In the world of Web3, there is Centralized Finance (CeFi), and Decentralized Finance (DeFi). Let’s explore how they compare to each other.
Centralized finance (CeFi) is the traditional method of managing funds. In CeFi, governments, banks, and other financial institutions act as intermediaries and regulate financial transactions. These central authorities control all economic activity as they monitor, approve and disapprove transactions as they see fit. In this system, users share in the security of large existing companies as we trust them to hold our assets.
On the other hand, should these institutions have security risks, be fraudulent or fail, CeFi users will suffer due to not “owning” their assets. Examples of CeFi include banks, stock markets, and centralized crypto exchanges like BitMEX and Coinbase.
Decentralized finance (DeFi) is a financial system operating on a decentralized network like the blockchain. It removes the need for intermediaries by having the system governed by code. Decentralized finance offers similar financial services as CeFi, such as lending and borrowing but with less restriction and more anonymity. In DeFi, you control your assets and transact with others in a peer-to-peer manner. Though it is open and permissionless, users have more responsibility in securing their funds since no third party can reverse their mistakes. Examples of DeFi include browser wallets like Metamask and decentralized exchanges like Uniswap.
To summarize, centralized finance involves using intermediaries like banks to store and manage one’s funds. In contrast, decentralized finance refers to handling one’s own funds through decentralized networks like blockchain.
Understanding the differences between CeFi and DeFi allows one to maximize financial services to their full potential. Keep exploring and make the best of both!
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