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What are the differences between CeFi vs DeFi vs DiFi? Centralized Finance (CeFi), Decentralized Finance (DeFi) and Distributed Finance (DiFi). Read on to define these terms further.
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The centralisation of financial systems is a concept which has exploded onto the scene in the last decade leading to a seemingly infinite array of abbreviations and acronyms. It has also led to a whole lot of confusion and need for clarification.
Furthermore, the past year has been eventful (to say the least) and lead to unplanned advancements in technology and finance that affect many areas of our society.
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CeFi vs DeFi vs DiFi?
Cryptocurrency and blockchain were already popular concepts have become part of our daily vernacular and it seems that the wildfire created by the crypto revolution has become harder to control with greater increases in diversification.
The financial technology of cryptocurrency evolves at a rate that is hard for most of us to keep up with, we thought it was a god opportunity to discuss these popular terms in cryptocurrency concept– CeFi vs DeFi vs DiFi, their relevance in the sphere of cryptocurrency, and the key differences between them.
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What Is CeFi?
CeFi means Centralised Finance. It is an earlier financial system for trading cryptocurrency before the development of Defi. CeFi provided control and management of crypto assets by central exchanges that offer various services to registered users. These services include trading, cross-chain swapping (e.g. Bitcoin to Ethereum, Ethereum to BNB, etc.), crypto-to-fiat, fiat-to-crypto, and crypto lending.
CeFi is a traditional system of applying cryptography in the financial world that incorporates traditional financial methods into handling cryptocurrency assets. With CeFi, exchanges control the users’ crypto assets, including the private wallet keys released to the users. With CeFi, Crypto services, especially trading, are handled by these exchanges.
CeFi represents a transition phase between the centralised, traditional financial system and the decentralised future, which is the core of blockchain. With CeFi, registration requires a KYC; exchanges review coins and tokens before they are listed. With CeFi, crypto assets and coins are owned by the exchanges but are made available to customers whenever they need them. With CeFi, users are also bound by rules set by exchanges.
In summary, CeFi offers trusted and regulated crypto services mediated via third party middlemen known as exchanges. Exchanges are in control of cryptocurrency assets and are tasked with protecting users against fraudulent projects (via careful review of coins), fraudulent transactions, malicious attacks and theft by hackers.
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Some popular examples of CeFi platforms include:
- eToro – eToro is a global social trading and investing platform that offers the purchase of cryptocurrencies as well as other assets such as stocks and currencies.
- Binance – A popular CeFi exchange (CEX) that provides trading, loaning, lending, swapping and many more services to its users.
- Coinbase is a similar platform to Binance that provides trading, loaning, lending, swapping, and many more services.
- BlockFi –is a CeFi platform that facilitates borrowing and lending of cryptocurrency.
- Fairlay – Fairlay is a CEX and also a gambling platform. Fairlay is similar to Defi ‘Augur’, where users can stake Bitcoin price predictions, sporting events and other global events.
What Is DeFi?
DeFi means Decentralised Finance. DeFi operates using ‘decentralised applications (DApps) that are built on existing cryptocurrency blockchain platforms such as Ethereum (ERC20) and Binance Smart Chain (BEP20).
Decentralised Finance is a fully open-source, transparent peer-to-peer financial domain where users can transact with each other without the involvement and supervision of middlemen – true decentralisation of blockchain. DeFi provides financial services such as yield farming, staking, crypto lending, borrowing, cold storage of crypto assets, and so much more.
With Defi, cryptocurrency exchanges are substituted by DApps. On DApps, analogues of popular cryptocurrencies such as Bitcoin, Ripple, Bitcoin Cash, e.g. wrapped BTC, Binance-Peg Ripple etc., that have the same value as original currency are available to users. There is no need for Know-Your-Customer (KYC) to transact within DeFi, and users are in complete control of their crypto assets and private wallet keys ( which are typically kept by exchanges in CeFi).
In essence, DeFi offers a trustless, decentralised, open-source financial blockchain platform available to everyone, especially users who do not have the necessary government-issued documentation required to register and transact on CeFi exchanges. DeFi also ensures that users are responsible for crypto-assets and are not exposed to malicious attacks by hackers on exchanges.
