CeFi Vs DeFi: should they work together? This way, more people will be able to access the crypto market, which will drive crypto adoption, says austin kimDirector of Strategy and Investments at Choose.com.
CeFi Vs DeFi: Do They Need Each Other?
Decentralized finance is one of the hottest topics not only in crypto but in finance in general today, widely seen as the next frontier in the global economy. Blockchain technology is changing the way we interact with the financial world and it has the power, if implemented correctly, to break down institutional and bureaucratic barriers.
However, looking at it from a practical perspective, DeFi cannot do it all on its own or isolated from existing financial infrastructures. For example, it is quite a challenge to succeed in implementing a solution that would allow people to buy crypto via a bank card and use this crypto to interact with the DeFi sector, without going through a centralized institution. (CeFi). Both DeFi and CeFi have their pros and cons, and today there is a growing desire to connect the two worlds for easier access to their respective services.
CeFi vs. DeFi: CeFi – Ups and Downs
Today, when you buy groceries with a debit card, the money is withdrawn from your bank account, which is held by a centralized institution. Alternatively in the case of a credit card, you will spend the money lent by the bank or other equivalent institution. On top of that, the money you use is government fiat currency, printed and guaranteed by a country’s central bank, which means a central institution decides the rate of inflation.
The examples are countless, but it is clear that most of our financial interactions go through the CeFi system. So let’s take a look at what CeFi can offer, as well as the cons that come with it.
When you buy something with your traditional debit card, there’s not much to worry about. All you have to do is swipe it and the amount will be automatically debited from your account. You know your funds are safe and you don’t have to worry about them losing 20% of their value in one day like you would if you bought something with Bitcoin or any other cryptocurrency. And if there is a problem, you can always contact customer service. The same can be said for almost all other centralized financial services.
The institution you are operating through is likely to be reputable and must follow a strict set of regulations and laws designed to protect the safety of your funds.
Fiat to crypto support
Having to buy crypto with fiat or sell it without going through a CeFi institution is a headache, to say the least. It’s not impossible, however, most people wouldn’t even know where to start. Integration between crypto exchanges and banks or other financial institutions allows for seamless and easy fiat-to-crypto transactions, and vice versa.
No control over your funds
Not having control of your funds is one of the biggest drawbacks of relying on CeFi institutions. Keeping funds in the bank or in a centralized crypto exchange, for example, means that an institution holds your funds and can, as long as they are in compliance with the law, do with them as they wish. To protect its interests, an institution could temporarily prevent customers from withdrawing their funds. This is a common sight during turbulent economic times with crypto companies and traditional banking institutions.
Poor wallet support
When using CeFi crypto platforms, it is likely that the services offered will only be available for the coin of the platform. For this reason, if you want to hold different coins, you will probably have to resort to several different wallets, which is, of course, very inconvenient.
CeFi Vs DeFi: DeFi – Promise and Risk
Unlike CeFi, DeFi aims to create a financial ecosystem that, by harnessing the power of blockchain, provides an alternative to traditional financial systems and allows users to maintain control over their money. Working peer-to-peer, DeFi removes the middleman, allowing the exchange of assets without the need for a central authority. Let’s take a closer look at the pros and cons of this market.
Say no to the middleman
Decentralized finance, as the name suggests, allows for a completely decentralized way of exchanging services on a peer-to-peer basis and without the need for oversight or control from third parties and institutions. Users are fully responsible for holding their funds and exchanging them as they see fit, without the risk of abuse of power like the one mentioned earlier with CeFi. Overall, DeFi excels at empowering individuals.
A rich ecosystem
DeFi offers a rich ecosystem of products and services, enabling endless possibilities from trading to deposit-making and everything in between. Users can earn significant sums with these services, much more than would be possible with CeFi.
Not suitable for beginners
DeFi takes a long time to learn and the stakes are usually high. The concepts of this market can be a lot to swallow even for seasoned members of the crypto industry, not to mention newcomers who are just beginning to find their way. As a result of being lost and confused, they often act unknowingly and end up losing their funds. This, in turn, causes some people to steer clear of DeFi altogether to stay on the safe side, and they end up losing out on awesome earning opportunities.
Risk of losing funds
With more freedom comes more responsibility. DeFi wallets allow you to store your private keys and give you a seed phrase to access your wallet in case the password is lost or the device is changed. However, storing the seed phrase is your job, losing it unfortunately means you also lose your funds. In DeFi, there is no central institution to hold your information for you or help you recover it if lost. It all depends on you and it can be a cause of doubt and uncertainty for many people.
No interconnectivity between blockchains
The DeFi ecosystem is not yet well integrated and platforms tend not to support tokens from different blockchains. Users therefore cannot use all of their assets in a unified and simple way, and are instead forced to trade between different chains to take full advantage of all that DeFi has to offer. This is a time-consuming process that also incurs costs.
CeFi Vs DeFi: Why not both?
Both CeFi and DeFi have their pros and cons, and only by working together can they reach their full potential. Full integration of the two systems would store all digital assets in one place, allowing users to effortlessly use various services without ever having to switch wallets or trade blockchains.
CeFi vs DeFi: single entry point
The CeFi system would allow easy access to all DeFi protocols, creating a single entry point. Not having to constantly jump between protocols and swap coins would greatly simplify the whole process, reducing fees and making DeFi much more accessible even for first-time users. By linking CeFi and DeFi, more people will be able to access the crypto market, which will drive crypto adoption as the industry is made less daunting by newly developed solutions.
About the Author
austin kim is Director of Strategy and Investments at Choose.com. Austin has over 25 years of experience as CEO of international companies, with a focus on all types of financial services, particularly insurance and cryptocurrencies. He has built several businesses from the ground up, some of which have sold for over $500 million.
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