For decades, the CeFi system, also known as Centralized Finance, has been used all around the world. However, with the evolution of the internet and the rise of web3, a new financial system flourished: DeFi, short for decentralized finance.
Is DeFi here to stay? What changes are coming in our daily lives? Can DeFi truly decentralize the power that massive institutions and corporations wield today?
We'll go over everything you need to know about CeFi and DeFi in this article.
Table of contents
The main differences between CeFi and DeFi The current problems with CeFi The holistic vision for DeFi DeFi growth How to leverage DeFi solutions - Hackathons - Bounties - dappKit Challenges during the transition CeFi vs DeFi: comparison chart Final Thoughts
In recent human history, centralized finance has been around since goods and assets were used as currency. With the evolution of human negotiation models, CeFi is typically represented by fiat currencies, which are mediated by governments and financial institutions, such as banks.
As you are aware, financial institutions are in charge of providing loans, investments, insurance, and other financial products we use and rely in our lives. There is always a central exchange going on behind the scenes.
Some of those institutions also exchange cryptocurrency. Unlike a digital wallet like Metamask, which makes these trades decentralized, organizations like Binance and Coinbase act as intermediaries for these transactions. They act as a bank's broker for standard web3 trades for their customers.
Meanwhile, organizations that work on a DeFi model use blockchain networks to authorize decentralized business based on pre-programmed conditions, rather than the intermediaries highlighted in the previous paragraph. In other words, DeFi models always operate via smart contracts to ensure no middlemen are required.
👉 Learn more about digital wallets and how investors can earn money with web3
Centralized finances provide some return, such as interest on savings, and it is a simple process. On the other hand, there are some risks to be aware of:
When dealing with crypto assets with CeFi institutions, such as an exchange, they are the holders of your cryptocurrencies. As a result, you are vulnerable to the organization's risks, such as being hacked or mismanaged.
There could be not enough backed insurance.
Some CeFi providers may lock up your crypto assets for a certain period, depending on market crashes and volatility.
Users do not have total control over their funds.
CeFi providers may charge high fees.
Regardless of whether you use the CeFi system for crypto purchases or to carry out traditional financial operations with FIAT, remember: financial institutions may crash. A good example of this occurred in 2008, when trusted organizations failed during one of the world's worst economic crises.
Another reason to use a hot wallet is that centralized systems can be dictatorial. They have the power to confiscate, limit cash withdrawals, and artificially inflate the money supply.
This hyperinflationary tendency can be seen in nations such as Venezuela and Argentina, for example.
The Decentralized Finance concept was designed, among other aspects, to be more transparent, accessible, and faster than the traditional CeFi.
DeFi isn’t perfect, though, and it’s still facing many challenges until it can reach this holistic approach. However, lessons are being learned from previous experiences, market & web3 project crashes, new government legislation and evolving technology.
This entire process is already being named Defi 2.0, which we covered extensively in this article.
CoinMarketCap has listed over 505 altcoins and stablecoins with DeFi operations by the beginning of 2022. In one year, the DeFi market grew by 47 percent, surpassing $170 billion in November 2021.
This expansion did not happen by chance. After all, the main proposal of DeFi vs CeFi is to make financial products and services accessible to everyone. And there is no need for a third party to be involved, such as a bank or a custodial agent.
Another benefit is that DeFi markets are always open, unlike stock exchanges that only operate during business hours and weekdays.
All it takes is programming some conditions to execute operations. Decentralized Autonomous Organizations (DAOs) provide services such as investments, credit, payments, purchasing, crowdfunding, and insurance.
DeFi does this by replacing financial institutions with cryptocurrencies and smart contracts, which hold funds and send & refund payments based on certain conditions.
There are several decentralized finance solutions available that can provide excellent outcomes and benefits to your business. Here's how you can start adopting DeFi solutions in your company:
Hackathons are programming marathons, and it’s the ideal tool for testing and validating ideas and MVPs, recruiting specialized talent, and attracting users to use a certain platform, framework, protocol or blockchain.
There are two types of hackathons:
Open hackathons, as the name suggests, are open to everyone outside your organization with the profile & skills to develop the project or concept you’re looking for.
Internal hackathons are company-closed marathons, where only employees can participate. They can be a great event to foster innovation and concepts within your organization.
Aside from that, hackathons are an excellent way to attract and recruit developers and professionals who are knowledgeable about the differences between DeFi and CeFi environments.Telos Foundation, for example, hosted an online hackathon at TAIKAI to invite Ethereum-based developers to bring tools and apps to the Telos EVM (tEVM), a scalable Ethereum Smart Contract platform.
