CEFI AND DEFI EXPLAINED
People vs technoloqy
Short introduction of how both systems work:
Cefi or Centralized Finance
In a way it's like looking at our financial system how we know it but through"encrypted" glasses.
The similarity lies in how both systems were built on a central party base.
Cefi allows people to earn interest or get loans , using their cryptocurrencies as collateral.
The users put their trust in the people working for these corporations to manage their funds and execution on services provided.
in short people trusting people
Defi or Decentralized Finance
Are decentralized financial applications which allows their users to use a protocol rather than the need for other people or corporations.
This trust is established by the use of smart contracts, whereby they can cut out the middleman or corporation for the execution of provided services. The main goal of this system is a peer-to-peer open-source, permission-free and as transparent as possible.
in short people trusting technologie
The benefits and disadvantages of each system:
Cefi's main benefit is that they provide their users a risk transfer.
Here the corporation will take away the risk from it's depositors by ensuring their funds' safety and returns.
This is accomplished true bear custody and is similar to our known financial system but in an automated way.
Another benefit is their user friendly interface which makes it accessible for all, no matter if you're new to the industry or a veteran.
Due to this simplicity they attract a lot of users and are still the biggest piece of the industry!!
However this custody and risk transference also brings a disadvantage as the bigger centralized platforms with a higher
liquidity obviously become targets for hackers. Another disadvantage of this system is the need for an accomplished trust,
as their users don't have full control of their funds.
For example there are known cases of hacks in the past and even corporations who try to keep your funds as long as possible on their platform.
hereby true extra verifications the withdrawals of your funds can take up to days or even weeks..
some good examples of Cefi projects:
- trading platforms: Binance, Coinbase, Bitstamp,..
- lending protocols: Celsius, Nexo, Salt,..
Defi's main benefit is that their users have full control of their funds without the need for custody, a middleman or corporations.
The trust is established by the smart protocol itself, hereby a user is not obliged to trust a corporation in accomplishing as advertised,
but the user audits a code himself and can simply verify this by using external tools like etherscan.
Also a big benefit is the non existing requirement of a KYC process where users need to give their personal information
to be able to access the given services. This reduces the risk that your information is used without your consent!
A disadvantage is the complexity of the smart contracts where it's less user friendly as compared to Cefi projects,
more for the veterans among us.
Also we need to keep in consideration that many Defi projects are ER20 tokens built on the Ethereum platform.
For the moment Ethereum's platform experiences an overload due to these Defi contracts which leads to enormous high transaction fees.
However with the launch of Ethermium 2.0 this scalability problem should be solved!
Also keep in mind the new generation of blockchains where Defi projects can be complied with.
But the biggest disadvantage of the system remains it's peer-to-peer concept by not using any third parties!
Meaning all trust lies in the smart contract itself and how it's written.
The developer takes all the risk and responsibility, meaning if there should be a bug
no refunds are possible and the loss of their funds could potentially be catastrophic.
some good examples of Defi projects:
- Trading platforms: Kyber Network, Uniswap, Tron Trade..
- Lending protocols: Rune, Aave, yEarn,..
- Derivatives: Synthetix, Augur, dYdX,..
Defi, Cefi bubble or not??? my opinion !!
For the moment many believe it's an unsustainable bubble due to the high interest rates and it not being to be substantial.
However high interest rates have also happened in the past in the financial system as we know it.
If we take a look at the F.F.R. (Federal Funds Rate) of the past half century we can see an enormous spike in the eighties around 20%!
Although I must admit these were exceptional times as the American economy was overheated and
inflation was at a much higher interest rate than prohibited .
The reason for this link is in my opinion we find ourselves also in a new exceptional digital era
where I believe some of the projects are constructed in a way that high interest rates are substantial
and there to keep for at least a longer time than more expect (+ 10 Y).
Please feel free to comment below on your thoughts on the subject matter.