Exploring CEFI vs DEFI in the Crypto World
Understanding Centralized Finance vs Decentralized Finance: Exploring CEFI and DEFI on the Blockchain
Digital assets have taken the world by storm and despite the current market volatility we are witnessing, I firmly believe they will become an even bigger part of our financial ecosystem. There will always be naysayers – that’s par for the course and good for the industry. We want doubters as that pushes us even harder to innovate.
In my last blog, I wrote about institutional adoption and the current regulatory environment. To me, it was not a question of if institutions would move into digital assets on a global basis and with mass scale, but when. My thesis was clear: whether regulated or not, decentralized or centralised, digital assets and the blockchain are here to stay. Which brings me to my next topic – decentralised vs. centralised finance or rather DeFi vs. CeFi.
Too often, I read articles pitting one against the other and while I understand the rationale, to me, it’s really not a fight – they both have a place in our financial ecosystem. Centralised finance is embedded in our core; it’s what the world knows as civilizations and economies were born through centralised finance. You have supply and demand. You have a currency. And you have a value for that currency backed by a government. Our financial banking system has been centralised for thousands of years and this will remain. However, with the rapid escalation of digital assets and cryptocurrencies, and the advent of the blockchain, the system as we know it, appears to be disrupted. But is this really the case? I think not.
What we are seeing is simply evolution – new ideas, new innovations and new ways of doing business. That’s what blockchain and digital assets are. Think back to the old days before we had regulated currencies. Think about the advent of the stock market, changing global currencies, and new financial instruments. And then think about technology and how it has changed our everyday lives – chips, processors, broadband networks, the Internet (and now the Internet of Things). Evolution through innovation is what makes us who we are and using these examples, you can hopefully follow my train of thought.
Which is better for you: CeFi or DeFi?
When we think about centralised finance in the crypto world, we’re simply saying that trading orders are routed through a central exchange. Those who trade or store assets in crypto believe the exchange is trustworthy because they are centralised and the belief is, information is safe and assets, secure. Despite lesser anonymity in CeFi, there is trust because it is what the world has grown accustomed to (and the underlying technology has been vetted and accepted).
On the other hand, decentralised finance has opened up a new arena – new currencies, exchanges and platforms. People and businesses are now leveraging the blockchain to trade in a decentralised manner. This means, transferring or trading assets without intermediaries via ‘smart contracts’. With DeFi, you in essence are removing barriers to transparency and providing greater control and accessibility. The custodian is removed giving users greater control – there is limited to no oversight – and they remain the custodian of their own assets.
My take: DeFi and CeFi will co-exist and are highly compatible.
Irrespective of the exchange platform, investors want to know their assets are safe, their information and privacy is protected, and the system or technology platform used, is trustworthy. That is the #1 variable – trust. And trust takes time. You don’t trust someone after meeting them for the first time and may not build a level of trust for quite some time thereafter. It’s the same with blockchain, digital assets and decentralised finance. The more we educate the masses and those responsible for regulations, the quicker decentralised finance will grow in popularity and the more similar it may be to the centralised world as we know it.
My take: Technology will only get better…it always does.
The blockchain wasn’t built overnight, nor were the companies supplying the underlying infrastructure. Through innovation and by understanding market needs better, technology evolves. It always has and always will. Think of the cell phone. It started as a suitcase in the trunk of your vehicle and evolved to become a portable device. We then saw phones get smaller and smaller and soon thereafter, was the advent of the iPhone. It killed companies and technologies – but also led to new innovations and technological advances. The smart device was born and we’ve seen just how quickly new applications and features have improved smart device functionality, becoming part of our everyday lives. We can’t live without it!
Technology supporting both centralised and decentralised infrastructures will only get better as the industry evolves and addresses the gaps and/or misperceptions in the marketplace.
My take: Security is key to adoption
This ties back to technology and innovation. If the exchange is protected, transactions are executed, and assets are secure, fears will be alleviated and thus, the pace of adoption will intensify. As we’ve unfortunately witnessed over the past several years, any network can be vulnerable to an outside attack, as they rely on technology, the same way a car relies on fuel. Companies around the globe spend billions of dollars annually to ensure their networks and the information stored within remains secure. Blockchain is no different. Centralised networks have experienced outages in the past – take the NYSE and Nasdaq – they are not immune despite the exorbitant capital and efforts placed on security. With blockchain, we are talking about markets and exchanges that are open 24/7/3645, thus an even greater effort will be placed on security.
Conclusion: DeFi and CeFi will co-exist and thrive!
Trakx is a global fintech company creating new standards for digital asset investments. Through our trading platform, we offer thematic Crypto Tradable Indices (CTIs) and customised solutions, providing sophisticated investors a high degree of compliance, custody and liquidity. Trakx is registered with the French regulator (AMF).
Trakx offers two types of Crypto Tradable Indices (CTIs) - "Decentralized Finance" (DeFi) and "Centralized Finance" (CeFi) - through our trading platform, providing investors with a diversified exposure to the crypto market.