CeFi vs DeFi: Exploring the Advantages and Disadvantages

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Techspace - Decentralized Finance (DeFi) is a trend among crypto asset lovers. However, do you know the difference between Centralized Finance (CeFi)? This is important because crypto asset users do not understand the details of crypto technology even though the popularity of blockchain technology is skyrocketing. So, if you don't know the difference, you can find the answer in this article!

What is Centralized Finance (CeFi)?

Blockchain describes CeFi as a financial service that facilitates its users through a centralized system. Users can borrow or lend their crypto through the Central Exchange. Central Exchange is the authority in CeFi that manages crypto funds, so you must deposit your data to your assets with CEX on a trust basis.

You can access funds through your Central Exchange account, but you cannot manage them yourself. The system will identify the coin being traded and the fee amount from that trade. CeFi aims to create a fair trading ecosystem so that all transactions must comply with the rules of the exchange.

In addition, at CeFi, some intermediaries have control over your assets and money. Therefore, you have to pay administrative fees, service fees, and other fees. This system is not only used by cryptocurrencies, but conventional financial services inspire the concept of CeFi in crypto assets. This financial service system has been around for a long time, so it is much more established than DeFi, which is still a new invention.

What is Decentralized Finance (DeFi)?

For a complete explanation, read also: What is Decentralized Finance and How Does it Work?

DeFi is the opposite of CeFi. In DeFi, all transactions are not carried out through several institutions but directly between users through the application. The application runs on blockchain technology which is automated by a Smart Contract system that runs on the Ethereum system. In addition, DeFi also creates a fair, transparent, and accessible financial system so everyone can participate. DeFi also varies, ranging from savings and loan activities to yield farming.

Advantages and Disadvantages of CeFi

A centralized system provides the flexibility of conversion between currencies, both fiat, and crypto. This system is claimed to be fairer because sales are carried out centrally. CeFi users are subject to the rules established by Central Exchange, so sellers and buyers obey the same laws. The system also provides a third party that ensures the integrity of each transaction. In addition, CeFi also allows for trading between cryptocurrencies.

Despite its many benefits, CeFi also has its drawbacks. The data requested by Central Exchange is very vulnerable to hacking. However, its existence makes transactions more flexible if you want to buy crypto with fiat money. In addition, the drawback of CeFi is a lot of transaction and admin fees that need to be incurred.

Advantages and Disadvantages of DeFi

Apart from that, DeFi allows you to have complete control over your crypto assets. DeFi does not require third-party authorization in transactions. What is needed are the rules that are translated into the Smart Contract algorithm. The protocol will execute the transaction if the second party fulfills all the prerequisites in the protocol that has been created. This means you don't have to pay admin fees and transaction fees paid to the intermediaries. In addition, all transactions are carried out transparently so that the DeFi system is minimally abused. Because the DeFi system runs on apps, and the DeFi application itself continues to evolve, financial services on DeFi are more diverse than CeFi.

However, the downside of DeFi is the complexity of the Smart Contract protocol, so you can't trade crypto assets directly with fiat money.

CeFi vs DeFi

The most fundamental difference between CeFi and DeFi is to whom you as the user are more likely to entrust asset management. Do you want to entrust your crypto assets to a centralized institution? Or instead, assign it to Smart Contract technology? CeFi is still driven by human authority, while DeFi is run by technology in the form of Smart Contract protocols. In addition, the issue of CeFi vs. DeFi also relates to convenience in choosing a financial ecosystem.

On the one hand, CeFi is an established system and has been used in conservative finance activities for many years. However, the number of variations in financial services is limited. Meanwhile, DeFi offers an ecosystem that continues to innovate rapidly. One new capability developed by DeFi can be quickly replaced with another capability. Future transactions between independent blocks may be carried out with protocols as well.

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