CeFi or DeFi?
Centralized vs. decentralized finance
Blockchain will expand financial access. Smart contracts, pioneered by Ethereum, treat finance permissionlessly and non-custodially. Bitcoin's resilience shows a non-central bank money system is conceivable.
Blockchain technology can be permissioned. A central authority controls and decides on the protocol's functioning. Including private keys. That's the difference between centralized and decentralized finance (DeFi).
Decentralized financial services
Bitcoin is the first decentralized peer-to-peer (P2P) electronic payment system. No board of directors decides Bitcoin allotment or blocks network access. Satoshi Nakamoto, the cryptocurrency's founder, is anonymous.
Anyone can contribute to Bitcoin. By mining and running a network node, they can exchange and store value without a bank or organization. North America and Europe have 14,185 Bitcoin nodes that validate and process transactions.
Bitcoin nodes worldwide. bits.io
Bitcoin was simply the start of decentralized money. Ethereum introduced a new blockchain in 2015. Ethereum is a general-purpose blockchain that enables users to construct and support dApps.
Ethereum also enables smart contracts, which automate agreements. Ethereum might imitate the traditional financial ecosystem. This includes cryptocurrency trading, lending, borrowing, insurance, payments, prediction markets, launchpads, derivatives, and marketplaces.
Ethereum held $135 billion in dApps in December 2021. DeFilllama.com
Instead of intermediaries, Ethereum uses dApps. Smart contracts replace CEOs, brokers, custodians, and clearing organizations, leaving users without permission.
Ethereum generated a generation of smart contract networks with dApp ecosystems, including Avalanche (AVAX), Algorand (ALGO), Solana (SOL), Cardano (ADA), Binance Smart Chain (BSC), Tron (TRON), and Ethereum scalability sidechains including Polygon, Optimism, and Arbitrum.
dApp example
DeFi centers on DApps. They work? Consider market makers. In traditional finance, these organizations buy and sell stocks in anticipation of consumer sales. They infuse capital to make markets run smoothly.
Trading would stop without market makers' liquidity. Banks need deep liquidity to exchange money and lend.
DeFi's elegance is that users conduct all critical functions.
Uniswap pioneered an AMM protocol to enable user transactions.
User A wishes to become a liquidity provider to produce yields (APY) (annual percentage yield). User A adds tokens to liquidity pools, which gather and issue cryptocurrencies.
B wants to swap cryptocurrencies. B uses A's liquidity pool to do so. A gets a cut when B does this. A and B construct a decentralized ecosystem without interacting. Only supply and demand use smart contracts. Without permission.
One of many liquidity pools, USDC/ETH. UNISWAP
LP pertains to borrowing and lending. A liquidity provider funds a smart contract. When borrowed, the borrower pays the LP interest.
These have always been the foundations of any monetary system. Top 10 blockchain lending dApps (chains).
DeFilllama.com
Why talk of centralized finance (CeFi) when the financial system is decentralized? Isn't that banking? CeFi's leaner operations simplify the user experience.
Explaining CeFi
Permissioned centralized finance (CeFi) uses blockchain technology. Unfortunately, Celsius Network shows what this means.
Both platforms had blockchain-compatible digital assets. The firms that launched them controlled token allocation, not users. Both could participate in dangerous lending methods like banks.
- Cryptocurrency Market Cap Defiant
- Cryptocurrency Market Cap Defiant
- Cryptocurrency Market Cap
The Defiant: Cryptocurrency Market Cap
Defiant Celsius Network overleveraged and overextended its balance sheet to achieve double-digit yearly yield gains. Celsius has $5.5 billion in liabilities and $4.3 billion in crypto assets, according to its bankruptcy petition.
Celsius might offer 18% APY in a bull market. Investors fled risky assets like stocks and crypto after the Fed raised interest rates, hurting Celsius' CEL utility coin.
Celsius Network's business model offered high rewards but high-risk leverage.
CelsiusNet
This caused debt burdens to tumble, driving the corporation into bankruptcy. Investors in Celsius provided the corporation their confidential keys. This means they transferred ownership without the corporation protecting the cash against financial disaster.
One month before declaring bankruptcy, Celsius banned account withdrawals and transfers.
Does DeFi win?
MetaMask is used to access DeFi dApps. Non-custodial means self-custody, so only you control your money because you have the private keys to a blockchain network.
Traditional banks and CeFi systems can't say this.
Celsius, Binance, Coinbase, Nexo, or Gemini...
Their accounts are custodial. They're digital banks without deposit insurance.
If they fail due to terrible business, your savings may too. DeFi dApps provide users complete control over their cash. DeFi hacks and exploits can happen, but so can CeFi.
Extra APY and conveniences aren't worth the danger. Because "severe market conditions" could lock you out of your account. Ask Celsius and Voyager users.