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:
| Parameter | CeFi | DeFi |
|---|---|---|
| Crypto Trading | Yes | Yes |
| Margin Trading | Yes | Yes |
| Derivative Trading | Yes | Yes |
| Lending | Yes | Yes |
| Borrowing | Yes | Yes |
| Stablecoins | Yes | Yes |
| Payments | Yes | Yes |
| Underlying Technology (Blockchain) | Yes | Yes |
| Fiat Conversions (Fiat-to-Crypto) | Yes | No |
| Cross-Chain Exchange | Yes | No* |
| Transparency | No** | Yes |
| KYC (Know Your Customer) Registration | Yes | No |
| Able to Move Funds to Help Customers | Yes | No |
| Permissionless | No | Yes |
| Non-Custodial | No | Yes |
| Private Keys | No | Yes |
| Fund Recovery / Insurance | Yes | Yes*** |
| Abundant Liquidity | No | No |
| Customer Service | Yes | No |
**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:
| Paramter | CeFi | DeFi |
|---|---|---|
| Security & Risk | Company risk (centralized custody) | Protocol risk (flaws in code) |
| UI/UX | Highly intuitive | Not usually highly intuitive |
| Governance Execution | By platform management decision | By community voting |
| Interest Rate | Discretionary rate | Market rate |
| Price Oracles | Relies on a sole provider of info | Queries multiple oracle sources |
| Platform Examples | Coinbase 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.