Payments, lending, and borrowing were used to be available only through established financial institutions and banks. However, with the introduction of Blockchain technology, the role of traditional banking has substantially changed.

As cryptocurrency began gaining traction over the years, CeFi (centralized finance) and DeFi (decentralized finance) have also caught the attention of people who had interest in cryptocurrency and its related services.

But before anything else, let’s get to know CeFi and DeFi more so we could get a good grasp of their many pros and cons.

What is CeFi?

Before the introduction of DeFi, the standard for trading cryptos was Centralized Finance or CeFi. It has a monopolistic command over the cryptocurrency industry.

All crypto trade orders in CeFi are processed through a central exchange. Funds are managed by specific individuals who run the central exchange, which means you don’t hold a private key that’d allow you to access your wallet.

The central exchange also determines which coins are listed for trading or how much fees you must pay to trade on their exchange.

To summarize the concept of CeFi, when you buy or sell cryptocurrencies through a centralized exchange, you don’t own them. You’re bound by the rules set and imposed by the centralized exchange.

What is DeFi?

The decentralized exchange doesn’t involve any exchange. The entire process is controlled and operated by automated applications built on top of blockchain platforms.

DeFi also establishes an impartial and transparent financial system in which anyone can take part in — by using blockchain technology to empower unbanked people with access to financial and banking services.

DeFi’s system provides asset storage, yield farming, borrowing services, crypto lending, and other services.

It’s vision is to build an open-source, transparent, and permissionless financial services ecosystem.

With DeFi, you’re provided with a fully accessible wallet and you have full control over your assets.

Furthermore, users who want to participate in DeFi must access its services through decentralized applications (dApps) built on blockchain platforms.

How different is CeFi from DeFi?

Users of DeFi have faith that the technology will perform as expected to carry out the services being offered.

Users of CeFi, on the other hand, trust the people in the business to manage funds and carry out the business’s services.

Who or what users should trust, people or technology?

Written By: Sharmin Rahman

Image: TJ