Stader Saturday School: CeFi vs DeFi











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Stader Saturday School: CeFi vs DeFi

5 mins read / updated on Fri Sep 08 2023


Many have faced the choice of whether to go with Centralized Finance [CeFi] or Decentralized Finance [DeFi] when it comes to buying, staking & storing their crypto assets. This debate has always been at an all-time high for investors who are continuously looking to expand their portfolios.

Undoubtedly, CeFi has been dominating as the medium for cryptocurrency trading. But let’s not forget that DeFi is also quickly gaining traction & charming investors to get away with CeFi’s control, uniformity & authority.

What is a Centralized Finance [CeFi]?
As expected, it is the traditional form of finance or old ways of people dealing with money. A central authority controls the entire financial system, where the crypto trade also happens through a central exchange.

Now, who this central authority can be? It can be the government, the bank, or any other financial institution. Yes, CeFi relies on fiat currencies, typically money not backed by any physical commodity.

Also, with CeFi, you cannot own your crypto funds outrightly; instead, they will be held by the exchange. Not to forget, you will also be subjected to the rules set by the exchange, which can be changed at any time without any prior notice.

What is a Decentralized Finance [DeFi]?
Many of us know about the blockchain sector; it is commonly known as decentralized finance [DeFi]. Here, all the financial products & services are basically built on blockchain technology.

In very simple terms, DeFi is an open & global financial system offering transparency & global accessibility to the financial markets. Yes, with DeFi, you attain control & visibility of your money and get exposure to different global alternatives to your currency or other banking options.

DeFi opportunities to make money, like borrowing, yield farming, lending, etc., are now just a click away. Given the fact that there is no monopoly or a central authority to block or deny or even restrict your actions/access. Instead, DeFi is meant to allow peer-to-peer transactions without needing a 3rd party.

Smart contracts are used in DeFi technologies to oversee various processes safely & to maintain sustainability in the network.

Comparision — DeFi & CeFi properties
Let us begin!

  1. Transparency
    The DeFi app codes might not always be open-source, but their execution has to be publicly verifiable on the blockchain. Hence, unlike on CeFi, DeFi users can actually observe & verify the execution of DeFi state changes. Such transparency instills trust in the users & gives DeFi technology an undisputed edge over CeFi.
  2. Atomicity
    A blockchain transaction allows for sequential actions to be performed. The entire combination of all these actions can be made atomic. That is, all the transactions will either get completed altogether or get failed collectively.
    This programmable atomicity feature does not exist in the CeFi as it’s expensive & attracts slow legal agreements.
  3. Custody
    DeFi is known for allowing users to have direct control over their assets anytime & anywhere. But with huge power comes both huge responsibilities & risks. It is better to have some insurance underlined to be on the safer side.
    While the CeFi technologies act like the custodian of your assets, even for your crypto funds.
  4. Crypto trading
    Centralized exchanges [CEXs] share the same foundations as other traditional financial technologies like the limit order books, etc. While the Decentralized Exchanges [DEXs] function in an altogether different way.
    They use Automated Market-Maker [AMM] protocols to determine the prices according to a mathematical algorithm [all depending on the transaction volumes].
  5. Transaction fees
    Transaction fees in DeFi or in blockchain technology at large are crucial to avoid spam. While in the CeFi, we have Anti-Money Laundering [AML] verifications of clients; hence the financial institutions in CeFi can either choose to levy transaction fees or conduct transactions at zero cost.
  6. Privacy
    DeFi is found only on blockchains that have non-privacy-preserving smart contracts. Why? As it offers pseudo-anonymity rather than true anonymity.
    While the Centralized Exchanges [CEXs] use the same AML policies to convert money to cryptocurrency assets, these exchanges have the power to reveal the ownership of the assets to the government or other law enforcement.
  7. Arbitrage Risks
    An arbitrage must operate atomically to avoid the risk of price swings. When transaction fees are ignored, arbitrage between two DEXs on the same blockchain can be deemed risk-free.
    This is majorly due to the blockchain’s atomicity feature that allows traders to write a smart contract and perform the arbitrage & would revert if the arbitrage does not return a profit to them.
  8. Inflation
    Inflation is simply the depreciation of an existing currency supply which is caused by adding a new supply or, say, the loss of currency’s purchasing power.
    In CeFi, the central banks maintain the power to produce fiat money. And they calculate the inflation & other indices based on a particular basket of consumer products, often called as consumer price index [CPI].
    While in the DeFi world, the asset supply of various cryptos is dynamic. Suppose Bitcoin [BTC] has a supply hard cap, which can lead to its scarcity. Also, there is no inflation, other vulnerable factors, or security instability here compared to the CeFi technologies.
  9. Never-ending Market Hours
    When you think about CeFi, one cannot stop thinking about the New York Stock Exchange, the Nasdaq Stock Exchange. These two major trading venues in the United States operate within a limited time range. Their work hours are from 9.30 AM to 4.00 PM EST, right from Monday to Friday.
    But when it comes to DeFi, due to the continuous & non-stop nature of Blockchain, most of the DeFi markets operate 24/7. Hence, as a result, DeFi lacks pre & post-market trading compared to CeFi.
  10. Cross-Chain Services
    DeFi normally does not support this service due to the complexity & delay in completing atomicity. But the CeFi services solve this problem by storing the funds from different chains.
    We must know that many highest-market-cap & highly traded coins on different blockchain networks do not necessarily support the interoperability rules, which gives CeFi the edge over DeFi.
  11. Fiat conversion flexibility
    Now, we know that interoperability is better with CeFi than with DeFi. Same with the fiat conversion flexibility as it requires a centralized institution, and most of the DeFi providers do not offer fiat on-ramps. Also, users or customers can be onboarded easily & in a shorter time period in CeFi compared to DeFi.

How is Stader different from CeFi market players?
Stader being in the DeFi world is built strongly & differently compared to many CeFi players in the market. And there are 4 major reasons why.

  1. Stader is decentralized or non-custodial. This means that users completely control their crypto funds, and no transaction is done without the signature from their wallet.
  2. Stader is security tested & underwent multiple audits. Not just this, it has 12K+ users who have staked nearly ~685mn HBAR across 90K transactions so far.
  3. Stader is an on-chain solution where users can clearly see where their funds are being staked, hence offering complete trust, transparency, and comfort that user funds are SAFU with us.
  4. It is permissionless as well. Being an equal access protocol, anyone across the globe can become a user whether you have 0.1 HBAR or 100mn HBAR.
  5. Also, Stader’s mission has always been to bring the best staking product to our users & kick-start amazing DeFi opportunities on the Hedera network.

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