What Is Defi
Defi is a new-age financial ecosystem where buying, and selling Crypto assets can happen without third parties. Defi transactions occur on a peer-to-peer basis. These transactions are not bound by geography and can happen instantaneously. Defi transactions are recorded on Blockchains, which make them secure, full proof, and trackable.
Features Of Defi
Decentralised Finance (Defi) systems eliminate third parties by using Smart contract-based applications. Smart contracts are code-enabled algorithms that execute when agreed-upon conditions are met by the parties involved in the transaction. In the current financial system, banks act as mediators to execute transactions. This gives banks enormous control over user assets. Moreover, banks can also be exposed to security threats and outages.
Read more: What are Smart Contracts
What Is Cefi
To understand Cefi let us step back and have a small precursor about money and the role of Financial Institutions.
Money is as old as civilization itself. Gold, Silver, Cattle, and Seashells are a few examples of money used by our ancestors. But money needs to qualify on a few parameters to be used on a mass scale. These parameters are 1) Scalability 2) Portability 3) A store hold of wealth.
Gold, Cattle, and Seashells have an intrinsic value but do not fare well in terms of portability and scalability. To solve this problem, paper currency was introduced. Paper currencies were backed by commodities till 1971 when Richard Nixon decided to de-link the US dollar with Gold. Thereby creating Fiat currencies.
From then on we have seen an uptick in banks and Financial institutions managing and controlling the best part of citizen wealth. With the advent of Crypto and increasing interest in the domain, Crypto exchanges (Cefi) came into existence.
Features Of Cefi
Centralised Finance ( Cefi) institutions are marketplaces for people to buy and sell Crypto. Users can purchase Cryptos they wish to at the click of a button instead of being part of a Blockchain.
With a large number of buyers and sellers, Crypto exchanges offer liquidity. Orders can be placed and settled instantaneously. Good Crypto exchanges take adequate measures to keep customer funds secure. Example: Zebpay stores 98% of its funds in Multi-signature cold wallets. These are wallets that are not connected to the internet, thereby eliminating the chances of hacks.
Centralised exchanges have features such as a Customer Support division to handle queries. Most of them also have Blog sections that can be used as a library for Crypto enthusiasts. The best part of Cefi exchanges is that transactions are settled instantly.
Defi vs Cefi: What Are The Major Differences
Control Over Assets:
DeFi gives the users complete control over their assets. While this is great, users should weigh their options and figure out if they can keep their assets secure. CeFi Crypto institutions have several security protocols in place to keep assets safe. Investors must do a thorough analysis before choosing the exchange on which they would like to trade.
Information:
Users are identified with a public key in a DeFi system. Whereas users provide personal information such as Identification proofs, Proof of Address, and Photographs when they trade through CeFi options.
Customer Support:
It is a fact that most users do not have in-depth knowledge of Blockchain and Crypto. While this is the scenario all over the world, users should not be discouraged from investing in Crypto as they also learn through investing. Customer Support terminals in Centralised Exchanges help users resolve their queries, whereas this facility is not available in DeFi.
Costs Incurred:
Centralised exchanges can choose to offer services with a minimal transaction fee. Since user identity is available to these exchanges, any unlawful transactions can be traced. DeFi on the other hand has relatively higher transaction fees to create a barrier of entry for spam. Also, the transaction fee on a Defi blockchain depends on the network congestion.
Read more: Defi Liquidity Pools
Real Use Cases Of Cefi
Some of the well-known Crypto exchanges today are Binance, Coinbase, FTX, and Zebpay to name a few. These exchanges not only offer buy and sell services but also allow users to lend and borrow Crypto. Some of these exchanges also provide services such as Staking, Future, and Options. These exchanges are also a great place to learn more about Crypto
Real Use Cases Of Defi
1inch and Uniswap are two well-known Defi exchanges. Uniswap for example runs on the Ethereum blockchain. The Uniswap community decides the direction of the projects being onboarded with the help of the UNI token, which is used for voting. Since Uniswap runs on Ethereum, there is a GAS fee attached to transactions. The GAS fee is the fee paid to miners who validate the transactions and create blocks for the Blockchain.
Final Thoughts On Who Is The Winner
Both Defi and Cefi systems come with their pros and cons. DeFi works better if a user wants complete autonomy over assets. DeFi systems also work well under extremely volatile conditions because of the distributed nature of the system. CeFi on the other hand is a clear winner in terms of user-friendliness. CeFi systems are improving with stronger security protocols by the day. Which one to choose depends on investor priorities.
