How Does DeFi Differ From CeFi?

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There are 3 major differences to know between CeFi and DeFi.

1) Centralized finance (CeFi) refer to crypto banking companies like Coinbase, Binance, and Huobi, which are owned by a single entity or corporation. CeFi teams can provide valuable services but they’re 100% in charge. They can let you in and kick you out.

In DeFi, applications aim to decentralize ownership and become community-owned, somewhat like a grocery co-op. Everyone owns a piece of the project and the community runs and maintains its code.

2) In CeFi, you often have to go through a sign-up and know your customer (KYC) process. This is necessary to abide by regulations and prevent criminal behavior like money laundering. But the practice also prevents global users from accessing financial services, it means trusting third parties with your private information — and it’s just cumbersome.

In DeFi, as long as you have a crypto wallet like MetaMask, you don’t have to submit to KYC or signup or ask anyone for permission –just click Connect and you’re in! That’s what we mean by DeFi is permissionless–no permission required. 

3) Lastly, in CeFi, we trust exchanges and other centralized apps with our assets. If I deposit into Coinbase, I am trusting them to keep my balance of crypto assets safe while I trade. Coinbase and other centralized exchanges own the private keys, and you know how the saying goes: “not your keys, not your coins.”

In DeFi, users don’t need to trust anyone. You hold control of your private keys at all times and have control over your assets, When trading, lending, or in any other interaction with DeFi dapps, you depend on the smart contracts to execute transactions and trades–not people. 

The takeaway here is that in CeFi you’re trusting companies with your assets and information, while in DeFi, users are in control. Because CeFi is regulated, it’s the main way to go from fiat currencies into crypto, so it’s a necessary gateway into DeFi.

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