DeFi (decentralized finance) and CeFi (centralized finance) have emerged in the cryptocurrency world. The main difference between them is that DeFi is centered on decentralized infrastructure and is managed by the community, while CeFi is managed by commercial institutions or a joint effort of many companies and organizations. This fundamental difference also leads to differences in their operating mechanisms.
DeFi: The financial revolution on blockchain
DeFi, or decentralized finance, represents a revolution that leverages blockchain infrastructure and open source software to create a variety of financial services and products, covering traditional financial services such as lending, trading, currency issuance, payments, insurance, over-the-counter trading, mortgages, financial data, asset management, and more. The core idea of DeFi is to return the management of financial services to the community, away from the centralized management of traditional banks, governments or regulators. This field is now emerging as a strong trend, similar to the initial coin offering (ICO) boom in 2017.
Currently, many DeFi projects rely on Ethereum, a public blockchain that provides intelligent features such as smart contracts, making the development of decentralized applications (dApps) possible. A smart contract is a code programmed on the blockchain that can be automatically executed and terminated when certain conditions are met. This eliminates the complexity of intermediaries in traditional financial services.
CeFi: The Dominance of Centralized Finance
CeFi, or centralized finance, as the name suggests, relies on centralized entities to provide financial services. Users entrust their funds to commercial institutions or organizations for various services, especially in the field of cryptocurrency exchanges. Most CeFi service providers follow Know Your Customer (KYC) and Anti-Money Laundering (AML) practices to meet legal requirements. Users must provide personal information and ensure that their funds come from a legal source.
DeFi and CeFi: Similarities and Differences Coexist
Although DeFi and CeFi have differences, they also have many similarities in providing financial services. Both DeFi and CeFi can realize spot trading, derivatives trading, margin trading, lending, payment, and the creation of stablecoins. The trading interface is also usually easy for new users to get started.
DeFi vs. CeFi: Differences Dominate
Although DeFi and CeFi can provide similar financial services, they have significant differences in their core mechanisms and philosophies. CeFi is managed by a single entity or collective, while DeFi operates through a community mechanism, emphasizing decentralization and decentralization. CeFi services typically require higher fees because they involve institutional operations and maintenance, while DeFi transactions are generally cheaper because there are no intermediaries. DeFi allows users to take control of their own funds, while CeFi typically requires users to escrow funds to a central entity.
in conclusion
DeFi and CeFi have their own merits, but they have both made important contributions to the development of cryptocurrency and blockchain. DeFi represents the future of decentralized finance, and its influence will continue to expand, providing more people with the convenience of financial services. Investors and industry observers should pay close attention to the development of the DeFi field, especially the progress of Ethereum's shift to the Proof of Stake (PoS) consensus mechanism and the regulatory changes related to DeFi. These factors will shape the new landscape of the financial field in the future.
