CeFi versus DeFi

Centralized Finance (CeFi) – you need to trust the company.
Decentralized Finance (DeFi) – you need to trust the protocol and technology

We’re living in a new world with lots of advancements in the ‘finance’ industry. At one point in our history, traditional financial services for lending (deposits & fixed returns), borrowing (loans & mortgages) and payments (credit & debit cards) were only available through banks, credit unions and other centrally controlled private financial institutions.

With the introduction of blockchain technology, the concept of ‘finance’ has shifted dramatically to allow people to lend, borrow and pay via alternative ways such as Centralized Finance (CeFi) and Decentralized Finance (DeFi) through cryptocurrencies and blockchain.

A common question is: what’s the difference between CeFi and DeFi? How are they the same and how are they different?

CeFi in a Nutshell

Centralized Finance (CeFi) started as soon as cryptocurrencies and blockchain technology became popular. Transactions are handled through a centrally controlled exchange and funds are managed by a company. It is important to note that users ‘do not own their private keys‘ when using Centralized Finance (CeFi) platforms. CeFi represents an ‘intermediary‘ between traditional finance and DeFi.

In CeFi, you have to trust the company.
DeFi in a Nutshell

Decentralized Finance (DeFi) started more recently and are essentially automated applications that are developed on top of blockchain platforms. DeFi provides an open-source, permissionless and transparent financial service ecosystem that is not ‘managed’ or ‘controlled’ by a central entity or company, leading to greater transparency and control over your assets as you ‘own your private keys‘.

In DeFi, you have to trust the protocol & technology.

CeFi versus DeFi Chart

Here’s a quick guide to the differences and similarities between Centralized Finance and Decentralized Finance in the crypto space. Anything in bold and red could be considered a disadvantage. This is our CeFi vs DeFi comparison chart:

ParameterCeFiDeFi
Crypto TradingYesYes
Margin TradingYesYes
Derivative TradingYesYes
LendingYesYes
BorrowingYesYes
StablecoinsYesYes
PaymentsYesYes
Underlying Technology (Blockchain)YesYes
Fiat Conversions (Fiat-to-Crypto)YesNo
Cross-Chain ExchangeYesNo*
TransparencyNo**Yes
KYC (Know Your Customer) RegistrationYesNo
Able to Move Funds to Help CustomersYesNo
PermissionlessNoYes
Non-CustodialNoYes
Private KeysNoYes
Fund Recovery / InsuranceYesYes***
Abundant LiquidityNoNo
Customer ServiceYesNo
*Wrapped tokens solve this issue.
**One exception is Celsius Network which has proven to be as transparent as DeFi and more transparent then traditional banks.
***Nexus Mutual now insures funds for certain platforms and scenarios. Celsius Network is also launching it’s own ‘self-insurance’ feature soon.

DeFi versus CeFi Point of Differentiation

Obviously, all the similarities and differences between Decentralized Finance and Centralized Finance cannot be summed up in the above chart. Therefore, we’ve added more details regarding the debate surrounding DeFi vs CeFi in crypto below:

ParamterCeFiDeFi
Security & RiskCompany risk
(centralized custody)
Protocol risk
(flaws in code)
UI/UXHighly intuitiveNot usually
highly intuitive
Governance ExecutionBy platform
management decision
By community
voting
Interest RateDiscretionary rateMarket rate
Price OraclesRelies on a
sole provider of info
Queries multiple
oracle sources
Platform ExamplesCoinbase
BlockFi
Celsius
Nexo
Binance
YouHodler
Ledn
Crypto.com
MakerDAO
Compound
Aave
dYdX
Ramp
Curve
Quickswap
Uniswap

In a nutshell:

With CeFi, users trust the people behind a business to ethically manage funds and execute on services the business is offering.
With DeFi, users trust that the technology will function as intended to execute on services being offered.