The word “cryptocurrency” is no longer confined to a small group of people. Not only are businesses exhibiting an interest in the cryptocurrency market these days, but a big number of individual investors are as well. DeFi (decentralised finance) and CeFi (centralised finance) are two new concepts that have emerged as a result of the growing popularity of cryptocurrencies. Despite the fact that the services offered by DeFi and CeFi are similar, they are distinct from one another.
It was in ancient Mesopotamia, more than a thousand years ago, when the concept of centralising financial management was first conceived. A broad variety of items and assets have been used as money since then, including livestock, land, and cowrie shells (a kind of seashell), precious metals (such as gold), and, more recently, fiat currencies. Every effort to build a currency and finance system based on a central authority, such as a government or military, with a military force at its command, has relied on this central authority. Even if a currency’s inherent worth is unknown, it may still be valued using an imputed or assumed value, which is an assumed value attributed to a currency, which may be zero.
Rather than requiring customers to put their faith in a third party, decentralised finance relies on financial apps running on top of a distributed blockchain. The main advantage of utilising DeFi is that customers may put their faith in a protocol instead of an organization. Examples are Uniswap, MakerDAO, and Compound. CeFi has a larger level of industry support than DeFi, but Blockchain specialists and technocrats feel that the tables could turn very soon in the future.
The introduction of Ethereum allowed businesses to design and deploy projects that established the ecosystem of DeFi, paving the way for the financial sector to maximise the potential of DeFi. A wide range of possibilities have been enabled, to implement a transparent and resilient financial system thanks to DeFi. Overall, DeFi provides a wide range of services, including borrowing, yield farming, crypto lending, asset storage, and more.
Because of the decentralised, permissionless nature of blockchains, new form of currencies have emerged. Blockchain technology has made it possible to transfer and exchange financial assets without the need of trusted third parties. A subfield of blockchain is Decentralized Finance (DeFi), which focuses on developing financial technology and services on top of smart contract-enabled ledgers. Most of CeFi’s products may be used with DeFi: asset exchanges, loans, leveraged trade, decentralised voting, stablecoins. Options and derivatives, as well as more complicated products like futures contracts, are also being worked upon.
Decentralized finance differs significantly from centralised finance primarily because CeFi system is regulated, but in DeFi the system is not. The exchanges are in charge of securing the money of its customers in a centralised financial system. DeFi, on the other hand, assumes that smart contracts (an agreement between two parties that enforces certain rules/terms of negotiation when a specific/specific condition is satisfied) would lead to successful transactions. In a nutshell, the users are ultimately liable for their own money and behaviour. CeFi supports the blocking of transactions and the imposition of restrictions on users, in a variety of cases. However, in the case of decentralised finance, this is generally not the case.
As a result, DeFi has three key advantages over conventional centralised finance.
1. Transparency: DeFi allows users to look into the specific rules that govern the operation of financial assets and products. Private agreements, back-deals, and centralization are all major barriers to transparency in CeFi, and DeFi seeks to eliminate them.
2. Control: In order to maintain ownership over its users’ assets, DeFi ensures that no one may censor, relocate, or destroy the users’ assets without the users’ permission.
3. Accessibility: While the blockchain and its distributed network of miners effectively administer any DeFi application, anybody with a computer and an internet connection can create and deploy DeFi products.