DeFi vs CeFi - The Critical Advantages And Risks

Much like the advent of Bitcoin shook the way in which we use currencies, the world of decentralized finance (DeFi) is shifting the financial landscape. In this article, we’re exploring the world of DeFi vs the world of CeFi (centralized finance), taking a closer look at their advantages as well as the risks involved.

Starting with the basics, we’ll cover what these two industries represent and how they differ.

While both DeFi and CeFi were created to provide traders with a platform to use cryptocurrencies for their financial needs and services, they operate in different ways. Let’s explore what CeFi and DeFi are in their own rights.

What Is CeFi?

Starting at the beginning, CeFi revolves around centralized exchanges providing crypto trading services as well as loans, interest-earning accounts, lending and borrowing. Mirroring the traditional financial sector, CeFi provides similar services however it also allows users to use crypto as collateral (instead of fiat money).

While this contributes to a shift in a more decentralized direction than traditional financial trading services, the fact that these services are offered by a centralized exchange takes some of the control away from the trader.

For instance, when using a CeFi exchange, traders are subjected to the platform’s rules, fees and generally don’t own the private keys to their on-platform wallets.

CeFi Advantages:

• Boosted transaction processing
• Increased buying and selling processes (fiat-crypto trading)
• Support cross-chain exchanges of multiple cryptocurrencies
• Customer support available
• Easy to use

CeFi Disadvantages:

• Higher transaction fees due to third-party compliance
• Lack of control over funds
• Personal information necessary
• Lack of transparency

What Is DeFi?

Decentralized finance platforms, on the other hand, use smart contract technology to automate traditional financial tools.

Smart contracts are able to automatically execute once certain criteria have been met, without the need of a middle man or any third party involvement. This allows traders to put their trust in the technology rather than a corporation.

The industry provides a wide range of decentralized services, such as loans, derivatives, insurance, margin trading, etc, and as there is no one party in charge, users are completely in control of their own funds and can store them where they see fit.

There is also no need for sharing any personal data in order to make use of these services.

While DeFi platforms have their advantages, one of the biggest downfalls is that they do not support cross-chain exchanges. Examples of DeFi platforms include MakerDAO, Compound, and Uniswap.

DeFi Advantages:

• No personal information is necessary
• No third party involvement
• Complete transparency
• No geographical requirements (anyone anywhere can engage in DeFi)

DeFi Disadvantages:

• No cross-chain exchanges
• Not ideal for beginners

DeFi vs CeFi

When taking a look at the advantages and risks associated with these two industries, let’s explore decentralized finance vs centralized finance. The main difference between choosing which to use boils down to the question: would you rather trust technology or humans?

Operational Preferences

Users might choose to trust a CeFi platform as it operates as a business with people in charge of managing funds and executing the services. Alternatively, in the spirit of using decentralized currencies, people might choose to use decentralized financial services as this provides more control and more transparency when engaging in the various activities on offer.

Market Value

In just one month in 2020, the DeFi industry grew by $125 million as investors flocked to make use of DeFi applications. While DeFi has grown at an exponential rate over the last few years (the industry is currently worth over $137 billion), CeFi platforms still far outnumber them.

Over the past year, there’s been a substantial shift in trader’s sentiment, with some believing that centralized exchanges have started to operate in a similar fashion to banks.

Innovation

While the traditional financial sector has seen little innovation in the last several decades, both the DeFi and CeFi industries are providing huge advances in propelling the sector forward.

While each has its own benefits and risks, there is no denying that they both are providing a more inclusive approach and better access to financial services, improved infrastructure, attractive yields, and together promote more secure and innovative financial tools.

Weighing Up The Advantages And Risks

While both industries provide a giant leap forward for the financial movement, which one you personally chose to engage in is up to you - realistically you can use both options if you wish.

As we’ve outlined the benefits and the risks of DeFi vs CeFi, the choice is up to you. Falling into the CeFi category, Oobit provides a streamlined and easy to use platform on which you can buy, sell, store, manage and exchange a wide range of cryptocurrencies. Get started for free today.

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