CeFi vs DeFi: What Is The Difference?
What are CeFi and DeFi?
CeFi and DeFi stand for ‘centralised’ and ‘decentralised’ finance. The beginning of bitcoin (BTC) in 2009 enabled people to decentralise themselves from government issued money like the US dollar, but this was only the first step towards the decentralization that the blockchain allows now. There is a misconception that all cryptocurrencies are DeFi, yet this is not quite the case. Decentralised and DeFi are not directly interchangeable.
Decentralised means that the currency is not run by a central authority like the government, while DeFi is a branch term for the financial system that operates on the trust of a decentralised blockchain. So while most cryptocurrencies are decentralised, there is a difference between CeFi and DeFi.
What enabled DeFi?
While Bitcoin enabled people to send money across the world and trade to make profit, the limitations of this blockchain were challenged by Ethereum . Ethereum blockchain offers the possibility to create smart contracts and build services such as landing and borrowing, that go beyond the simple exchange of the token. Ethereum also enables the development of applications on the blockchain (dApps).
Essentially, this means that a new financial system can be built on the trustless protocol of blockchain platforms.
CeFi vs DeFi is not a case of ‘normal money’ vs ‘crypto' as both belong to the crypto world. For example, popular exchanges such as Binance and Coinbase operate with CeFi as the corporation stands as the lender and holds the trust (and risk) between client and asset.
As mentioned above, the most important part of the puzzle are smart contracts. Like any other contract, it fixes a set of rules for how the transaction will proceed. The key difference here is that this contract is embedded in code, and its execution is automated. This is what really meant DeFi could take off in 2014.
MakerDAO is the biggest project that was credited with the birth of DeFi. It introduced Dai, a stablecoin soft pegged to the USD. The essence of the Maker protocol is to allow users to generate Dai by borrowing it using a crypto collateral. This happens through Oasis.app, which is the most used entry point to the Maker Protocol.
What makes DeFi different?
One difference between CeFi and DeFi is the presence and absence of the ‘middle men’. While CeFi relies on middle men to regulate transactions, DeFi uses smart contracts to secure an agreement.
Another difference is that because smart contracts run on computers, DeFi can be accessible to anyone around the world, at any time of day, and from any location. Smart contracts are unbiased. This makes DeFi transparent, private and reliable.
The final difference is the custodial status between CeFi and DeFi. What this means is whether or not a user has partial or full control over their crypto assets. In CeFi, there is still a third-party that looks after money on a user's behalf. But in DeFi, the user has 100% control of their funds. So this is concerning the user's wallet, i.e. where the money is stored.
With these features, DeFi can be considered fascinating but riskier than CeFi in a sense. Users who decide to interact with DeFi apps must be aware that nobody can help them in case something goes wrong. It is then very recommended to inform yourself and follow some common best practices.
How can I use DeFi?
DeFi opens the door to an alternative financial system which is trustless and transparent, accessible and open. There are a lot of dApps in the ecosystem, providing services like wallets, borrowing & lending, asset tokenization, and more. Also, since DeFi projects and protocols allow to built on top of them, new projects arise every day.
In essence, DeFi broadens the horizon for cryptocurrency, as it gives users freedoms over assets with the trust of the blockchain system. This does mean though, that the user is held accountable if problems arise.
Oasis.app - is it DeFi?
Oasis.app mission is to provide the best and most trusted entry point to deploy your capital and benefit from all of the potential in DeFi. You can just connect your wallet, and borrow Dai by opening a Vault using your preferred crypto as collateral (such as ETH, wBTC, USDC, LINK and many more). If you have any doubt or want to learn more, you can visit our Knowledge Center.
DeFi platforms like Oasis.app are reimagining the way access to financial products work - helping investors to unlock the potential of cryptocurrency, without having to deal with high costs and third parties.
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13 August 2021