Comparison between Defi and CeFi lending platforms

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Crypto lending is a popular tactic used by crypto investors to earn additional income on their crypto portfolios. It is a process of lending cryptocurrencies to borrowers in return for interest payments. 

Earlier, when this concept of crypto lending was not there, there were two ways through which individuals used to capitalize on their investments. These included the long-term holding of coins or tokens; and short-term trading in and out of volatile markets.

 

Crypto lending resulted from the matured crypto market when additional ways were developed, thus offering new opportunities to investors. With the emergence and growth of decentralized finance (DeFi), more traditional services such as banking were brought to the crypto market.

 

With the expansion of cryptocurrencies, our focus has now moved to new considerations – DeFi (decentralized finance) and CeFi (centralized finance). Though the duo offers various cryptocurrency-related financial services, they are not entirely the same. This article will compare “DeFi with CeFi” and discuss them in detail.

 What is DeFi?

DeFi is an umbrella term for peer-to-peer financial services built on the public blockchain, typically Ethereum. In simple terms, DeFi is an open financial system. DeFi gives investors control and visibility over their money and exposure to global markets and banking options. DeFi uses smart contracts and does not need intermediaries to conduct a financial transaction. DeFi offers all-in-one services, including borrowing, crypto lending, asset storage, yield farming, and much more.

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What is CeFi?

 

CeFi, which stands for centralized financing, refers to the process of centralization means the concentration of planning & decision-making processes inside an organization to one single leader or location. In centralized finance, all crypto trading orders are routed via a central exchange. The individuals in charge of this exchange manage money on CeFi. Furthermore, the exchange decides which currencies can be used for trading and how much fees the users should pay to trade on their platform. In addition to crypto trading services, these exchanges support other services such asborrowing, lending, and margin trading, etc.

The decentralized finance platforms have their own tokens which are termed as DeFi tokens. Some of the top DeFi tokens are Dai, Wrapped Bitcoin, AAVE, Maker, and Lido DAO.

The Future of DeFi Adoption

DeFi adoption gained pace in mid-2020 with the total value locked (TVL) reaching almost $100 billion in 2021 end. The DeFi market has declined since then due to hacks, liquidity crises, and regulatory burdens.

The future of decentralized finance will depend on appeal from people, government support, and solving liquidity challenges.

 

DeFi Vs CeFi:

One of the most visible difference between decentralized finance and centralized finance is that the CeFi is regulated, whereas DeFi is an open source and is not regulated. In centralized finance, the responsibility of protecting users’ money is with the exchange. In contrast, transactions are verified DeFi with the help of smart contracts. In simple terms, DeFi makes users responsible for managing their funds and activities. In CeFi, it is possible to stop trade and impose restrictions or limitations on users. However, this is not true for decentralized finance. Decentralized finance is permissionless, while the same is not valid for CeFi. There are two areas where CeFi stands separated – One, where the CeFi exchanges support the conversion of cryptocurrency to fiat currency, and vice-versa. And secondly, where it promotes cross-chain exchange for various cryptocurrencies, demonstrating interoperability of cryptocurrencies. Centralized finance provides less anonymity to users compared to decentralized finance. There are multiple intermediaries available in a Ce-fi, while DeFi platforms do not need any intermediary to allow exchange between two parties. 

 

 

 

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