Some practical examples (use cases) of Defi include:
- Pancakeswap – DeFi exchange (DEX) offers token swapping, yield farming, staking and other exchange services of BEP20 tokens.
- Uniswap – is a DEX that offers token swapping, yield farming and other exchange services of ERC20 tokens.
- OpenSea – DeFi marketplace that provides a platform for trading non-fungible tokens (NFTs) for artists.
- Augur – DeFi platform for gambling on sporting events, news, elections etc.
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What Is DiFi?
DeFi and CeFi colluded, extracted their better bits and an improved hybrid – DiFi was created. DiFi inherits the best features of both Defi and CeFi. DiFi stands for Distributed Finance and incorporates vital features of Decentralized Finance (DeFi) and Centralized Finance (CeFi).
DiFi is a newer, open-source, peer-to-peer financial system that is decentralised, like DeFi to a certain extent with limited supervision by custodians. Custodians are responsible for the verification of new users when they join their DiFi platforms. DiFi also provides crypto services like trading, borrowing, lending, swapping, and so much more.
With DiFi, users possess their private wallet keys, and they can perform peer-to-peer crypto transactions with other users that have been verified by Know-Your-Customer (KYC). Unlike Defi, which provides limited cross-chain swaps using atomic swap, DiFi promises easier and faster cross-chain swapping by logging all transactions on the DiFi network into a universal blockchain ledger. This DiFi application is facilitated by the provision of IOU (I Owe You), which are 1:1 analogues of existing cryptocurrencies, e.g. Bitcoin.
Also similar to DeFi, DiFi provides users with their private keys and the ability to access their wallets across several DiFi apps. However, unlike DeFi and similar to CeFi, DiFi users need to be verified, usually by KYC, before creating wallets. Their crypto assets are stored in custodial wallets provided by the platform when they are signed on (similar to CeFi exchanges). DiFi combines true DeFi decentralisation – Private wallet keys, peer-to-peer transactions, elimination and middlemen with the trust and security of CeFi – KYC verification for all users and centralised custodial wallets.
DiFi is new with limited applications. A popular DiFi platform is Block Basis which provides trusted, decentralised crypto trading and exchange services to users.
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Why Is CeFi vs DeFi vs DiFi Important?
It is important to know the difference between CeFi vs DeFi vs DiFi because the last decade has seen the emergence of alternative financial systems which are here to stay. 2020 alone saw a boost in relevance and usage of cryptocurrency globally thanks to the pandemic preventing people from going about their daily lives as normal.
With the many innovations associated with crypto, It can be challenging to remain well informed in this constantly evolving blockchain space. Below are two reasons why every user should understand the differences between CeFi vs DeFi vs DiFi.
Picking The Right Platform
The blockchain ecosystem provides every user with a wide array of services ranging from trading, NFTs borrowing, lending, yield farming, gaming, gambling etc. Before picking a system out of the three, it’s essential to understand its key features and limitations. For example, DApps are supported on DeFi but not on CeFi, while cross-chain swapping is supported on CeFi, but not on DeFi.
Optimising Crypto Services
The world of crypto works like a lock and key mechanism – every lock has its specific key that can open the lock multiple times. Crypto services are niched to distinct ecosystems based on their features. For example, although NFTs might be available on both DeFi and CeFi, decentralised exchange of NFTs are optimised on DeFi DApps.
Final Word On CeFi vs DeFi vs DiFi
The world of finance is wide, fast-paced and cryptocurrency seems to be faster than most can keep track of CeFi vs DeFi vs DiFi are financial systems built on the blockchain with unique characteristics which facilitate their applications.
DeFi provides an open, user-controlled decentralised ecosystem without restrictions and surveillance; CeFi provides a centralised ecosystem where exchanges and users manage assets are verified before joining, while DiFi incorporates the decentralisation of Defi with the trust of verification of CeFi.
We hope you have enjoyed this post What Is The Difference Between CeFi vs DeFi vs DiFi? [And Why Does It Matter?].
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