What is the difference between DeFi, CeFi and TradFi?
One of the most confusing and overwhelming things about block chain is the amount of acronyms, terms and inside jokes that are frequently used, including “DeFi”, “CeFi” and “TradFi”. In crypto, any term that ends in “Fi” refers to a type of financial application or financial industry, both inside and outside of the blockchain.
Blockchain has a wide variety of uses, but it is essentially an economic technology that enables independent ownership of digital assets. Bitcoin, the first blockchain, was created to counter the centralization of the traditional financial system by providing an open, decentralized and “permissionless” alternative payment system. However, years later, Ethereum came into the picture and introduced blockchain smart contracts, which are used with website development to create decentralized applications called “dApps”. This innovation allows users around the world to use their crypto in different ways, leading to the emergence of many new financial services that all use blockchain technology in one way or another, some more secure than others. others.
As register explains, DeFi stands for “Decentralized Finance” and refers almost exclusively to dApps that operate via smart contracts. CeFi stands for “Centralized Finance,” which refers to businesses that use blockchain (and sometimes DeFi) as part of their business model, including cryptocurrency exchanges and centralized lending/borrowing applications. Finally, TradFi stands for “traditional finance” and refers to the entire non-blockchain financial system that most people use. CeFi apps and services are the “bridge” between TradFi and DeFi, as DeFi dApps cannot accept bank transfers or use debit cards, and TradFi cannot accept cryptocurrencies as payments (yet).
The risks of DeFi and CeFi
DeFi is an unregulated economic Wild West. Scams, poorly designed projects, and experimental implosions are common, and many DeFi activities present unique risks that require advanced knowledge to protect against. DeFi is also the birthplace of the infamous “rug pull” scam, and many projects are vulnerable to hacks and exploits that result in losses for users. However, many ‘blue-chip’ DeFi projects like Aave, a crypto lending and borrowing dApp, and Uniswap, a decentralized cryptocurrency exchange (DEX), have suffered enough stress over the years. to be considered safe to use, and many other projects also fall into this category. DeFi gives all the risk, reward, and responsibility to users who want to be their own banks, hedge funds, or venture capitalists, and it provides the tools and data they need to do so.
CeFi is completely different from DeFi, although it often uses DeFi as part of its strategy to generate income. In early 2022, CeFi lending and borrowing apps were considered superior to DeFi lending and borrowing dApps. However, in mid-2022, the largest of these platforms, Celsius, filed for bankruptcy and triggered a cascade of CeFi liquidations and bankruptcies across the industry, including crypto exchange Voyager Digital CeFi, resulting in billions of dollars in lost customers in the industry. unpaid. This series of events taught everyone that (established) DeFi dApps run by computer algorithms are safer than CeFi apps run by humans. While 2022 has been a year of many hard lessons about trusting third-party crypto, CeFi is only risky if the company providing the service is unregulated and opaque. CeFi plays a vital role in the crypto economy, as crypto exchanges are a form of CeFi services and are currently the only way to transfer dollars into or out of a block chain.