Centralized Finance Versus Decentralized Finance
Before we dive into Centralized Finance Versus Decentralized Finance in the crypto currency world, let us establish some facts about the main centralized finance or centralized banking system model used in our global society.
In the centralised model of banking, you deposit your money with a company, for example a traditional bank. Then, when you need to spend that money, you go back to the same company for your withdrawals. Banks can also give loans and manage other aspects of your finances, such as mortgages and investing. However, banks are not perfect. For example, they can charge fees on top of their service costs if you don’t keep enough of your savings with them.
Centralised finance is based on trust. People often put faith in their bank and assume the institution will always behave fairly.
However, this isn’t necessarily true. There have been instances where large companies have taken advantage of people’s lack of knowledge about how the economy works, or even outright fraud. In addition to unethical behaviour, there are several ways that the current system can cause problems for users.
The Traditional Banking System.
Traditional banking is a system where you give someone else your money to look after for you then you collect it back later.
Banks have been around since ancient times, but the modern traditional centralized banking system began with the Swedish Riksbank, established in 1668.
Here’s how the system basically works.
A person gives the bank his or her money to save.
Sometimes that person might need more cash than he or she has in their account.
This means that the bank will loan the person a certain amount of money. In return, the borrower agrees to repay the loan with interest. If the borrower doesn’t pay back all of the money, then the lender can take legal action against the borrower.
This sum of money that is borrowed can be small sums of money or very large sums, depending on the person’s needs.
A quick note.
We strongly encourage you to take your time to go through all of the course material, as there is a lot of information in the additional videos.
You can listen to the video below, or use the listen now feature, and navigate back to this page to listen to a recording of it.
It’s best to read this page, along with the audio, so you will know when to pause the audio and watch the videos or answer any quiz questions.
The Main Problems With Banks.
Keeping your money in a bank account means you can access it when you need to, but did you know that it also means you have a lot of money sitting in one place (increased risk), losing value over time.
How is your money losing value over time???
Consider this…. If you have $1000 in the bank and the bank gives you 0.01% interest for the year, that means that you will have $1000.10 at the end of the year right?
You forgot about the increase in the cost of living.
Let’s say that in a particular year the cost of living goes up 7%.
Your $1000 and 10 cents is actually worth $930.09, in terms of buying power.
And that is not taking inflation in account which would reduce the value of your $930.09 even further.
Inflation occurs when a nation’s bank prints more money. This causes the money already in circulation to have less value.
How the banks actually work is a HUGE topic and way beyond the scope of this course.
We’ve sourced a great series of short, fun and very informative videos for you that explain very clearly how modern banking works.
Here is the first video in this short series:
And the remainder can be found HERE. Watch them and then come back.
The reason we are encouraging you to watch all of the videos we provide, is because WE HAVE NEVER BEEN TAUGHT THE TRUTH ABOUT HOW MONEY WORKS !!
Schools and the education system do not teach you about this important subject UNLESS you take a course in finance or economics.
Because of that most people will go through their lifetime not understanding how money works.
Lack Of Transparency.
Did you know that when you ‘deposit’ money into a bank, you are actually making a loan to the bank and the money no longer legally belongs to you? That is why they can then dictate to you what you can and cannot do with your money.
Legally, it’s no longer yours!
There is a very long list of things that the banks do not tell us before they accept our money.
The following videos will give you a deep insight into what the banking industry actually represents.
The videos are optional viewing but if you really want to understand what is going on in our global society and why we advocate DeFi as necessary for all to be involved in, please take the time to watch the videos.
In the next video Professor Richard Werner, an economist explains how banks create money (out of nothing!)
Learn the mechanics of central bank issued money HERE. PLEASE TAKE THE TIME TO WATCH THE VIDEOS.
The next video is The Money Masters.
An older video that gives a very deep insight into how we came to be in our current global financial situation.
The video is about 3 hours and 30 minutes long. However, it will show you exactly how the money system works and how very wealthy and powerful people use it to control almost everything. PLEASE TAKE THE TIME TO WATCH THE VIDEO.
If you want to control your own finances, then you should avoid using the traditional banking system, or at least use it less and less from now on.
Blockchain And Crypto Currency Based Finance.
The world of banking and finance is moving toward a new form of financial technology. Blockchain technology is being used as a way to transfer money and data in an effort to remove the banks as middlemen, reduce costs, increase transaction speeds, eliminate fraud and provide more transparency.
Usually, Centralized Finance refers to traditional finance, which is based on government backed currencies issued by national central banks.
