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CeFi vs DeFi: Power to the people?

Created By : Admin

CeFi stands for Centralised Finance, allowing people to use their holdings as collateral for earning interest and loans. Organizations act as the lenders in this case and take custody of the client’sholdings which are then used to provide interest to lenders. This means the parties involved must trust the organization to manage their funds.

Examples of CeFi:

. Binance

. Coinbase

. BlockFi

DeFi stands for Decentralised Finance, which utilises smart contracts to make the process trustless and remove the need for a third-party middleman to be involved. For those of you who don’t know, smart contracts are lines of code that are programmed to execute conditionally (i.e. party 1 sends $100 to a contract and party 2 sends $100 of $TOKEN. The smart contract will then swap provided both parties have fulfilled the terms of the contracts).

Examples of DeFi:

. Compound

. Uniswap

. Binance DEX

. MakerDAO

Advantages of CeFi:

1. Cross-chain trading is commonplace

2. Fiat integration with CeFi is more significant than with DeFi

3. Risk-transference: With CeFi, the risk is passed down to the middleman. The organization involved guarantees minimum returns and safety of the users’ assets as they bear custody of the funds

4. Easier to use/understand and more user friendly for beginners

Advantages of DeFi:

1. Trustless: No need for the user to trust any third-party middleman

2. Permissionless: Permission is not required to use the services, making it censorship free (no age limits, no KYC needed etc)

3. Users are completely in control of their funds

Disadvantages of CeFi:

1. Lack of transparency

2. Heavily reliant on the third-partymiddleman

3. Security — CEX’s are more commonly attacked by hackers, so your funds are at risk

4. Custody over your funds — “Not your keys not your coins”

Disadvantages of DeFi:

1. Heavily reliant upon code — one small error in the code or an unauthorised change in the code can be detrimental

2. Non-custodial so you are solely responsible for your funds as an individual

3. Complex interfaces can be difficult to use from a beginner’s point of view

4. Uncertainty on a network infrastructure level, for example, the migration of PoW to PoS with ETH 2.0 may have flaws that present a risk to DeFi projects built atop of the Ethereum network (inheritance of flaws)

5. Scalability is a huge drawback for DeFi solutions as transactions can be both costly and take a very long time to confirm

6. Element of risk — Even though DeFi removes the centralised authority from financial systems, the risk is still there to an extent; for example, the CEO of a coin could rug pull

To conclude, decentralised solutions are gaining traction at an enormous rate in the cryptocurrency industry however DeFi as a whole is still in its very early stages and although it is promising, there are some teething issues as mentioned above. In the future, we could see DeFi systems become more robust, allowing for day-to-day decentralisation and automating of many things we do, and move to a trustless and permissionless society but first, they must overcome the major issue of scalability to be used practically, and complex UIs which can be intimidating to beginner users.