For more than ten years of development in the cryptocurrency industry, the two strong financial sectors of CeFi and DeFi have been present throughout the cycle. However, in the industry that claims to be decentralized, CeFi is obviously more mainstream at present.
This article will explore where the fundamental differences between DeFi and CeFi lie, and why DeFi may never be able to surpass CeFi!
1.What is DeFi and what is CeFi?
The fundamental difference between the two lies in who controls the money. DeFi funds are controlled by you, while CeFi involves depositing your money with a platform for custody.
DeFi = Decentralized Finance
CeFi = Centralized Finance
The most significant concept is the exchange sector, which is generally recognized as CeFi, and its extensions are Cex and Dex.
These two different exchange concepts provide the industry with a rich trading scene. It can be said that without exchanges, the development of the cryptocurrency industry would not be so fast. The phrase "circulation generates value" is fully reflected in exchanges.
However, although they are both exchanges, their asset holding methods are different. One is that we hold the funds ourselves, and the other is that we entrust the exchange to hold our funds for us.
This is why many centralized exchanges have caused users to suffer significant losses after experiencing fraud or bankruptcy. This is because you entrust your money to the platform, and some platforms may divert your funds elsewhere. #DeFiChallenge
Once the funds are misused and exposed, it can be devastating for an exchange: refer to the FTX fraud incident.
Dex is entirely controlled by users themselves, and it can even be said that Dex only serves to satisfy the user's needs one-way. It will not retain any funds in the contract (unless you form LP, etc.).
2.The core differences between DeFi and CeFi.
Based on the differences between DEX and CEX mentioned above, we can extend to DeFi and CeFi. In the cryptocurrency industry, we judge whether a project is decentralized based on whether users hold assets independently.
Because some projects, even if they claim to be decentralized, are still doing "semi-custodial" things.
And we also need to distinguish whether the project is technically decentralized or governance decentralized, because many technically decentralized projects are still dominated by a single entity in terms of governance.
However, even so, ensuring technical decentralization can further ensure the autonomy of user assets, and ensuring autonomy means that security needs to be taken care of to some extent~
3.The pain points of DeFi and CeFi respectively.
Expanding on what I said earlier, DeFi needs to manage assets on its own, which can be both an advantage and a disadvantage. Imagine if there is a wrong transfer, it would be very difficult, even impossible, to retrieve the assets.
If you lose assets in an exchange or custodial wallet, you only need to contact the project team to have a channel to retrieve the assets.
Providing human services is what I think is the core advantage of CeFi over DeFi, and it is also why I think the scale of DeFi will never surpass CeFi. People can make many flexible expansions, while technology can only meet corresponding needs (undeniably, the decentralized community's expansion behavior will be cumbersome).
Therefore, the term "decentralized" is almost a double-edged sword in some cases. You cannot truly experience the feeling of losing assets until you have experienced it. Many people in the industry have lost huge fortunes due to the loss of their mnemonic phrases, and such examples are everywhere.
Nowadays, various scams are rampant, and users will create multiple decentralized wallets for security, but this also leads to a problem: the complexity of wallet management. #DeFiCeFi
These are the "decentralized pain points" that I have personally experienced.
As for centralized exchanges, the only thing that is criticized is the centralization itself. After all, in an industry that advocates decentralization, centralization is like a mistake.
But as I said above, the services that centralized platforms can provide can meet more extensive needs, and can even solve some problems that are difficult to solve in a decentralized manner.
In summary, there is a feeling in the cryptocurrency industry that "decentralization is both a success and a failure."
