Defi VS Cefi
What is Defi?
Defi is a modern financial ecosystem where buying and selling crypto assets can occur without a third party. Defi transactions run on a peer-to-peer system. These transactions can be executed instantaneously and are not limited by geography. Defi transactions are trackable, foolproof, and secure because they are recorded on blockchains.
Features of Defi
Decentralized Finance, or Defi, systems use Smart contract-based applications to eliminate third parties. Smart contracts are code-enabled algorithms. They execute when stipulated conditions are agreed upon by the parties involved in the transaction. Banks act as mediators for financial transactions in the current model. This hands over enormous power over the user assets to the bank. This is risky because banks get regularly exposed to security outages and threats.
What is Cefi?
We need to understand the concept of money and the role of financial institutions to understand Cefi.
The concept of money is as old as our civilization. Our ancestors used shells, cattle, silver, and gold as money to buy and sell essential commodities. But to qualify an entity as money, it needs to have a few parameters for large-scale use. Some of the top parameters to qualify as money are 1) Portability 2) Scalability 3) Keeping Wealth
Although they have an intrinsic value, old entities like seashells, cattle, and gold do not perform well in scalability and portability parameters. Paper currency was introduced to solve these issues. Until 1971, paper currencies were backed by commodities like gold. But in 1971, President Nixon decided to de-link the US dollar from gold. This was a historical moment as it created fiat currencies.
Since the advent of fiat currencies, we have seen a shift in banks and financial institutions managing and controlling almost all of the public’s wealth. With the advent of cryptocurrency and the ever-increasing interest in this space, crypto exchanges, or Cefi, was born.
Features of Cefi:
People can buy or sell cryptocurrencies in crypto marketplaces like Centralised Finance or Cefi. You do not need to be a part of any blockchain. Users can easily invest in cryptos at the click of a button.
Crypto exchanges offer liquidity as they have many buyers and sellers. Crypto orders can be placed and settled almost instantaneously. Reliable crypto exchanges take the necessary steps to keep their customers’ investments secure. For example, Zebpay uses multi-signature cold wallets to store 98% of its funds. These wallets eliminate the chances of hacks as they are not connected to the internet.
Centralized exchanges, or Cefi, have many features, like a customer support division that handle and respond to queries. Some have informative blog sections that can be used to gain knowledge and keep updated with all the new crypto news and happenings. All crypto transactions settle instantly on Cefi exchanges.
Cefi vs. Defi
Users provide personal information like photographs, identification proofs, and proofs of address when they trade through Cefi institutes. A public key is used to identify users in a Defi system.
Control of Assets:
Users have complete control over their assets in a Defi system. This works well only if users make informed decisions while trading and find ways on their own to keep their assets secure. There are several security protocols in place to keep your assets secure in a Cefi Cryptosystem. Proper research and analysis should be undertaken before investors choose the exchange they would like to trade on.
Cefi exchanges can keep a minimal transaction fee across all their services. Any unlawful transactions can be tracked since user identities get recorded in these exchanges. On the other hand, Defi blocks entry to spam by having high transaction fees. Network congestion is another factor causing high transaction fees on the Defi blockchain.
Most crypto users do not have a deep knowledge of crypto and the blockchain. This is the case for most users all over the world. Users should not be discouraged from crypto investing as it is a learning curve. You usually learn more through investing. Through customer support terminals, Cefi institutes can help resolve any of the users’ queries. Defi institutes do not offer such facilities.
Use cases for Cefi
Some top crypto exchanges are Coinbase, Zebpay, FTX, and Binance. Many of these exchanges offer advanced services that go beyond just buying and selling services. They allow users to lend and borrow cryptos. They also have services like future, staking, and options. They are also a good resource for learning more about crypto.
Use Cases of Defi
Uniswap and 1inch are two of the most popular Defi exchanges. Uniswap uses the Ethereum blockchain to power its system. The UNI token is used for voting by the Uniswap community to decide the direction of future projects and the company. A GAS fee is tied to all transactions as Uniswap runs on the Ethereum network. A fee is paid to miners to create blocks and validate transactions for the blockchain.
So who is the winner?
The Cefi and Defi systems both have their pros and cons. Defi should be the choice for users who want complete autonomy over their assets. The Defi system is distributed in nature and performs well under volatile conditions. Cefi systems are very user-friendly. Cefi systems are improving as they keep adding and updating new security protocols by the day. The choice between the two solely depends on the investor’s priorities.