In recent times, there has been a debate over centralized finance and decentralized finance(Defi), with individuals trying to determine which is better. This post aims to dissect and compare both of them effectively.

What is Centralized finance all about?

Before DeFi came around, centralized financing was the norm for trading cryptocurrency. It still controls a sizable portion of the cryptocurrency market. But as DeFi experiences astonishing growth, decentralized finance is matching up to it.

All orders in the cryptocurrency market are routed through a central exchange in centralized finance (CeFi). The responsible individuals administering this exchange manage the funds. Therefore, you lack access the a private key which opens your wallet. Additionally, the exchange chooses which coins are available for transacting or what it will cost you to use their exchange.

In conclusion, using a centralized exchange to trade cryptocurrencies prevents you from genuinely owning them. You are also bound by the restrictions a centralized exchange places on you.

What is decentralized finance about?

There is no exchange involved in decentralized finance. Automated apps created on blockchain technology drive the entire process.

Decentralized finance also aims to provide a equitable financial system in which anybody can take part. In theory, blockchain technology and DeFi will make it feasible for even those who do not have a bank account to use some type of banking services.

Decentralized finance is more explicitly designed to develop a permissionless and transparent ecosystem of financial service providers. This decentralized financial system offers a variety of services, including lending and borrowing in cryptocurrency, yield farming, asset storage, and others.

The ability to maintain control over your assets is the main advantage decentralized finance has. This indicates that you are the only person with access to move your money and that you own the keys to your wallet. Decentralized applications (DApps) are also required for customers who want to access DeFi services.

Differences between centralized finance and decentralized finance

The presence of an exchange is what distinguishes centralized from decentralized finance. Exchanges control the system in centralized finance. In contrast, it depends on technology in decentralized finance. Users of DeFi can access financial services via DApps, as was previously mentioned.

This difference is based on a more important differentiator that is frequently ignored. The exchanges bear the risk of users as a result of the exchanges' involvement in Centralized Finance. Exchanges are responsible for safeguarding users' funds as a result.

These middlemen are removed in DeFi. On the assumption that smart contract would function well, the transactions take place.

There are also other distinctions between both. Cross-chain solutions and fiat to cryptocurrency conversions are made easier by centralized finance. If necessary, centralized finance can also shift money to support its clients or halt trade in the event of a bad occurrence like a cyberattack. DeFi, on the other hand, is thought of as being more open and non invasive as it does not request any personal information from the client and is not a custodial service. DeFi cannot restrict users or block trades, whereas Centralized Finance may.