Are you new to the concept of decentralized finance? Wondering why DeFi continues to be under limelight these days? How does it differ from centralized finance(CeFi)? You have landed on the right page. This article talks about the concept of DeFi, distinguishing it from CeFi, detailing the pros and cons of each.
So let’s get started!
Table of Contents
- What is CeFi? What are its Limitations?
- Introduction to DeFi: Its Advantages and Disadvantages
- The Current State of Play
- The Verdict
What is CeFi? What are its Limitations?
Centralized finance is a structured and specialized financial service that allows people to get loans or earn interest on their cryptocurrency by lending or borrowing it through a central exchange. CeFi aims to make trades fairer, boost transaction processing, and increase buying and selling processes. The central exchange quotes their prices; thus, these are the only available price options for traders.
Despite its name as centralized, CeFi services prioritize to shift to a more decentralized version of traditional financial services.
There are various drawbacks associated with CeFi, such as higher transaction fees due to third-party or intermediaries’ involvement.
Lack of transparency and lack of absolute control over funds are other concerns related to CeFi. Moreover, they require users to disclose personal information during the registration process.
Introduction to DeFi: Its Advantages and Disadvantages
Decentralized finance is made up of financial applications that operate through a decentralized blockchain, thereby removing the need for users to trust any third-party. The major benefit of using DeFi is that users trust a protocol rather than any corporation. Uniswap, MakerDAO, Compound are a few of its examples. Compared to DeFi platforms, CeFi enjoys higher patronage within the industry, but Blockchain experts and technocrats believe that tables could turn rapidly. DeFi Pulse indicates that, in a mere two years, the DeFi ecosystem has grown from zero to around $1 billion in value locked. If you are already a part of DeFi or decides to be its part in the future, get ready to avail these benefits:
- Autonomy — DeFi platforms ensure that your assets are all yours, and no one has control over them.
- Enables affordable and faster cross border payments
- Tradability — You can trade more efficiently as they aren’t prone to an entire high-value investment at once.
- Accessibility: DeFi has a financial system that is accessible to everyone regardless of their location.
- Interoperability: DeFi apps and protocols are built to integrate and complement one another.
- Transparency — In the DeFi environment, data is available publicly, which helps keep service providers impartial.
While several agencies are making headway, the regulatory environment of DeFi is still unclear. Many of the classifications of the rule and DeFi is still unclear. This is why most corporations fail to step in completely.
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The Current State of Play
When it comes to the number of users and total market size, CeFi platforms drastically outnumber the DeFi ecosystem. Compared to DeFi platforms, CeFi platforms are far more well-established. It has taken several years for centralized cryptocurrency exchanges and loan platforms to develop open user interfaces and deliver services that DeFi platforms are still struggling to match.
But a growing number of investors have started to feel that centralized crypto exchanges operate like traditional banks, and so as a response to this, decentralized exchanges have started gaining popularity. DeFi Pulse reported that in less than a month in 2020, users locked an additional $125 million of cryptocurrency in DeFi applications. The reason for this popularity is due to the fact that they utilize smart contracts instead of brokers, and the derivatives contracts are settled when the contract terms have been met.
According to DeFi Pulse, Aave and Compound are the two top-ranking DeFi protocols. DeFi’s surge in adoption has been exponential over the past one year. According to the report, since September 30th, the total value locked showed $519 million, and in 2020, a new all-time hike was seen with $11.23 billion.
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Both types of finance hold a special place in the cryptocurrency movement. They offer faster transactions, attractive yields, and infrastructure that promotes advanced and secured finance. Whether you decide to go with CeFi or Defi, it is clear that you will experience better financial services, and you will certainly end up with traditional banking. That is a net positive for everyone.