DEFI VS CEFI : THE FINANCIAL SYSTEMS CHASM

With the current buzz of Defi (Decentralized finance) in the blockchain space recently. A lot of people have been looking into the architecture of Defi and a lot of questions have been raised with respect to Cefi as well.
Defi has been said to be a suitable replacement for Cefi services due to it’s features. In this article I’ll give a brief explanation of both concepts and outline their primary differences and advantages.

WHAT IS DEFI?
Defi stands for decentralized finance and it refers to the decentralized financial ecosystem built on blockchain technology. But the principle idea of Defi is more of in its application in the finance ecosystem than its architecture since Cefi can also refer to financial solutions built with blockchain technology. Defi was built to create an open source and transparent financial ecosystem free from the governance of central authorities. The absence of central authorities ushers in a lot of benefits to users globally.

Defi applications are DApps(decentralized apps) built with blockchain technology using smart contracts to govern operations. Smart contracts are self executing contract terms written in code. The code is open source and operations are transparent. Defi is offers permissionless access to services and interoperability(Various Defi concepts and applications can be combined to create a unique solution or service) as well.

WHAT IS CEFI??
Cefi in this article refers to the financial ecosystem offering various services as lending, borrowing, currency exchanging, swapping and trading. Most Cefi services are cryptocurrency exchanges. What primarily distinguishes them from Defi is the presence of a central authority. They act as a third party for transactions and operations. They also hold custody to funds and assets.

DEFI VS CEFI
The main distinguishing factor between CEFI and DEFI lies in trust. Defi requires you to place your trust in blockchain technology while CEFI requires you to trust a central authority.

Under subsequent headings below, I would highlight the main factors that distinguish CEFI from DEFI

INTERMEDIARY : In Defi the blockchain protocol governing the ecosystem is responsible for facilitating transactions between users directly as opposed to a central authority or institution acting as an intermediary between users to manage transactions and activities.

CUSTODY OF FUNDS: Defi enables transactions between users while still having control of their financial assets. Cefi on the other hand is the opposite. Funds are held by the central authority and they are responsible for it. In an event of a cyber attack, users assets stand great risks of being lost and this is a serious issue.

PERMISSIONLESS : With Defi, users do not need to go through the rigors of identity verification laid down by KYC and AML regulations as evident with Cefi. Services are openly accessible to all parties, without any discrimination or barrier or any requirements pertaining to identity verification. These feature makes financial services available globally to anyone without any restrictions.

CROSS CHAIN SERVICES : Cefi services enable trading of assets issued on different blockchains. So cryptocurrencies from different chains can be traded smoothly. This is not yet possible with Defi as tokens are required to follow ethereum token standards and smart contracts protocol.

For now, Defi and Cefi are still relatively fresh concepts. Defi seems to be the new boom in the crypto space. They both offer different advantages and all. But I believe Defi would be a gamechanger. If implementations and solutions can be added to the services. Services like cross chain service and fiat to crypto conversion. It is a promising concept and will DEFInitely be an ingenious solution to the finance ecosystem.

Crypto. Photography. Vibes

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Ubong Ephraim

Ubong Ephraim

Crypto. Photography. Vibes

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