The short answer: It depends.
As increasing numbers of people turn to cryptocurrency to move their money outside the traditional financial trading system, more people than ever before are exploring their options. After all, users have differing needs – some might require a platform that enables derivative trading, others might need the regular cross-chain exchange with fiat currency and crypto. Whatever the case may be, there are two main classifications within blockchain-based crypto finance, namely Centralised Finance and Decentralised Finance. While they both aim to help people use crypto in a range of financial services, they differ in how they go about doing it.
In this article, we’ll be breaking down the pros and cons of each of these, so you can make an informed decision.
What is Centralised Finance (CeFi)?
Centralised Finance exchanges are managed by a group of people who are usually in control of a financial technology company. The main advantages and disadvantages of CeFi lie in its central nature. On the one hand, you don’t need to worry about illegal transactions being made for fraudulent purposes since the platform uses Anti-Money Laundering (AML) and Know-Your-Customer (KYC) identity verification checks before completing transactions. On the other hand, you need to be willing to entrust strangers with your digital assets.
Since CeFi platforms are custodial, their duties will include handling user deposits and managing the accrual and payment of interest.
Advantages of CeFi:
- More flexible and convenient than DeFi – can do fiat to crypto conversions and cross-chain exchanges.
- Higher interest rates when depositing assets on CeFi platforms.
- Access to customer service by individuals or companies managing funds in the event of a problem.
Disadvantages of CeFi:
- No anonymity. While the use of KYC and AML makes CeFi less susceptible to illegal activity, it also means you can’t use financial services anonymously since identity verifications will be required.
- Vulnerable to threats. Centralised nature opens CeFi up to all kinds of threats, from security breaches, leaks and even cyberattacks.
What is Decentralised Finance (DeFi)?
Decentralised Finance involves the use of smart contracts and algorithms to manage transactions. Unlike CeFi, these don’t require intermediaries or banks. Instead, they use blockchain technology and run on the Ethereum network.
Naturally, this means you don’t need to worry about the middleman having access to your funds. You also don’t need to be concerned with data theft vulnerability since smart contracts execute contracts securely and correctly each time.
Advantages of DeFi:
- No need to request permission to join. Since DeFi platforms are permissionless, users don’t need permission to enter a DeFi exchange.
- Non-custodial in nature, so smart contracts manage all deposited funds.
- Can quickly verify if transactions were completed correctly using external tools or auditing codes, unlike CeFi, where transactions must go through various checks first.
Disadvantages of DeFi:
- The anonymous nature of Defi can be misused to conduct illegal transactions and, in some cases, fraud.
- No consumer protection. Since there’s no intermediary, there’s no one to go to for help if things go south.
What are the main differences between the two?
In summary, these are the main areas you’ll see differences between the two platforms.
- Cross-chain exchanges. Like we explained earlier, CeFi exchanges allow you to convert fiat currency to cryptocurrency and vice versa. CeFi will also allow you to switch between multiple cryptocurrencies, despite them being on individual blockchains. DeFi exchanges can do neither of these.
- Transparency. DeFi transactions are more transparent than CeFi transactions. They run on smart contracts, which operate on specific conditions, whereas with CeFi, you can never be entirely sure how a company is managing your assets.
- Privacy. DeFi exchanges are much more private than CeFi exchanges. This can be attributed to the fewer checks and verifications it needs, as well as the fact that it operates on a blockchain without the use of an intermediary to monitor transactions.
- Permissionless. DeFi exchanges don’t require permission to join like CeFi exchanges do.
How to pick which exchange is best for you:
If privacy is your biggest priority, go for a DeFi exchange. You’ll be able to make transactions anonymously, handle all matters relating to your digital assets directly and enjoy the benefits of automation and smart contracts in your business.
If safe, efficient transactions are your biggest priority, go for a CeFi exchange. Your safety will be ensured with each transaction, and you’ll be able to seek help if you need it.
Curious whether KISS Token will be listed on Dex or Cex? Stay tuned for the official announcements on our launch. We hope you’ve enjoyed reading this article! For more related articles, visit https://old.ukiss.io/press/