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How does DeFi borrowing connect to CeFi lending/saving?

CeFi facilitates borrowing of money against your crypto holdings as collateral like the traditional assets method for bank loans. The interest users can pay for the loans borrowed is where the yield you earn for holding crypto is generated. DeFi, unlike traditional bank loans, requires little to no paperwork.

Examples of CeFi

Coinbase

You have probably read the term coinbase as you browse through the internet. Coinbase is one of the major cryptocurrency exchange platforms in the world which at the moment boasts of 56 million verified users. Coinbase offers a huge array of products such as a state of the art trading platform and a wallet for investors in retail. The crypto exchange giant is on a path to develop a more efficient, fair and available to all crypto system.

Binance

Launched in 2017, Binance has expanded to become one of the largest cryptocurrency exchange platforms with a reach in over 180 countries world wide. Its popularity has grown due to its potential to trade in over 500 types of crypto currencies and virtual tokens such as Bitcoin, Ethereum and Dogecoin.

Benefits of Centralized Finance (CeFi)

Flexibility in Fiat Conversions

For conversions to occur between cryptocurrency and fiat a centralized exchange is required. New entrants to crypto trading can efficiently use the said exchanges to convert fiat to crypto and the reverse. This process is not easily achieved in DeFi.

Cross-Chain Services

CeFi systems support the trading of various coins that are facilitated on independent blockchain networks. This is a huge advantage of CeFi as majority of the high market-cap coins are traded on these blockchain networks, which are not supported by DeFi systems which are more limited and do not support such tokens due to the complex process of cross-chain swaps.

Availability of Customer Service

The field of blockchain technology is evolving at a fast rate and the investors find it difficult to be updated. Properly established cryptocurrency exchanges have a well structured customer service department to assist their users. Furthermore they provide relevant materials to educate new users on their platform.

Risks of Centralized Finance (CeFi)

Risk of Losing Funds

Users in CeFi systems invest their capital in a designated centralized exchange and have no autonomy over their money. This simply translates to a user relinquishing control and trusting the management of the institutions to uphold noble morality and high levels of security and safeguard the assets. If the platform is accessed by hackers there is a possibility the funds may be lost.

Risk of Compromised Privacy

As all centralized exchange  platforms require the user to create an account, during the initial processes private data such as legal documents and home address are required for an account to be processed. This practice is referred to as Know Your customer(KYC), which helps to curb money laundering and verify the authenticity of the user. If intrusion by a hacker were to happen most of these data would be accessible to them.

What is DeFi?

DeFi derived from the term Decentralized finance is a system where financial entities become accessible on public decentralized blockchains networks. This makes them easy to use and public rather than accessing them through middle men or brokerage firms.But unlike traditional banks or brokerage accounts, an ID, Social Security number, or proof of address are not required to use DeFi.

Benefits of DeFi

Making use of blockchain as technological infrastructure permits fast and low-cost transactions, the immutability of the economical contracts, and contract automation.

DeFi implementation extensively  allows the users to  remain in possession of the private keys. This process is referred to as non-custodial in the blockchain ecosystem. The user is in total control of their funds without a third-party.

Factors to Consider before joining a DeFi

If you’re interested in joining a DeFi platform, one way is to own DeFi crypto tokens. As the DeFi industry has expanded, so has the value of the currencies grown.

A user can also earn interest on the cryptocurrency through DeFi. When  borrowing and lending these platforms, which pay much higher rates than  with traditional banking.

As with various forms of cryptocurrency investment, if you decide to trade in DeFi, only invest money you are willing to lose, and perform due diligence of the industry to ensure you fully understand the risks involved.

Conclusion: Centralized Finance (CeFi) vs Decentralized Finance (DeFi)

Both CeFi and DeFi platforms champion the adoption of blockchain and digital currencies, and have the same objective which is to assist people in using crypto for various economical needs and services.

CeFi provides a higher interest rate and improves trust and flexibility with the  customers, while DeFi facilitates privacy and security by detaching the need for any third parties.

In conclusion, each system has its own pros and cons, and plays an important role in cryptocurrency exchange. There is a future for both CeFi and DeFi, and a user could expand their portfolio by using both platforms instead of one for maximum efficiency.