What is Defi and Cefi | Decentralized finance vs. Centralized finance

  • Centralized Exchange (CEX)
  • Using a traditional cryptocurrency exchange, for example, Binance, Kraken, or Coinbase, users send funds to the exchange to manage them within an internal account. Though funds are stored on the exchange, they are kept outside users’ custody. They are vulnerable to threats in case the security measures put in place by the exchange fail.
  • Due to this, centralized exchanges have been the target of various security attacks. Customers on the centralized exchange do not mind sharing their personal information or putting funds into these companies’ custody as they consider central exchanges trustworthy.
  • Moreover, large exchanges have complete departments with customer service teams offering assistance to customers. The high level of customer support provides the customer with comfort, strengthening the feeling that their funds are in good hands.
  • The Flexibility of Fiat Conversion
  • Centralized services represent more flexibility than decentralized services when turning fiat to cryptocurrency and vice versa. Conversion between cryptocurrency and fiat usually requires a centralized entity; however, Defi services do not offer fiat that flexibly. Onboarding customers in the Centralized Finance (CeFi) ecosystem is quite convenient and can offer a better customer experience.
  • Cross-chain services
  • CeFi services support the trading of LTC, XRP, BTC, and other coins issued on independent blockchain platforms. Defi services do not help these tokens because of the latency and complexity of performing cross-chain swaps. CeFi can overcome this issue by getting custody of funds from multiple chains. It is a significant benefit for CeFi as many of the frequently traded and highest-market-cap coins exist on independent blockchains and don’t implement interoperability standards.
  • Permissionless
  • Users do not require permission to use Defi. With CeFi, users need to complete a KYC process to access services, which means they have to share their personal information or deposit some money before accessing services.
  • Users can directly access the services using a wallet and without providing personal information or depositing money with Defi. It is because Defi is openly accessible to all parties, without any barrier or discrimination.
  • Moreover, individuals who plan to build on top of a decentralized platform can do that freely. It provides a high degree of accessibility and supports collaboration within the community. Products developed within the Defi ecosystem are designed to benefit from each other. That is why Defi products are also known as money legos.
  • Trustless
  • The most significant benefit of using Defi services is you don’t need to trust that the service will perform as promoted. Users can authenticate that Defi services perform as intended by auditing their code and using external tools such as Etherscan to identify if a transaction was correctly executed.
  • Quick Innovation
  • Another significant advantage of Defi is its quick rate of innovation. The Decentralized Finance Ecosystem constantly builds current capabilities and experiments with new capabilities. The build-centric nature of the Defi space has transformed into a rich ecosystem embedded with ground-breaking financial services. Defi space has been working to deliver alternative ways to solve the issue in functionalities where centralized financial services have thrived. For example, to overcome DeFi’s inability to facilitate the transfer of incompatible cryptocurrencies such as BTC, solutions like tBTC and WBTC that are compatible with decentralized protocols eliminate the gap by behaving as tokens pegged to the value of BTC. It enables Defi users to access Bitcoin via Defi without requiring them to use the token directly.
  • dYdX: The dYdX protocol allows users to access derivative products in a decentralized environment. dYdX also supports peer-to-peer borrowing, which means you can earn passive income while your assets are held on the exchange.
  • Loopring Exchange: The Loopring platform features an order-book-based DEX protocol known as zk-Rollups, which validates transactions using zk-SNARKs technology. Validity proofs update and verify the DEX asset holdings, make transactions more private, and improve the scalability of the Ethereum network.
  • Binance DEX: The decentralized iteration of the centralized Binance platform, Binance DEX operates through a web-based application programming interface (API) that uses a similar user interface to Binance.com. The exchange offers the same functionality as a typical DEX but also integrates TradingView charts with technical indicators. By bringing conventional tools to a DEX, Binance eases the transition to unfamiliar infrastructure.
  • DDEX: The DDEX exchange facilitates decentralized margin trading. Margin trading occurs when users borrow funds to amplify their potential returns. Margin trading may carry a high degree of risk as market downturns amplify losses of borrowed money.
  • Uniswap: Users of the Uniswap platform can swap any two Ethereum-built assets seamlessly atop an underlying liquidity pool. These highly accessible liquidity pools ensure that Uniswap remains permissionless and trustless, which democratizes lending and borrowing on the platform.
  • Curve: Like Uniswap, Curve is a decentralized exchange that utilizes a liquidity pool. However, Curve specifically caters to stablecoin trading, allowing users to trade between them with low slippage and fees — all through the use of an algorithm that optimizes trading pairs.
  • SushiSwap: SushiSwap emulates Uniswap, except that it started by offering liquidity providers a token known as SUSHI (which Uniswap later also provided with its UNI token). On Uniswap, the trading fee is 0.3%, but SushiSwap allocates the 0.3% differently, distributing 0.05% in the form of SUSHI tokens.
  • DODO: Like others in this segment, DODO is a liquidity protocol. However, the DODO platform employs its Proactive Market Maker (PMM) algorithm to provide adequate liquidity.
  • Balancer: Balancer builds on the concept of Uniswap but has more liquidity pool flexibility. While Uniswap has liquidity pools of equally weighted token pairs, Balancer allows for pools with different ratios (80/20 or 70/30 DAI/ETH, for example). Although a Balancer pool could be a mere token pair, it also allows for liquidity pools with as many as eight different assets.
  • Bancor: The Bancor exchange model does not require a second party to execute a trade. Instead, you can exchange your ERC-20 tokens for Bancor’s native “smart” Bancor Network Token (BNT). You can then exchange these for other ERC-20 tokens on the platform.
  • Kyber: The Kyber protocol operates as a stack of smart contracts that run on any blockchain, not just Ethereum. Kyber utilizes liquidity pools to facilitate peer-to-peer swaps like other exchanges operating without an order book.
  • 1inch Exchange: The 1inch platform aggregates liquidity from different DEXs to minimize slippage on large orders. Slippage occurs when there is insufficient liquidity on one platform, resulting in a buyer paying more to buy an asset than was expected. Capital is made available to a trader for the best price possible by eliminating slippage.
  • Binance
  • Coinbase

--

--

Get the Medium app

A button that says 'Download on the App Store', and if clicked it will lead you to the iOS App store
A button that says 'Get it on, Google Play', and if clicked it will lead you to the Google Play store