It is surprising how relatively little time has passed since the world first witnessed the financial revolution with the advent of Bitcoin and Blockchain. But it was not that long ago that cryptocurrencies were a new invention created with the intent of decentralising the traditional financial trading system, but were limited solely to crypto trading.
But then it evolved and Decentralised Finance (DeFi) exchanges came into being, not only supporting the trading aspect of cryptocurrencies but also had uses such as crypto loans, crypto derivative trading (such as Bitcoin Futures) and tokenising digital assets, to name but a few.
With the concept of cryptocurrencies expanding as time moves forward the discussion has now shifted to new considerations, namely those of decentralised finance (DeFi) vs centralised finance (CeFi).
While both offer a wide range of cryptocurrency-related financial services, they are different from each other.
The CeFi ecosystem has long been seen as a mystery to those not directly within it since many are unaware of the rules and regulations that govern financial assets and goods. While DeFi, on the other hand, is establishing its mark as an ecosystem that aims to provide clarity and control, thanks to the integrity-protected blockchain and higher asset yields than CeFi platforms.
Two different ecosystems, but what are the differences between the two?
What is CeFi?
Definition: Centralized Finance (CeFi) exchanges — act as an intermediary to manage the crypto transactions and activities of users.
The main idea of a centralised exchange, in crypto terms, is that all crypto trading orders are routed through a central exchange. Binance, Coinbase etc are quite familiar terms in the world of crypto and within these exchanges, users create an account and use the same platform to primarily transfer and receive funds. In addition, they also support other services like lending, borrowing, margin trading etc.
Even though funds are housed on the exchange, they are maintained outside of the user’s control; and can be exposed to threats if the exchange’s security procedures fail. This is why, historically, centralised exchanges have been targeted by various security attacks. But people are also comfortable with sharing personal information and placing funds in the custody of these exchanges because they believe them to be trustworthy and they are de rigueur.
What is DeFi?
Definition: Decentralized Finance (DeFi) exchanges — which eliminate the need for any third party to control the activities of users, thus allowing technology to take over and users having authority to manage their transactions and deals.
DeFi is a collective term for financial products and services that have been built on blockchain technologies and are in the public blockchain space. IT is an open and global financial system with three distinctive characteristics; transparency, control and accessibility.
Within DeFi a user can examine the precise rules that govern the operation of financial assets and goods, a far clearer view than is found in CeFi.
DeFi makes an effort to eliminate private agreements, back deals and the centralisation of finance, which are barriers found in CeFi and block its transparency.
Wit DeFi you not only have control over your money but also have exposure to global markets and alternatives to your local currencies and banking options.
Another feature of decentralised finance is that the markets are always open and there aren’t any centralised authorities who can block or bar your payments, or deny you access to anything.
Ethereum’s launch in 2015 paved the way for maximising the potential of decentralised finance within the financial industry, encouraging businesses and other enterprises to build and deploy projects that formed the initial ecosystem of DeFi. With DeFi, what became a reality was a plethora of opportunities to bring about a transparent and robust financial system. All in all, DeFi offers plenty of services, including borrowing, yield farming, crypto lending, asset storage and much more.
So, What’s the Difference?
The biggest difference between the two systems is the fact that CeFi is regulated whereas the opposite is the case with DeFi. In centralised finance, the responsibility of safeguarding the money of its users lies with the exchange.
On the other hand, the notion behind DeFi is that the transactions would be successful as a result of smart contracts. This means the users themselves are responsible for managing their funds and activities.
In CeFi, it’s possible to prevent trade and impose limitations on users, whereas DeFi works in a permissionless arena so it is not possible there. There are, however, two areas where CeFi stands apart. The first is that CeFi exchanges enable the conversion of fiat currency to cryptocurrency and vice versa easily and seamlessly. The second is that it supports cross-chain exchange for multiple cryptocurrencies, displaying the interoperability of said currencies.
How we can Help
Unfortunately, one major similarity between both of these systems is the fact that there are those who will try to take advantage of them and their users for their own personal gain.
Whether dealing with a legacy system such as CeFi or dealing in the decentralised finance arena, people need to keep themselves and their business safe from harm, and those who would try to take advantage of them.
We at Sekuritance offer a dedicated RegTech ecosystem that works in both the CeFi and DeFi spaces, delivering top compliance, regulatory, transaction and identity management to merchants and individuals across the globe.
With services including our KYC tool suite, our support of larger and smaller cryptocurrencies, and a wide range of investigation tools we help people protect themselves, learn more about those with who they are doing business with, and monitor their exposure.
SO, whichever system you are moving in, let us help you navigate
The Sekuritance RegTech platform provides a single platform for every eGRC need, including end-to-end AML/CTF, CECL, FCPA, vendor management, beneficiary onboarding, investor check, card processing MFA checks, blockchain wallet checks, cyber-risk assessments, and other RegTech or Business Process Management requirements.
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