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DeFiDecember 2, 2020

CeFi exchanges vs. DeFi exchanges

Shubham Goyal
Chief Business Officer
December 2, 2020

While blockchain technology has certainly democratized finance, it still operates in two forms – centralized finance (CeFi) and decentralized finance (DeFi). Both are equally important players in the cryptocurrency industry and make good use of the distributed ledger technology. Both concepts have evolved to solve separate challenges and continue to revolutionize the field.

CeFi Exchanges vs DeFi Exchanges

#1 Decentralization

DeFi, as the name suggests, is an entirely decentralized system, as it does away with any intermediaries. It is essentially an application of smart contracts to financial instruments.

On the other hand, CeFi involves private companies or corporations. It mimics the legacy financial industry by enabling people to get loans or earn interest while using their cryptocurrencies as collateral. Therefore, these private companies act as lenders, bear custody of the deposited assets, and also bear the risk – much like traditional financial institutions. They act as intermediaries, and this makes the CeFi system rather centralized.

#2 Functionality

When it comes to functionality, CeFi exchanges do have an edge. In addition to regular functions like crypto trading, lending, borrowing, payments, and stable coins, CeFi setups also allow cross-chain exchange, fiat-to-crypto conversions and lucrative instruments like crypto derivatives – like Bitcoin futures, options, and more . Being able to convert fiat money to cryptocurrency is particularly useful for new users.

As of now, DeFi exchanges lag in this respect as they do not allow fiat-to-crypto conversions and cross-change exchange.

#3 Philosophy

Worth admitting that CeFi exchanges, relying on a centralized architecture, are not in keeping with the philosophy of Bitcoin. Contrary to this, DeFi strives to offer a complete range of financial services to digital asset users and yet does not sacrifice the core tenets that underlie these assets.

#4 Transparency

In the case of transparency, the Decentralized Finance concept as a whole, wins hands down. On exchanges, the model enables pseudonymous transactions and does not require personal information to be registered, unlike CeFi. Since it is based on public blockchain platforms, it allows greater transparency as anyone can audit the transactions and even the code. Therefore, while information is accessible to all participants of the blockchain, individual piracy is still maintained.

#5 Accessibility

To access a DeFi exchange, all you need is a device with an internet connection. You could be located anywhere in the world and still access the DeFi system as long as you have these. But global adoption of decentralized finance has not been possible yet due to legal restrictions in some countries.

A CeFi exchange, however, can be geographically restricted.

#6 Security Challenges

cefi vs defi

Source: Ledger

CeFi exchanges have a disadvantage since the custody of the assets lies with the company. Due to this high liquidity, they can become a target for hackers. There have been some major cases of hackers managing to walk away with massive amounts and consequently, users have lost their funds. But several CeFi exchanges have been prompt in securing their systems. Delta, for instance, has enterprise-grade security, stores crypto assets in multisig wallets, and processes withdrawals only once a day with manual review.

DeFi exchanges are mostly non-custodial and users do not forfeit ownership of their assets, making them responsible for their own risk. But this does not mean that they are completely foolproof. Since these systems rely on code, any flaw in the code can result in disaster. This can be particularly concerning for newcomers because they may not be aware of the underlying risks of a protocol.

#7 Speed of Transaction

CeFi offers greater speeds of transaction as compared to DeFi. For example, Ethereum and Bitcoin networks can process 25 and 7 transactions per second respectively. Compare this with Visa, which can process 24,000 transactions per second.

#8 Popularity

Owing to its user-friendliness (generally superior UI/UX) and capacity to convert fiat currency, CeFi exchanges have achieved much popularity. CeFi exchanges are also leading when it comes to active trading, volumes, and liquidity. However, this is not to say that DeFi exchanges are particularly behind. In recent times, the DeFi ecosystem overall has been growing at a breakneck pace and might just catch up in the future.

CeFi exchanges vs DeFi exchanges: Conclusion

So which one is the better crypto exchange? The answer is tricky and honestly depends on the needs and preferences of users. When considering CeFi exchanges vs DeFi exchanges, it’s clear that both occupy their unique place in the crypto finance ecosystem and are heading towards more developments. Many cryptocurrency holders are not comfortable with the idea of forfeiting ownership of their crypto assets while others might prefer an exchange that allows fiat-to-crypto conversion while offering attractive interest rates. More recently, efforts are also being made to connect CeFi and DeFi.

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