Blockchain technology has allowed cryptocurrency service providers to offer wide range of services. One way to categorise these providers will be as Centralised Finance (CeFi) or Decentralised Finance (DeFi). Let us look at their differences in this post.
Both CeFi and DeFi have the same objective which is to offer cryptocurrency services for users. While CeFi customers have to trust the exchange to be responsible of their assets and provide convenient services, DeFi customers have full responsibility and flexibility over their assets.
Before we start, let’s look at the definition of the two concepts.
Centralised Finance (CeFi) Offer cryptocurrency services including cryptocurrency exchanges, financing, yield farming and much more through companies like Binance and Coinbase which are platform managed by a centralised authority and hold/protect users wallet private keys (passwords).
Decentralised Finance (Defi) Offers the same services as CeFi but are executed through smart contracts which are (automated agreements) that are governed by a group of people without a central authority. Which means users have to make sure that they protect their own wallets. DeFi companies are like Uniswap.
Source: @nachoperuzzo
Centralised Finance vs Decentralised Finance
Ownership
The key difference between CeFi and Defi is how they are managed. In the centralised finance space, the controlling entity is the management that build this platform. In decentralised finance, it is the community that hold tokens and Decentralised Autonomous Organisation (DAO) members who have the governance over it. If you want to know more about DAOs here is a link to another post I wrote discussing the topic.
Whenever a decision and execution is taken in the CeFi space it is done through the management working in that company.
On the other hand, DeFi decisions are based on votes of the members in the DAO and action is usually taken with the smart contact (automated program) execution. here is a link for a post on smart contracts for your reference.
Exchange Options
When it comes to exchanges, CeFi has multiple blockchains given the way it’s structured which allows more tokens from different chains on their website.
DeFi mainly use one blockchain you may have to go through multiple websites if you want to buy tokens from different blockchains.
For example. in Binance a CeFi platform, you will be able to Ethereum and Bitcoin on your account. But when it comes to a DeFi platform like Uniswap, it will only have Ethereum tokens.
But there is a catch the, DeFi exchange allow any token to be listed which means if you have found a cryptocurrency that interests you at an early stage you will be quicker buying it from a DeFi exchange than a CeFi.
Privacy
Centralised platforms requires you to do a Know Your Customer (KYC) verification. This could indirectly have a potential risk of exposing your personal information (if you are really worried about this matter). Let’s say someone hacks the platform or there was any potential data leak whether it is for security purposes or marketing.
On the other hand, decentralised platform we not require you to do any KYC making it private network.
Security
When you use CeFi you trust the exchange to protect your money because your account is accessible through them.
On the other hand, when it comes to DeFi it’s all protected by yourself. so the only way to access your wallet is to either guess your wallet seed phrases (private key password), or phish for the details through hacking/social engineering.
Deposit / Withdrawal
Ok this point is one of the main reasons that most likely everyone has a CeFi account which is for being able to convert your cryptocurrency to fiat (e.g. US$) and able to withdraw/deposit from your bank account. it and the other way around
As far as a result there is no decentralised finance platform that provides this service yet.
Support
In the CeFi platform everything is controlled by the management, so if you have an issue or a challenge usually you have to go for a customer support.
On DeFi, because you have control everything, you will have to solve every challenge by yourself and most of the time issues are usually solved by the community who support the platform.
Final Thoughts
Both centralised and decentralised finance platforms have the same goals. Personally I use both, CeFi for the convenience of depositing money and having extra diversification. And my DeFi wallet assist me to be flexible doing transactions and also have access to tokens that are very early stage.
Related Posts:
- Cryptocurrency for Dummies – Everything I learned About it
- What is a Smart Contract? and How Does it Work?
- What are DeFi Products and Services With Examples?
Disclaimer: Above links are affiliate links and at no additional cost to you. I may earn a commission. Know that I only recommend products, tools, services and learning resources I’ve personally used and believe are genuinely helpful and relevant. It is not because of the small commissions I make if you decide to purchase them. Most of all, I would never advocate for buying something that you can’t afford or that you’re not yet ready to implement.