It has provided developers with an opportunity to create DeFi innovations as well as other web3 projects. The best projects were rewarded with Telos ($TLOs) tokens, demonstrating that an increasing number of developers are interested in being rewarded in crypto tokens.
👉 Read more about Telos Spark Hackathon
Short-term programming challenges are also great to test new platform designs on blockchains or identify bugs.
It means that organizations encourage developers to work on an "open-call" basis. Those who complete the objectives are rewarded with bounties. They are compensated usually in the form of crypto tokens.
Here is an example:
Caduceus is an open-source metaverse infrastructure that recently began the public testing phase. They hosted a hackathon at TAIKAI to identify any potential bugs before the Beta release and paid developers according to the level of (in)security for each bug found.
Security reports and solutions could be submitted by developers anywhere in the world. In exchange, these blockchain analysts are rewarded with bounties.
DAO organizations can do the same by offering bounties when testing a new DeFi solution or product. And aside from testing, companies may benefit from professional outsourcing to find highly qualified blockchain and web3 developers, which are still few and growing in demand.
The program encourages the community to audit contracts and security. There is a monetary reward ranging from 500€ to 50,000€ for eligible discoveries that may have an impact on the on-chain Bepro Network Protocol.
👉 Know more about Bepro’s Bug Bounty Program
Furthermore, if you already have an idea for a DeFi solution, you can speed up development by using dappkit: an open-source web3 software development kit that helps create web3 products in as little as 3 lines of code.
With dappKit, you can build DeFi platforms, NFT collections, marketplaces, predictive markets, DAOs, and even your own crypto token.
Our dappkit connects an entire integration, allowing for faster project development because:
One of the most pressing issues surrounding the CeFi-to-DeFi transition is how governments and traditional financial institutions approach the subject.
Some countries may believe that cryptos and DeFi operations threaten monetary policy sovereignty. Russia, for example, proposed banning cryptos in early 2022 - but this has not actually been done yet.
Central banks, on the other hand, are proposing the creation of CDBCs - Central Bank Digital Currency. The idea is to create a virtual version of a country's currency that is centralized and regulated by the monetary authority, particularly on blockchain platforms. To put it another way, it is a competitor to the DeFi system.
Another challenge is convincing the general public that DeFi operations are safe because the majority of the population is unaware of their existence. In some cases, users may see the CeFi to DeFi transition as a way to avoid inflation and conflicts.
With the Ukraine-Russia conflict, for example, civilians of these two countries have increased their DeFi operations as a result of bank and stock exchange closures, inflation, and devaluation of the local currencies.
Another issue (and a major criticism) is that decentralized operations have been used to finance criminal activities such as money laundering and terrorism. This type of control may appear difficult in a decentralized environment. However, it is possible to track the entire history of payments made by organizations that are behind crimes by accessing the public data of the blockchain.
In the United States, for example, the Securities and Exchange Commission (SEC) has stated that it intends to use AI to track illegal activity across DeFi protocols.
On the chart below you can find more information about CeFi vs DeFi:
|You have complete control over your money.||Money is held by companies and you need their permission to use or cash out|
|Payments and transfers are completed in a matter of minutes.||Payments and transfers may take days to complete.|
|You do not need an ID to freely trade your assets.||Many financial institutions must approve your ID, as well as your credit history in order to authorize you to carry out transactions.|
|Markets are open 24/7. You can exchange at any time.||Markets are open for a limited time during weekdays.|
|Increase transparency by writing all rules and conditions on smart contracts.||Financial institutions and governments may close some markets without giving any indication.|
Despite the challenges, DeFi is starting to embrace mass adoption and many brilliant minds are working every day to improve the current system.
Decentralized environments are ideal for executing credit agreements, investments, insurance policies, and so on.
DeFi also allows users to keep their own money, and smart contracts streamline pre-defined conditions between users without the involvement of a third party. This speeds up the process and gives users more control over their money.
Aside from that, DeFi democratizes the possibilities for people who cannot open a bank account and protects users from the high fees associated with CeFi operations.
There are many ways you can introduce DeFi to your business or professional life. Hackathons allow you to develop concepts, ideas, and web3 projects by using the power of the community. Bounties can help you outsource blockchain developers to work on your products. If you’re a solopreneur or want to keep development indoors, the dappKit SDK can help your developers implement web3 projects in a simple way.
Hosting a hackathon is a great way to engage your community and get developers to test and use your protocol or EVM.
TAIKAI is a virtual hackathon platform that makes an online hackathon event much easier to host.
Grow your network today with us. Request a Demo or launch your hackathon.