- Decentralized Finance is the core concept behind cryptocurrency—the ability to remove a centrally located authority when dealing with finances
- Crypto traders used a centralized finance system to maintain and distribute. The crucial aspect of CFI is its application of central authority over cryptocurrency
- With the recent downfall of FTX, it has become clear to many that CeFi organizations are becoming obsolete
There is always an equal and opposite force or reaction for every force or action. This is a fundamental fact in almost every aspect of life, and the same is true for cryptocurrency. When cryptocurrency first made its global debut in 2009, many crypto exchange platforms emerged.
Each was trying to outdo the other by offering new ways of handling crypto, new consensus mechanisms and new services. The Golden age of crypto led to the advancements in blockchain technology and many users today still look back at such a time fondly, especially with the current crypto winter. Amid the consistent uprising of the new concept, two key aspects emerged; Centralized Finance(Ceci) and Decentralized Finance(DeFi).
Opposite methodologies are applied to cryptocurrency, each striving to prove different concepts for applying and using crypto. Before anyone could realize it, many debated which idea was better, so the CeFi vs DeFi war began, each trying to outdo the other. Finally, the answer to this debate has come to a close.
What is DeFi
Decentralized Finance is the core concept behind cryptocurrency—the ability to remove a centrally located authority when dealing with finances. There is no involvement of a crypto exchange platform, and the process operates through automated applications built on blockchain technology.
This financial system ensures that each individual has complete control over their cryptocurrency.
It caters to unbanked people to access more financial services. This factor is the main contributor behind Africa’s massive crypto adoption rate. It provided peer-to-peer services and transactions for all products and services of a traditional banking system but without the hectic processes of a bank.
DeFi uses blockchain technology to provide an immutable ledger that prevents any alteration of the data. It also incorporates open-source smart contracts that define the basic rules of various DeFi protocols. Decentralized Autonomous Organizations govern DeFi protocols where token holders participate across multiple decision-making roles to decide the rules and tokenomics. Blockchain Explorer accomplishes this task, allowing anyone to track the wallet transaction in the crypto ecosystem.
According to Rahagol Menon, vice president at WazirX, a crypto exchange platform stated that the main objective for DeFi was to enable users to acquire cheaper loans and better deposit and insurance rates.
- Permissionless – users do not require permission to use DeFi hence they do not require any form of personal information to perform a transaction. Users have direct access to these services via crypto wallets. In addition, the blockchain technology incorporated within DeFi allows anyone with the expertise and know-how to build their DeFi platform.
- Truthless – regardless of the lack of personal information, all processes are automated. This means that the user has nothing to worry about. In the case of maintenance, a user can authenticate that DeFi services.
- Quick Innovation – DeFi has grown exponentially over the past few years and is still at the forefront of creating new consensus mechanisms and platforms that could potentially revolutionize the crypto ecosystem. This consistent growth rate is crucial and has inspired many crypto traders to opt for DeFi features.
What is CeFI
Before DeFi came into the picture, crypto traders used a centralized finance system to maintain and distribute. The crucial aspect of CeFi is its application of central authority over cryptocurrency. In a nutshell, it generally carries a firm grip on cryptocurrency t provide its users with better and safer transactions.
In CeFi, all orders and transactions are placed or channelled within the crypto exchange platform. This means that the crypto exchange platform staff members handle user crypto coins.
In addition, the crypto exchange platform also determines the type of crypto coins they use for trading and how much gas fee you’ll pay if you trade using their crypto exchange platform. Essentially a user only owns part of their crypto coins while the exchange takes a bit of it as a service fee for hosting and handling.
Generally, many have argued that CeFi goes against the very foundation of cryptocurrency by installing a third party to handle, monitor and secure crypto organizations.
- Centralized Exchange platforms – this is the use of crypto-dedicated organizations such as Binance and Coinbase to manage the crypto coins of users. Although generally, the exchange stores the funds, the user has full access to their funds. This has both been a merit and a demerit. Since the crypto exchange platform receives the funding, the user can focus on different things knowing that the exchange can host their investments. However, this merit is the root cause of their primary demerit; crypto security breaches. Malicious users consistently try to bypass the set blockchain security; however, the recent cases of crypto hacks have reduced.
- Flexiilitbity – CeFi combines cryptocurrency and a centralized system in layman’s language. It has a variety of capabilities. Such companies can easily convert fiat currency to crypto and vice versa.
- Cross-Chain Services – Most crypto exchange platforms incorporating CeFi can perform complex cross-chain swaps, which would be difficult for DeFi. Its underlying blockchain technology enables it to accomplish this task by acquiring custody of funds from multiple chains. Due to this capability, multiple crypto exchange platforms offer CeFi services attracting crypto traders who target frequently traded and high market cap coins.
The conclusion of a war
With the recent downfall of FTX, it has become clear to many that CeFi organizations are becoming obsolete. Man experts argue that trying to govern as a concept with the very thing it is fighting against is a recipe for disaster. It is the amount we acknowledge that there are crucial components in CeFi that Defi generally lacks, such as the cross-chain mechanism.
Despite this, there are numerous instances of the CeFi system failing. CeFi crypto exchange forms such as Celsius, Hodlnaut and Vauld are going bankrupt and halting withdrawals during his intense crypto winter. Unlike traditional government systems, CeFi organizations do not guarantee a return of funds.
Another instance involves the fall of TERRA Luna, which created a ripple effect throughout the entire cryptocurrency ecosystem. It led to the fall of Three Arrow Capital, an organization that heavily invested in Terra Luna and Bitcoin Grayscale Trust. According to Menon, CeFi exchanges are not a long-term goal.
Instead, they significantly apply as entry levels for crypto traders before they branch into NFTs and DeFi crypto exchange platforms. Experts believe that the main failing point of CeFi is its users. The more greedy or ambitious a user becomes, the more strain CeFi organizations have to ensure they generate those expected returns.
CeFi has ultimately lost this raging debate. Despite its shortcomings, DeFi still offers users the hope for more new mechanisms. Provide more elaborate systems, and they have absolute control over their cryptocurrencies.