the process facilitates the tracking of transactions. Therefore, it is safe to say that federal agencies can track crypto transactions. Also, centralized exchanges mandate KYC. This means the identity of users is no longer hidden.
How DeFi Is Solving The Challenges In CeFi?
The rapid emergence of DeFi (decentralized finance) as a sector is mainly due to its advantages over CeFi. DeFi functions without the involvement of centralized exchanges. Users can buy and sell crypto tokens on applications built on blockchain technology. The motive behind these applications is to create a transparent and permissionless system. The goal is to encourage the participation of users while promoting autonomy.
Unlike CeFi, DeFi aims to enable complete decentralization and transparency. It puts users in control of their money. Moreover, the risk involved with DeFi is much less than with CeFi. Let’s try and find out the winner in this battle of DeFi vs CeFi.
How DeFi Is Better Than CeFi?
- Permissionless: One of the biggest advantages of DeFi is that it is permissionless. In centralized exchanges, the KYC process is mandatory to create an account and trade cryptocurrencies. Whereas in DeFi, anyone can participate in the ecosystem. As a user, you can buy and sell cryptocurrencies through decentralized wallets over the internet without any permission.
- Autonomy: Autonomy means providing users with complete control over their assets. Unlike CeFi, DeFi creates a system where crypto assets are in the custody of respective users. This eliminates the dependence on exchanges, and users have complete control over what they want to do with their funds.
- Extremely Fast Onboarding: Trading cryptocurrencies on centralized exchanges takes time. You need to create an account and go through the KYC process before making a trade. However, in DeFi, the onboarding process is extremely fast, where users can simply go to a decentralized wallet and buy and sell cryptocurrencies.
- Minimized Risk: The risks associated with DeFi are much less than that of CeFi. In CeFi, exchanges can suspend withdrawals, de-list coins, or even freeze trading temporarily. But in DeFi, such things are unlikely to happen. Therefore, you can quickly withdraw your funds or exit a trade in case of a sudden crash. Offline access is another major advantage of DeFi over CeFi.
Conclusion
The collective goal of both Decentralized Finance (DeFi) and Centralized Finance (CeFi) is the promote the use of cryptocurrencies. However, the functioning of the two systems is entirely different. While CeFi promotes a centralized system where centralized exchanges have the authority and control over crypto assets. On the other hand, DeFi promotes complete decentralization and transparency. In the DeFi vs CeFi battle, DeFi seems to be winning because of the aforementioned reasons. This is why institutional investment in DeFi protocols has increased manifold over the past few years. As users become aware of the advantages, the popularity of decentralized applications like PancakSwap and SushiSwap continues to rise significantly.