DeFi vs CeFi: these terms seem a bit complex, but in practice, they are things that apparently already existed, at least in their philosophical conception, we just didn’t know that.
DeFi is an abbreviation for Decentralized Finance, which means decentralized finance.
CeFi is an abbreviation for Centralized Finance, that is, centralized finance.
Who has never ventured financially or at least wanted to make a short-term investment? From that small bet on the Mega-Sena da Virada or a simple deposit into savings.
Those who are used to the financial market and finance in general certainly know or at least have heard of these terms, however, interacting with them and knowing how to distinguish them is what we are going to talk about.
Do not think that all of this is limited to the blockchain universe or something related to cryptocurrencies, although they are related, but they may be closer to us than you think.
Let’s see a little more detail about them and what they refer to.
CeFi: centralized finance
Let’s start talking about what is more typical of what we are used to, the most traditional. The term CeFi therefore refers to centralized finance. Let’s go deeper into this!
Centralized finance is any and all types of financial activities that have a central authority, that is, an intermediary, through which transactions or activities are performed.
Roughly speaking, we can say that banks, finance companies, lottery houses, bookmakers, or even the famous moneylenders or bookies, are centralized ways of understanding this intermediary based on a central authority.
To better understand, it is necessary to move away from the traditional conception and immerse yourself in the digital and cryptographic space, thus, it is possible to understand these intermediaries as cryptocurrency brokers.
When it comes to these intermediaries, we can mention the best known ones like Binance and OKX or even the infamous FTX, which recently declared bankruptcy.
The business model in this format takes place through the custody of third parties, where the private keys of the cryptoassets are in the possession of the brokerage houses. This is one of the main aspects that differentiates CeFi from DeFi.
The Tradition of CeFi vs DeFi
We cannot rule out that centralized forms combine the advantages of simplicity, security and convenience for the investor, even if this brings the risks of trusting third parties.
In decentralized protocols, we will see that the risks of trusting third parties are nullified, although it is not possible to nullify the risks arising from flaws and vulnerabilities in smart contracts, which we will see later.
In centralized finance, it is possible to lend money, buy and sell digital assets, make payments using a debit card, among other services such as leverage operations with derivatives and futures.
Exchanges have different departments with customer service, which can convince the user, maintaining the feeling of trust in the provider.
DeFi: new trends in the financial market
When we talk about the subject and put CeFi vs DeFi in vogue, we have the impression that they are essentially different things, but we will see that this is not the case.
They are not exactly different things, since it is necessary to understand the financial essence of both, despite the existing methods in each one.
DeFi is based on decentralized networks such as blockchain and is built on the principles of transparency, openness and resistance to censorship.
This means that users can access financial services without having to go through a traditional financial institution such as a bank.
It is difficult to think of decentralized finance in today’s world, as we are more used to conventional finance, banks and intermediaries.
When we deal with DeFi, we reach a level of coding, where trust in third parties is no longer necessary, since smart contract protocols perform these operations without the need for trust or even permission.
As mentioned above, it is also not necessary to collect user data, in addition to providing anonymity and resistance to censorship, since they are executed in parallel networks and infrastructures in relation to centralized institutions.
DeFi has gained popularity in recent years because it allows for more accessible and inclusive financial services.
For example, DeFi platforms can offer lower fees and faster transaction times compared to traditional financial institutions.
Furthermore, DeFi allows for the creation of new and innovative financial products such as stablecoins and lending protocols that can offer new opportunities to users.
DeFi offers more control and flexibility, but it also comes with additional risks.
Example of DeFi services
Below I will show you some examples of decentralized protocols, such as AMM (Automated Market Maker), where you can exchange assets in a very simple interface.
In addition to the one mentioned above, I will give examples of trading interface with charts and order books. Both are known as DEX (decentralized exchanges), however, this second one is a little more complex.
Finally, I will bring some examples of decentralized loan protocols, where it is possible to leave some asset as collateral, in exchange for the loan of others.
To exemplify decentralized exchange platforms, let’s understand how those that have an AMM-style user interface, I name three of them, Tinyman, Humble and Pact.
As an order book exchange, I give Algodex as an example.
When it comes to loan protocols, I bring Algofi.
As a lending protocol in Ethereum, it is possible to use Aave. It is a liquidity protocol that also supports other networks such as Arbitrum, Avalanche, Optimism and Polygon.
When it comes to exchanges and liquidity we can mention Uniswap, a popular DEX that also supports Polygon, Optimism, Arbitrum and Celo network.
Alternatively, using layer 2, we have Loopring, as the first zkRollup for Ethereum. Fast, secure and 100x cheaper.
Risks inherent in DeFi vs CeFi
Tokens on decentralized finance platforms are very volatile, just like cryptocurrencies. As such, token prices can rise or fall very quickly.
The security of the protocols, even if audited, may present inconsistencies or vulnerabilities.
Just to give you an idea, it is possible to consult different information in indexers such as DefiLlama. Attacks and hacks over the past 5 years have resulted in the loss of over 5 billion dollars worth of DeFi protocols.
All this makes us understand how risky DeFi can also be, to the detriment of centralized custody services.