What is DeFi? How is it different from CeFi? (DeFi vs CeFi)

DeFi vs CeFi

DeFi is a term that people in the crypto space hear almost every day and probably now know by heart. But, those who are new to this industry or just starting out in the crypto market may not be well aware of DeFi and what it actually is. For those and everyone else who wish to know more about DeFi, including how it is different or better than CeFi, here’s everything about DeFi vs CeFi.

Decentralized Finance (DeFi) and Centralized Finance (CeFi) are two major categories of the finance industry, which loosely define the way different financial services are delivered. Let’s start with the basics.

What is Decentralized Finance (DeFi)?

In simple terms, decentralized finance refers to a system where access to financial services is provided in a decentralized manner, i.e. the control is distributed among multiple people or points rather than single-point management.

In technical terms, DeFi refers to the use of a decentralized network such as blockchain to avail and provide access to financial services like payments, trading and loans.

This type of financial services system is independent of centralized control and works without middlemen. Smart Contracts are computer programs that are used in the DeFi space to ensure a secure and errorless exchange of financial services directly (peer-to-peer) between the trading parties.

DeFi essentially offers a way to provide/access financial services without the need for middlemen such as banks, financial companies, card providers and others. Cryptocurrencies, blockchain ecommerce and decentralized exchanges are some examples of DeFi.

What is Centralized Finance (CeFi)?

Centralized Finance is our current financial system, where almost all kinds of financial services, from banking to loans, trading, money transfer, etc. are managed and processed by a centralized entity or organization such as banks.

In the case of CeFi, all customer transactions, requests and grievances are addressed by the centralized entity providing financial services.

Decentralized Finance Vs Centralized Finance

The primary difference between DeFi and CeFi is the way financial services are provided.

In the case of CeFi, users’ funds are handled and managed by a centralized institution like a bank, which approves every single transaction in the user’s account.  Banks can deny or approve a transaction on its terms. Similarly, if a person needs a loan, they will have to seek approval from the centralized institution and then there is a lot of paperwork and a lengthy process involved, which further increases the timeline and cost of lending.

In a DeFi system, however, the control is always in the hands of users. They can send/receive money to anyone any number of times and do not need to seek permission from anyone. Similarly, people seeking loans can connect directly with people offering loans and can trade securely on a blockchain platform using programmable smart contracts. This kind of system is free of human involvement and errors.

In CeFi, the accessibility is governed by certain norms and may be denied to users who do not fulfill the conditions. Also, the reach of a CeFi system or services is limited to a particular location. DeFi, on the other hand, is free from such restrictions and provides seamless access to digital financial services for all users irrespective of their locations.

Other pros of the DeFi system include increased transparency (information is publicly available in DeFi, unlike centralized systems which are privately managed) and resistance to hacking and other threats that CeFi systems are normally prone to.

However, a decentralized finance system also has some limitations. For example, they do not offer personalized customer services as the CeFi networks do. Other cons of DeFi include a complex user interface (for beginners) and no support for fiat conversion.

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