Many of us by now have heard something about decentralized finance or DeFi, but what about CeFi?
A piece by Caspar Brown published at CoinGape this morning goes into some of the specifics, contrasting DeFi platforms like Bitrue and OKEx with other “CeFi” platforms that use more traditional custodial systems to collateralize assets.
“Wishing to build on initial success in providing more traditional crypto and CeFi solutions, and following a surge in interest for DeFi services, some of the top exchanges are now seeking to offer the best of both worlds,” Brown writes. “The goal? A reliable and recognizable hybrid solution to merge the benefits of CeFi and DeFi, while mitigating the drawbacks.”
So what are CeFi and DeFi, really?
One basic way to explain it is like this: decentralized finance (DeFi) is based on the idea pioneered when Satoshi created Bitcoin, the idea that a blockchain can verify its own processes based on consensus, without any banking middleman. By contrast, CeFi represents “the old way” where banks or other parties verify assets and transactions.
Here’s how Brown puts it:
“Generally speaking, CeFi mirrors legacy finance, allowing users to earn interest or obtain loans, providing the safety of risk-transference against the drawback of requiring custody of assets. DeFi applies the use of smart contracts to financial instruments, cutting out the intermediary. It is non-custodial, but you take on the systemic risk of there being a fatal code flaw in the protocol.”
However, it wouldn’t be finance if somebody didn’t dream up a combination of both CeFi and DeFi options, as Brown calls for “a balanced hybrid solution,” calling that an “ideal combination.”
The benefits and disadvantages of both options are further defined by analysts looking at how finance is evolving today.
“Non-custodial finance also means you are responsible for your risk,” writes an expert at SwissBorg, also noting that CeFi systems have their own drawback in the kinds of loss of control that can lead to negative outcomes for those who buy into centralized systems. “While anyone may argue this is a necessary principle for personal finance, newbies who may not know the underlying risks behind a protocol may be burnt in the event of a bug.”
The bottom line here is that whichever you tend to favor and buy into, whether it’s CeFi or DeFi, you have to know what each one means, and what the specific platform does, and how it treats assets. There are no short cuts here: investor research is key. You can take that to the bank.
