There is still a wide chasm between centralized finance (CeFi) and decentralized finance (DeFi). Bridging the gap between both worlds will enable broader financial inclusion and improved liquidity across the board. Both have benefits and drawbacks that need to be addressed in their current format, but taking the best of both industries can lead to exciting developments.
When talking about centralized finance, one must understand it pertains to financial activities in the cryptocurrency space. Even though decentralization reigns supreme in the “code is law” environment, centralized entities have had tremendous success. Unfortunately, those providers and platforms can also pose a systemic risk to all users, as the user does not control their funds directly. It is often a trade-off between convenience and security, although most agree both elements should be present.
Centralized finance providers will often manage assets and services on behalf of their customers. That means users need to trust other humans with their money, as providers will act as a custodian and control user funds. That can enable easier ways to earn interest on idle assets and maximize the value of cryptocurrencies. Additionally, users will often enjoy better flexibility, support for fiat currency to buy crypto, and sometimes even higher interest rates.
An extra bonus of centralized finance is having customer support. It can often be helpful – especially for newcomers – to talk to someone if someone is unclear or potentially wrong. Centralized finance providers can rectify those aspects if necessary, which would not be possible through DeFi counterparts. Whether all of that is worth giving up control of one’s funds is a personal decision everyone has to make eventually.
While centralized finance providers offer a hands-off user experience, decentralized finance is a very different creature. Users must interact with smart contracts and algorithms to access financial products and services. That may seem straightforward but can prove somewhat daunting for those dipping their toes in these unknown waters for the first time. DeFi also requires a Web3 wallet, which introduces another layer of responsibility for the user to keep their funds, private key, and seed phrase safe.
The upside of decentralized finance is how it cuts out all the intermediaries. There are no signups, account managers, banks, or other institutions to worry about. Instead, users deposit their funds in a smart contract directly without interacting with any human. It is a very straightforward process; the code will do all the work. Trusting that code, however, is a different matter, as all code is written by humans, who can be fallible and corruptible.
The trustless and permissionless nature of decentralized finance is the primary selling point. While it is true users can audit the code themselves before interacting with it, one must understand the code too. It is not impossible to learn, but it is less of a “set it and forget it” experience than centralized finance. However, users will always control their funds, which is a huge benefit.
It is not hard to see both centralized and decentralized finance have benefits and drawbacks. The next step is to combine the best of both industries and explore new products, services, and use cases that can make a global impact. That may seem a bit tricky, as DeFi remains a largely unregulated industry. Without regulation, it becomes hard for entities in centralized finance to explore opportunities involving decentralized smart contracts and protocols.
Thankfully, things are heading in the right direction. Phree offers a regulation-minded ecosystem – supported by Swiss regulators – where centralized and decentralized finance can meet in the model. As a result, DeFi builders can build a fully compliant solution, and CeFi entities can explore decentralized opportunities benefiting from compliant solutions. Whether one wants to admit it or not, a regulatory approach will bring DeFi and CeFi into the mainstream, as it offers increased security and legitimacy.
The saying “you can’t have your cake and eat it too” does not apply to CeFi and DeFi. It is more than possible to keep everything decentralized and still have rules or guidelines to adhere to. These aspects are not mutually exclusive and may be the golden combination to bring both industries closer together. It offers an exciting look at what the future may hold for CeFi and DeFi, as well as the hybrid evolution that combines the best elements of both industries.
This post was last modified on Aug 22, 2022, 12:09 BST 12:09