In traditional financial and crypto services people have to depend on established financial institutions and banks for executing different financial operations. This is the centralized finance system that requires a middle person or intermediary institution to process the transactions and other functions.
But with the emergence of blockchain, the current financial system has started shifting to Defi (decentralized finance). And this shift has created discussions to understand the difference between Defi and CeFi. Do you have some confusion between Defi and CeFi? Then, let’s understand what is the difference between Defi and CeFi.
What is DeFi?
DeFi is the opposite of CeFi. It is an open and decentralized financial system that eliminates the need for any common central authority. In DeFi, users or traders have full control over their crypto exchange.
Since there is no central or intermediary authority there is no one to control your access. And therefore, DeFi technology is used for peer-to-peer transactions. Top fintech app development company considers DeFi as the game-changer in the crypto exchange market. It is because it provides better transparency, ownership, and accessibility to crypto traders.
What is CeFi?
CeFi or centralized finance is a centralized form of financial system. It works as a central authority and allows all crypto trades through a central or single-handled exchange point. This central authority could be a bank, government, or any other financial institution or authority. CeFi generally relied on a fiat currency that is not backed by any physical commodity.
In the CeFi system, funds or money are controlled and managed by a central exchange. It actually determines or permits which coins would be traded and what fees or charges need to be paid for this exchange.
So when you use CeFi, you don’t have complete rights or control over your cryptocurrencies. Instead, the central authority handles or controls your crypto exchange. As a result, you are subject to the rules defined by the central exchange authority.
What is the difference between DeFi and CeFi?
So by passing through the basics you have now understood that DeFi and CeFi work contrary to each other. DeFi eliminates the need for a single or central authority and gives full control to the stakeholders. On the other hand, CeFi involves a central or a single authority and control over the crypto exchange.
While DeFi and CeFi work for the same niche cryptocurrency and other financial operations. There are many things that set them apart, not only being centralized or decentralized. Here are the below features of DeFi and CeFi to help you understand the difference between DeFi and CeFi.
Key features of CeFi
Centralized exchange (CEX)
A CeFi platform allows you to make crypto exchanges and manage your portfolios. It charges a certain fee from users for doing crypto exchanges. A CeFi platform keeps your funds not with full control but as the guardian of your funds. For instance, when a user needs to purchase or sell a cryptocurrency, CeFi platform asks users to make orders.
The CeFi platform here matches the orders of the user with another user who also wants to trade the same cryptocurrency. Once the exchange gets completed, the CeFi platform manages the funds. Consequently, the platform records the transaction on its blockchain network.
Fiat conversion flexibility
Since CeFi uses a central medium for crypto exchange or other financial services it gives better flexibility in fiat conversion. In CeFi, it is quite easy and dynamic to move the money back and forth between fiat and cryptocurrency.
For instance, in case a user wants to purchase Ethereum with USD from CeFi. Then, they just need to search for a CEX platform that allows users to exchange for this pair.
Facility for cross-chain swaps
CeFi allows trading and exchange for different cryptocurrencies like BTC, LTC, XRP based on independent blockchain platforms. When DeFi is unable to perform cross-chain swaps or exchanges for different cryptocurrencies. CeFi stands out as the best solution for exchanging digital assets from multiple chains.
And this is one of the top features of a Centralized finance platform. It allows you to trade several cryptocurrencies within a single platform. Whereas, DeFi, which is based on decentralized blockchains without interoperability. It lacks the ability to allow the exchange of various cryptocurrencies from a single blockchain network.
Key features of DeFi
Unlike CeFi, DeFi works as a decentralized financial system. It doesn’t depend on a central exchange authority to allow the crypto exchange. Rather, it gives full control to the stakeholders and privately traded cryptocurrencies. Any user from any location can buy, sell or trade in cryptocurrencies without the permission of any central exchange authority.
DeFi platforms provide great accessibility and transparency. They can interact securely and priestly and define their own rules of exchange. Thus, DeFi saves costs associated with the exchange.
In CeFi, users have to depend on the CEX platform for ensuring the authenticity of cryptocurrency exchange. As a result, the trust of users is required in CeFi. Whereas in DeFi, there is no need for trust from users.
Stakeholders can verify the authenticity of exchange or transaction by auditing the code. For example, smart contract is a blockchain application that automatically verifies transactions. As a result, there is no need to depend on verifying on the user’s side.
Since DeFi is a totally decentralized blockchain it has great adaptability to new technologies and innovations. It allows blockchain owners to make changes easily. Stakeholders can integrate new technologies and innovative solutions in their existing blockchain applications using DeFi.
So, after going through all these things, you are now able to differentiate between DeFi and CeFi. DeFi works as a decentralized financial system and offers more flexibility and liberty. CeFi being a centralized exchange authority offers more reliability and trade options.
However, both DeFi and CeFi offer features for trading cryptocurrencies and different fintech services. There are many differences between these two financial systems. So if you are a business owner you should try to work with a professional fintech app development company that can help leverage both technologies.
And MobileCoderz is one such company that has delivered various Fintech projects in DeFi and CeFi. They hold great expertise in using blockchain and other technologies to build innovative and effective DeFi and CeFi solutions.