The term Decentralised Finance (DeFi) refers to the broader ecosystem of protocols, platforms, and applications that are being built on blockchain technology with the aim to provide alternative financial services.
Today, we will try to understand the differences between two major protocols that are part of this space — CeFi and DeFi.
What Is CeFi?
CeFi is centralised; data is all stored on one central server which can be accessed by authorised personnel. Data is not encrypted before leaving the sender’s device. The database has strict regulations about who can access it and for what reasons.
For example, if someone wants to update information about themselves, they need to know their name, phone number, address, social security number, and more.
Once this information is verified through public records or the individual’s employer, then the user will have permission to make changes or updates. A system administrator will also be required to verify those changes in order for them to go into effect.
What Is DeFi?
DeFi is an acronym for Decentralised Finance. This means that data isn’t stored in one central server, but rather on a network of computers. Data is encrypted before it leaves the sender’s device so that only the receiver can decrypt it.
Features of DeFi
DeFi is popular among users due to the following reasons:
- Offers a decentralised exchange platform
- Is trustless and permissionless
- Has a rich ecosystem with a variety of financial services
- Technologically advanced
If you need a financial ecosystem where you can conveniently exchange cryptocurrency, try Grapherex.
The Differences Between CeFIs & Deposits
The following are some of the major differences between CeFis and deposits:
- CeFIs do not require a minimum deposit or any collateral for the loan.
- CeFIs are only available for accredited investors, which means individuals with either an annual income of $200,000 or a net worth of at least $1 million.
- Deposits offer a lower interest rate than a Cefi; the interest rates can vary depending on the bank. For example, Goldman Sachs offers 0% APR loans up to 1 year in length. On the other hand, Ally Bank offers 5% APR loans up to 12 months in length.
Example of a Pseudo-CeFi and How it Functions
A pseudo-CeFi is a digital token that can be exchanged for products and services. A pseudo-DeFi, or decentralised financial institution, is a digital token that can be used to store value or provide credit.
A simple example of a pseudo-DeFi would be StableCoin. StableCoin is the digital equivalent of the US dollar. As with any fiat currency, it’s backed by nothing but has value because people want it enough to make it valuable.
Examples of Stablecoins
A stablecoin is a cryptocurrency that has a fixed value in relation to another asset, such as the US dollar.
There are two main types of stablecoins: fiat-backed stablecoins and crypto-backed stablecoins. Fiat-backed stablecoins are backed by government currencies, like dollars, euros, or yen.
Crypto-backed stablecoins are supported by cryptocurrencies themselves. They often have their own coin for every unit of currency they support. For example, one USD Coin would be worth 1 USD and one BitCoin would be worth 1 BTC
How Are Centralised Exchanges Similar to Banks?
Centralised exchanges are similar to banks in that they offer a place for buyers and sellers to trade cryptocurrencies, just like a bank offers a place for people to trade fiat currencies.
The difference, of course, is that centralised exchanges are digital platforms while banks are physical locations. A centralised exchange has features like KYC compliance which ensures that the users who use the platform have been verified by their bank or government.
They also tend to charge higher transaction fees than decentralised exchanges, and some require you to pay those fees in crypto so you can use their services – these are called ‘maker fees’.
In contrast, decentralised exchanges operate on a peer-to-peer basis with lower transaction fees than centralised ones because there’s no need for third-party verification or regulation.