An explanation of centralized vs. decentralized finance

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In this video, TechTarget editor Jamison Cush talks about decentralized and centralized finance.

Centralized or decentralized, that is the question.

The two prevailing approaches to managing cryptocurrency transactions include centralized finance and decentralized finance.

There are notable differences between the two approaches, but they both have the fundamental goal of enabling the use of cryptocurrency.

Centralized finance, or CeFi, handles the purchase, sale and trading of crypto through a central exchange. This is similar to how traditional currency is exchanged, where banks and exchanges manage the flow of currency.

CeFi exchanges hold the private keys for cryptocurrency wallets that enable access to cryptocurrency tokens on a blockchain. CeFi exchanges are responsible for the safety, security and timely execution of transactions.

CeFi boasts advantages like:

  • Customer service.
  • Fiat conversion.
  • Cross-chain exchange support.
  • Margin trading.
  • And the possibility of interest income.

But it also has drawbacks, like:

  • Funds held outside of user custody.
  • Potential risk from regulatory compliance.
  • And, accounting being handled by the CeFi, not in a smart contract.

Decentralized finance, or DeFi, is a peer-to-peer approach for cryptocurrency transactions. There is no centralized exchange holding custody over crypto assets. With DeFi, individuals have control of private keys and use smart contracts to execute transactions.

While DeFi removes centralized control, there are Decentralized Exchanges that help facilitate DeFi transactions.

The advantages that DeFi offers include:

  • Custody of funds.
  • No permissions.
  • Anonymity.
  • And lower fees.

But there are drawbacks as well, like:

  • Complexity, relying on sophisticated algorithms and smart contracts.
  • High risk of attacks.
  • Volatility, as there is no central authority.
  • And no human customer support. 

With blockchain at the core of both CeFi and DeFi, the two approaches are both widely used to deliver cryptocurrency-related financial services.

What approach do you think is the best? What risks are you willing to accept and what benefits are you looking for? Share your thoughts [at Eye on Tech] and remember to like and subscribe.

Sabrina Polin is a managing editor of video content for the Learning Content team. She plans and develops video content for TechTarget's editorial YouTube channel, Eye on Tech. Previously, Sabrina was a reporter for the Products Content team.