You have probably heard the word DeFi, or decentralized finance, a lot during the last year. DeFi begins its story with one of the oldest DeFi projects on Ethereum — Maker. The pioneer of decentralized finance emerged in 2014. Maker is a protocol that allows you to create a decentralized stablecoin — DAI. The first iteration of the protocol — Single Collateral DAI — only supported ETH as collateral. Later, this was expanded to Multi Collateral DAI, which was launched in late 2019.
DeFi has evolved rapidly over the past two years, leading to a divergence in the types of cryptocurrency services available in the market today. Though, did you know that not all companies that run on the blockchain are actually decentralized? Now there are different forms of projects operating on the market, such as centralized, decentralized finance, or CeDeFi in short. What does it mean, and what is the difference between all these financial models? Let us start with the definition of decentralization.
What is Decentralization?
In the blockchain, decentralization means transferring control and decision-making from a centralized entity, such as an individual, organization, or group, to a distributed network. In this way, participants’ trust in each other is reduced, and their ability to influence the network is limited.
Decentralization has its advantages and disadvantages. On the one hand, it enables a trusted environment, improves data reconciliation as each object has real-time access to the data, and reduces vulnerabilities where there may be too many dependencies on specific subjects. On the other hand, usability can suffer because no entity maintains the network in Dapps. For example, if you forget your password for a decentralized wallet, you cannot contact the support department, and your assets are lost forever. In the last two years, the UI of DeFi applications has improved dramatically, but you still have a learning curve to go through when onboarding.
Of course, nothing is black and white, and even DeFi apps can be centralized to some degree. For example, while the DeFi app is programmed to run on the blockchain, it is usually accessed through a user interface hosted on a website. The ISP can technically block the website, or the hosting service can temporarily disable it. However, the basic smart contracts on the blockchain will continue to exist and function without interruption.
What is DeFi?
DeFi represents a blockchain-based form of finance that does not rely on central financial intermediaries to provide services. Instead, it uses smart contracts on blockchains. Currently, there is a wide range of DeFi products. You have probably heard of decentralized exchanges or DEXes. Major types of DeFi products may also include peer-to-peer lending, insurance, derivatives, tokenization, prediction markets protocols, and others.
What is CeFi?
Currently, cryptocurrency trading is one of the most common solutions provided by centralized financial institutions. In addition to trading, the companies covered by CeFi offer their customers services such as borrowing, lending, margin trading, etc.
While these services are automated to some degree, they require centralized intermediaries to operate them. At CeFi, institutions manage your funds in their custodial wallets and store your private key. Furthermore, most providers tend to follow the rules set by the local authorities in which they operate. For instance, centralized trading platforms should introduce Know Your Customer (KYC) and Anti-Money Laundering (AML) policies.
There are several essential differences between CeFi and DeFi, each with advantages and disadvantages.
What are the differences between DeFi and CeFi?
1. Centralization
In a centralized financial environment, platforms can be owned by one person or a company. However, centralized institutions are responsible for everything from user registration to setting ground rules, among other things. DeFi apps, on the other hand, aim to decentralize ownership and put it in the hands of the community.
2. Permission
In centralized finance, users must register and follow KYC (Know Your Customer) rules. This is often done to prevent criminal activity, such as money laundering, and to comply with other crypto regulations. With DeFi, if you have a non-centralized cryptocurrency wallet like MetaMask, you do not have to pass KYC or register an account.
3. Trust
In centralized finance, you have no choice but to trust the centralized provider. With DeFi, you do not have to trust anyone with your assets, even if you want to trade them via peer-to-peer swaps or the like.
CeFi vs. DeFi: Which Is Better?
If CeFi issues can be summed up in the word “trust,” then DeFi is primarily about risk. Many DeFi protocols have fallen victim to savvy hackers who have discovered vulnerabilities in the underlying software.
The most recent example is Poly Network, which turned out to be the largest DeFi hack, allowing an attacker to withdraw over $600 million from the platform. While many DeFi protocols are now taking the time to review their programming, the Poly incident shows that security is still an issue.
DeFi is also an emerging sector where developers are focusing on function rather than form. Even where smart contracts are robust, user interfaces are often crude and not particularly user-friendly. Users can not expect to find libraries of supporting documentation or FAQs, let alone a support person to talk to if something goes wrong. Despite its shortcomings, DeFi is nonetheless a revolutionary change in finance, so it seems likely that it will continue to gain traction.
The concept CeDeFi arose to combine the advantages of both models.
What is CeDeFi, then?
The term “CeDeFi” first appeared in the world of cryptocurrencies. CeDeFi, or Centralized Decentralized Finance, combines centralized financial services with decentralized applications and fuses traditional regulatory measures with a modern monetary system. CeDeFi represents the perfect fusion of centralized and decentralized finance, combining the best features of both systems.
Simply put, CeDeFi allows you to explore DeFi products such as decentralized exchanges (DEX), liquidity aggregators, harvesting tools, credit protocols, and more with low transaction fees. Companies can deploy unique smart contracts and offer multiple products and services on the same platform while enabling faster transactions and lower risks.
CeDeFi also addresses the growing regulatory and compliance challenges for cryptocurrencies. By merging centralized and decentralized financial functions, CeDeFi paves the way for institutional storage of DeFi protocols.
PointPay is a CeDeFi application because our technology is written on the blockchain, but the enterprise supports the network.
What does CeDeFi give us?
1. Links to existing financial services to buy crypto with fiat currency.
2. Enough resources to develop user-friendly applications accepted on the most popular marketplaces like the Apple and Google Store. We are also constantly working to improve the interface to provide an exceptional user experience.
3. Additional services, such as prompt customer support. Furthermore, as a legal entity, we have a special responsibility to the authorities.
4. Explore the world of modern products and infrastructure while adhering to traditional financial rules. Integrated KYC and AML procedures allow institutional investors to use our platform without worrying about the money coming from an illegal source.
5. Thorough selection of assets available for trading, borrowing, or earning interest on our platform. This way, you do not have to worry about losing your money due to investing in a scam project.
6. Lower transaction costs and higher transaction speed.
By combining two opposite financial models, we can incorporate their advantages, as our goal is always to provide our customers with a best-in-class user experience.
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