02 August 2022
2 min read
Blockchain technology, which underlies cryptocurrencies, exposed the world to the concept of decentralized finance a.k.a., DeFi. The blockchain has made cryptocurrency available to everyone, irrespective of the boundaries. Since blockchain has so many uses, the financial sector has had to adapt to fit the technology, which has led to the creation of a world centred on decentralized financial services, resulting in greater efficiency and reliability.
These days, it is possible to roughly divide the financial services sector including cryptocurrencies and blockchain into two groups. DeFi and CeFi, fall under this category. Despite serving to accomplish the same goal, both these categories have different ways of going about it.
What is Decentralized Finance?
The term decentralized finance refers to the democratization of financial processes and institutions. Because DeFi uses blockchain, many parties can keep a record of transactions. It means that no single source has control over anything. Instead, everything is decentralized. It must be noted that DeFi differs from traditional banking as it provides consumers with access to previously unavailable options like a centralized transactional system. With all the substantial benefits, DeFi has expanded from a $1 billion sector in 2019 to a market worth more than $100 billion.
What is Centralized Finance?
CeFi refers to the current financial system, when an organization or middleman facilitates financial services like trade, loan, exchange, and others, frequently acting as the prime decision-maker. The company handles consumer complaints and offers support. When a customer registers on a cryptocurrency exchange to use its services in the crypto sphere is known as a CeFi entity. To avail of the requested services, a user allows a centralized body to spend their funds, much like in real-world financial service corporations.
How is DeFi different from CeFi?
CeFi and DeFi, both function with the same objective. They want to increase trading volume and popularize crypto trading. However, there are differences in how these two ecosystems achieve their goals. DeFi is the top option (as an investor) on the table if losing control of your money is a serious issue. While exploring cryptocurrencies, CeFi stands out as the most dependable alternative on the market if fiat conversion or cross-chain transactions are essential components.
Aside from these shortcomings, DeFi is a hassle-free and optimistic replacement for centralized finance, offering the advantage of improved control over financial assets. DeFi can open up financial services to the general public, which is the most crucial aspect.