Introduction to Science Popularization: What are the similarities and differences between DeFi and CeFi, and how to combine innovation in an increasingly competitive environment

This article is sourced from Kine.

Our introductory science popularization series has briefly introduced the differences between the spot market and the derivatives market. The next topic is an essential subject in the crypto world, namely Centralized Finance (CeFi) and Decentralized Finance (DeFi). The issues related to DeFi are being discussed fervently in the crypto world. We already understand that DeFi is different from traditional finance, but how does CeFi differ from these two concepts, and what is its relationship with DeFi?

CeFi stands for "Centralized Finance," which is a concept that contrasts with DeFi. It refers to organizations operated by specialized centralized teams to provide financial services in the blockchain world. Both CeFi and DeFi differ from traditional financial services, as they are based on blockchain and distributed computing architecture consensus to provide crypto financial services. CeFi may be more efficient and focus on user experience, while DeFi is fundamentally more secure and cost-effective.

CeFi

Flexibility

In CeFi, funds are managed by people, which allows for a certain degree of flexibility and does not impose the same strictness as code. CeFi service providers generally offer comprehensive solutions and can directly handle users' funds according to customer needs.

Liquidity

Cryptocurrencies are still in their early stages of development and require centralized trading venues to provide a medium for users to exchange fiat and cryptocurrencies. Most DeFi services do not offer fiat channels; therefore, CeFi, as an entry point for exchanges, can achieve greater trading volumes and thus better liquidity.

User Experience

Due to dedicated teams managing them, the crypto services provided by CeFi often offer users a good experience. Centralized exchanges like Coinbase and Binance provide not only basic trading but also services like lending, financing, margin trading, and over-the-counter trading, allowing users to enjoy diverse and comprehensive financial services with a single account. For traditional users, the various functions of DeFi may have a certain learning curve, while the functions and operations of CeFi are relatively simpler and more user-friendly for novice users.

Efficiency

In CeFi services, off-chain matching by centralized exchanges is often more efficient and cost-effective than DEX in DeFi. Additionally, asset management and user services for cryptocurrencies in CeFi can draw more from the relatively mature models of traditional financial markets, allowing for standardization and quantification.

DeFi

Trustlessness

The goal of DeFi is to leverage the advantages of decentralization to provide solutions for the financial market. If there are black-box operations in human-centered CeFi, including issues of credit endorsement and guarantees, DeFi avoids such problems by managing assets through smart contracts instead of people, thus resolving trust issues between individuals.

Permissionless

In traditional finance, investors are classified into different levels based on their asset levels and risk profiles. CeFi also requires users to complete KYC processes to access certain services. In DeFi, however, users can connect to various DeFi services directly using a wallet without disclosing personal information or needing to deposit funds. This permissionless approach in DeFi is more open and fair for investors and reduces the instances of institutions profiting from personal information.

Innovation

The speed of innovation in DeFi is also one of its characteristics. Freed from the constraints of traditional finance, DeFi can maximize its potential for financial innovation, continuously building new DeFi applications that create pioneering financial services and offer users more possibilities.

Composability

An interesting aspect of DeFi protocols is their ability to interoperate. Most liquidity mining involves layers of contracts nested together, bringing more ways to engage with cryptocurrencies.

Security and Transparency

In DeFi, users have control over their funds, eliminating risks associated with centralized institutions misappropriating assets. DeFi is interconnected through a series of smart contracts, and transaction data is publicly transparent on the blockchain, avoiding issues like black-box operations. However, DeFi protocols still carry risks associated with smart contracts.

The Interconnection of DeFi and CeFi

Although DeFi is rapidly developing, there is still a significant gap in trading volume compared to CeFi service providers. For the most representative exchanges, according to data from The Block, the trading volume of DEX has never exceeded 20% of that of CEX. In the process of development, DeFi can use CeFi as a traffic entry point and can collaborate and learn from it in certain aspects.

The user experience in DeFi still has considerable room for improvement compared to CeFi. Due to lower liquidity, traders may sometimes encounter significant slippage. However, some DeFi applications are already making improvements in this area. For example, the decentralized derivatives trading platform Kine uses a peer-to-pool model to ensure liquidity and address high slippage issues. Additionally, Kine combines CeFi's synthetic financing rates and automatic deleveraging features, enabling it to offer up to 100 times leverage and cross-margining. In the future, there may be many areas worth exploring for the integration of DeFi and CeFi.