DeFi vs. CeFi: A Cross-Comparison

July 20, 2022
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Access to financial services in the digital asset space has become a key area in the current financial landscape as well as a large topic of discussion in mainstream media. CeFi (Centralized Finance) is one realm that provides users with access to some of the lucrative benefits of the crypto industry via intermediaries with added security.

DeFi (Decentralized Finance) is the newest financial realm to emerge, creating a permissionless, inclusive, and easy way to engage in exciting and highly attractive opportunities. It’s stretching the concept of trading and swaps, yield-generation, lending, and more to new heights, completely changing the way people think about and use finance today.

Each area and industry comes with its own set of pros and cons - let’s take a deeper dive and explore what they’re really all about. 

What is CeFi?

CeFi was originally the way users traded cryptocurrencies, that is, through a CEX (Centralized EXchange) - and it’s still widely used today. A CEX, such as Coinbase or Binance, is a third-party platform that stores your cryptocurrency for you at the expense of forfeiting control of the private keys to your wallet - in other words, they’re more convenient and have higher liquidity but are considered risky in some regards.

This CeFi space provides many of the passive income and yield-generating opportunities DeFi offers, but with often easier-to-use tools that are similar to traditional financial products. Some examples are trading digital assets, crypto debit/credit cards, lending/borrowing, margin/futures trading, to name a few.

Additionally, while many claim CeFi platforms are unsafe in some regards, many of the modern-day exchanges do provide offline “cold” storage or insurance for your funds. This gives users some peace of mind when it comes to the safety of their tokens, acting similarly to an FDIC-insured bank.

All in all, while CeFi is generally easier and more familiar to the traditional investor, you don’t technically own your tokens and have to follow the rules of the CEX on which you store them, which can range anywhere from trading halts to the inability to withdraw funds when needed. 

The Vast World of DeFi

While CeFi set the stage for crypto trading, DeFi truly stole the show and transitioned the world into the next financial paradigm and revolution. With DeFi, there are no third party exchanges - instead, protocol interactions like trading are entirely facilitated by smart contracts on the blockchain.

It’s completely open-source and transparent code, facilitating greater trust as a whole. Moreover, anyone across the globe can participate - there are no limitations or barriers to entry, providing financial freedom and opportunity to the masses never seen before in the financial service space.

Users also have full control of their private keys and digital assets, making them the sole owner of their tokens. This is indeed more secure in some ways but presents a risk of losing your funds if your private key is misrecorded or forgotten. 

Some of the key features and benefits that DeFi brings to the table include token swaps, decentralized credit markets (lending/borrowing), yield farming, staking, and more. Many of these benefits allow for seamless access to funds in addition to reaping the rewards of very high interest rates on your funds, making them extremely attractive to the average investor.

Key Differences

There are several key differences between CeFi and DeFi that are critical to note, especially to determine which one is the right avenue for you to take. One thing to remember with this comparison is that, regardless of these differences, both strive to increase the global adoption of the crypto market and digital asset trading, 

First, let’s start with privacy. It’s without question that privacy has become far more desired in today’s world, for a variety of reasons. With CeFi, since users need to go register through a CEX, they’re typically required to enter in personal information such as their name, address, driver’s license, and passport, otherwise known as KYC (Know Your Customer) verification. On the other hand, with DeFi, this is not required - all you need is a web wallet (i.e. MetaMask or Coinbase Wallet) to get started, so you can keep your privacy with minimal setup time.

In terms of human support and interaction, many CeFi exchanges provide customer service via phone or chat, making it easy to resolve any issues you may have. The downside to DeFi is that you need to rely entirely on the smart contracts and protocol to execute your orders and FAQs or tutorial videos to educate yourself, which can be time-consuming.

Another important difference is that while they both offer many of the aforementioned features and benefits, DeFi protocols tend to provide much higher yields and more attractive rates, while also making their accessibility far easier than a CeFi platform. This may be partly because CeFi entities are often required to comply with regulators and other legal forces, restricting them in regards to what they can offer their customers. 

Which Will You Choose?

This list is by no means exhaustive but covers some of the fundamental questions, answers, and key points when evaluating both options.

So which one is right for you? If you’re someone who prefers privacy, permissionless activity, and true asset ownership, then DeFi is your go-to choice. However, if you’re okay with sacrificing a little privacy for the benefits of convenience and security, then CeFi would likely be your best option.

One thing’s for sure, though. With Coinchange, we offer the best of both worlds for our customers. We give our users the safest method to earn the highest yields in the crypto space, tapping into the APY offered by the top DeFi protocols by scanning the market for the best yields possible. We’re merging CeFi and DeFi to create a one-stop-shop platform for all your needs - buy your crypto, keep it safe, and earn passive income indefinitely with Coinchange.

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