CeFi vs. DeFi
Blockchain technology has been a hot topic for a few years, as more people learnt about the concept of decentralisation and cryptocurrencies. Centralisation is seen in our daily lives — having authority and decision making concentrated in central points.
Both centralised finance (CeFi) and decentralised finance (DeFi) platforms facilitate users to use cryptocurrencies. What roles do they play in the future of finance? We break it down for you.
What is Centralised Finance (CeFi)?
The financial system today is still run by governing bodies and authorities. In every area of banking, lending and trading, we need to go through middlemen to get transactions approved. In CeFi, all crypto trade orders are handled via a central exchange. Users can trade crypto using fiat currencies and convert cryptocurrency to fiat seamlessly. CeFi supports cross chain exchange for various cryptocurrencies as these popular coins are issued in independent blockchains.
However, users need to take note that the funds are managed by people behind these CeFi exchanges which means that the crypto holdings are stored outside of the user’s custody and the exchanges are responsible for keeping these holdings secured from security threats.
Examples of CeFi are centralised exchanges such as Bitwewe, Binance and Coinbase.
What is Decentralised Finance (DeFi)?
Decentralised Finance (DeFi) came about as a potential solution to problems that CeFi brings. Built on decentralised and open source blockchain networks, DeFi brings about a new financial system that is fair, permissionless and transparent. DeFi provides a myriad of services such as crypto lending, borrowing, staking, yield farming, digital asset storage, etc.
To access DeFi, users do not have to share their personal information nor require permission. They can access DeFi services using a digital asset wallet. As such, users are the sole owners of their data and responsible for managing their own funds. Furthermore, as anyone can audit and view all the smart contract transactions on blockchain platforms, thus creating transparency for everyone.
However, DeFi platforms only support tokens following their standards. For example, an Ethereum-based decentralised exchange only supports ERC20-based tokens traded via its smart contracts. Also, as no individuals and companies can be held accountable in DeFi, there are risks of scams.
Examples of DeFi are MakerDAO, Kyber and Totle.
CeFi or DeFi?
So which is better, CeFi or DeFi? The answer depends on what you want from crypto financial services. Both systems aim to make crypto trading popular and increase the trading volume. For new crypto users, they can familiarise with crypto using CeFi first before venturing into DeFi.
If you are new to crypto, you can create a digital wallet on Bitwewe now.
