Cefi and Defi, What and why

Cefi

All over the world, people use traditional financial services every day. However, these services are provided by big banks and always have a single point of failure. CeFi is an extension of the existing financial model, but upgraded to the next level with crypto. “It alleviates one of the biggest pain points of the traditional financial system — accessibility but keeps the usability and simplicity as it’s more familiar to most people.” said Dashdorj. Centralization refers to a point of central control, which in the case of finance refers to banking institutions. Historically, centralization in finance was desirable as a measure and maintainer of stability in global financial processes, thought to be more secure and stable than personal management. These systems were particularly necessary for cross-border transactions due to the reach of the infrastructure. But, there’s a catch: the centralised finance sector is only as stable as we pretend it to be. Realistically, centralised financial systems are impacted by a variety of issues such as fraud, forgery, questionable lending processes and more.

Example: Faceboook Libra stablecoin, Coinbase, and Binance.

  • Central authority
  • Single Point of failure.
  • Centralized technology and data both allow for the security risk and monopolization of power.
  • Centralization of power can allow companies to monitor the user data habits in a way that user does not like and may never know about.

Incidents in history caused by Cefi

There are some of the incidents mentioned that are cause by the Cefi.

  1. The citizens of Greece whose money is in a centralized bank, that in June and July of this year could only access €60, per day [1].
  2. 47 thosuands Sony employees whose social scurity number were stolen [3].
  3. 76 million household affected by the JP morjan hack [4].
  4. 40 million target customers whose Credit Card information was stolen [5].
  5. Chinese Uber drivers who are panelized based upon where they drive by their centralized employer [2].

Defi

Defi is basically about shifting the power and authority in a community away from the one central entity and making that power available to the members themselves, making community members self-sovereign. A dapp has its backend code running on a decentralized peer-to-peer network. Contrast this with an app where the backend code is running on centralized servers.

Example: Bitcoin, BitTorrent

  • No central authority
  • Power is shared
  • Community members self soverign

Benefits of Defi

  • No Middleman: DeFi applications are built on top of protocols with open governance models. Over time, these protocols will not be governed by any single company instead of by entities owning the tokens with real skin in the game. It removes the profit-seeking middle man and the dependency on a single company or entity. Therefore, eliminating the chance of People failure and manipulation.
  • Innovation: DeFi is powered by protocols that are open and permissionless. Therefore anyone can build on top of them, which is a catalyst for innovation. DeFi services are applications of programmable money, and developers are reinventing the finance and making it more efficient.
  • Operating Cost: As email eradicated the need for physical post offices and reduced the operating cost and increased the efficiency and volume at the same time. Similar will happen to banks and other financial services as DeFi services will grow. Do you remember when you went to your bank last time? I don’t.Digital assets will replace not only the physical assets but also all the operating costs associated with it. Think, a protocol on the internet can give loans to anyone in the world without any human involvement.
  • Transparency: Transparency is one of the biggest problems in the financial sector. If people knew that banks were giving bad loans earlier, we could have prevented the 2008 financial crisis. With DeFi services, you can see every transaction on the blockchain and analyze them.
  • Safety: Systems are less prowened to be hacked when based on redundant data. Hard to attack, users are not at a same place.
  • Nodes can come and go but the system remains the same. Blockchains are generally resilient to failure as it continues to function as long as at least one node is up and running.
  • No single point of failure: With no single point of failure and distributed architecture, it is difficult for malicious attackers to attack on individual users.
  • No owners: Once deployed to Ethereum, dapp code can’t be taken down. And anyone can use the dapp’s features. Even if the team behind the dapp disbanded you could still use it. Once on Ethereum, it stays there.

Disadvantages of Defi

  • It is a great risk when you give individuals total control of their money and assets. Passwords can be forgotten, addresses mis-typed — the list of ways you can lose your cryptocurrency is just endless.
  • Reliable sources prove that more than one-fifth of all bitcoin are currently missing. And with further adoption, this figure is bound to grow.
  • Despite the headway’s many entities are making, the DeFi regulatory landscape is still ambiguous. Much of the law and DeFi classifications are still uncertain. This is why most businesses are hesitant to jump in fully.

Conclusion

  • According to DEFI PULSE, In less than one month in 2020, users locked more than $125 Billion worth of cryptocurrency in Defi apps.
  • Most of them are Lending and borrowing platforms, which are covering most of the Defi space.
  • The core DeFi concepts are genuinely novel, but the products in the market at present are mostly unusable for the majority of the target market — the unbanked and underbanked people. For this, DeFi needs the user experience of CeFi.

References

[1] Mark Thompson, “Greece shuts banks in pid to prevent collapse,” June 28, 2015, CNN Money, available at, http://money.cnn.com/2015/06/28/news/economy/greece-banks-ecb/ (last visited Jan 08, 2021).

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