On the other hand, Blockchain Based CeFi and DeFi are based on forms of decentralization.
Blockchain Based Centralized Finance.
What is Blockchain Based Centralized Finance (CeFi)?
The idea of decentralized finance (that is – finance not controlled by governments and large banks) is to give users complete control over their money. This is why it has been a dream for many years. But what is decentralized finance exactly? How does it work? Can we trust it? For now let’s say the answer is yes, because it is built on a set of smart protocols.
CeFi is a new concept that is gaining traction in the crypto currency community. It’s probably the biggest use of blockchain technology, and is supposed to bring many benefits to the blockchain community. CeFi is presented as a way for people to earn interest and get loans on their digital assets, which collectively are already worth billions of dollars, through a centralized platform.
Centralized exchange platforms include (some of these may no longer be operational by the time you read this):
- and hundreds of others.
CeFi platforms are set to be major financial portals now and into the future. They are built around the idea of bringing together the best of both worlds – centralized and decentralized finance. The combination of these two is supposed to be a powerful combination and CeFi platforms are supposed to allow for the best of both worlds by utilizing the best of both systems.
CeFi offers an array of services that include crypto currency lending, deposits, exchanges, and trading. With CeFi, you can easily convert your fiat currency into cryptocurrencies and vice versa. In addition, you can deposit your funds in most local fiat currencies and receive a higher interest rate. You can then use your cryptocurrency to trade on the exchange or lend it out.
What Is A Centralized Exchange?
A centralized exchange or CeFi exchange is a privately owned marketplace for crypto currency services.
These platforms have a lot of security measures in place to prevent hackers from stealing funds and users’ personal information. These security measures include things like two-factor authentication and multi-level authorization. However, CeFi platforms also have a lot of regulations that must be followed. Some CeFi platforms have to operate with a license from a government agency.
When you deposit funds to a centralized organization like a crypto currency exchange, you’re giving up control of your funds. These exchanges have AML (anti money laundering) and KYC (know your customer) policies to prevent money laundering and ensure that only authorized people can access your funds.
That means you will have to upload your identity documents to prove who you are and are now open to tax claims from your country’s revenue services. Also you are now relying on the crypto currency exchange to protect your private information. This is why it is important to consider how much of your privacy you are willing to give up.
Many people have become interested in cryptocurrencies and the blockchain technology which is at the heart of the CeFi platforms. The growing popularity of this form of finance has made it a highly lucrative business for many companies.
The Advantages of Centralized Finance (CeFi) Platforms.
The advantages of blockchain based centralized finance platforms are numerous. But, what really sets them apart from traditional banking and finance is that they allow users to use their assets for whatever purpose they choose in a relatively easy way.
CeFi platforms provide flexibility and freedom to users by providing access to a wide choice of assets for use in the platform’s ecosystem.
CeFi platforms do this by allowing you to convert fiat currency (your local currency) into crypto currency and vice versa. They are some of the most popular platforms in the world with 1,000,000s of customers. They offer 1000s of different exchange pairs, including EUR/BTC, USD/BTC, USD/ETH, AUD/BTC, GBP/BTC, CAD/BTC, and many, many others. Collectively, these exchanges have over 10,000 different coins that you can choose from, such as HEX, Bitcoin, Litecoin, Ethereum, Ripple, and many more.
Since the process of cross chain exchange (that is, switching from one network such as HEX to Bitcoin) is cumbersome and complicated, CeFi plaforms remove this issue and simplify the process for their users.
The Disadvantages of Centralized Finance (CeFi) Platforms.
Centralized exchanges have become a popular way to buy and sell cryptocurrency because they offer secure trading, but also have the ability to be hacked. Centralized exchanges are not only vulnerable to hackers, but also have transaction fees, which can make trading expensive.
CeFi exchanges allow you to store your assets in custodial wallets, which are owned by these centralized organizations and companies.
The user’s private keys of these crypto wallets are stored in within the exchange and this can be a problem if the exchange is hacked and the users private keys are obtained by malicious intruders and thieves.
If the decentralized exchange model is used, then it is not vulnerable to such attacks. Therefore, this is one of the reasons why many people prefer to use decentralized exchanges.
Another key point to be aware of is that some CeFi exchanges become mismanaged.
If this happens, you may end up not being able to access your funds temporarily or you may lose your funds totally as can be seen in the next couple of videos.
First is an exchange called Hoo.com. They had been operating for around 4 years and suddenly stopped customers making withdrawals.
Here is another CeFi platform that experienced some serious problems and prevented it’s users from withdrawing their assets:
And lastly for the failed exchanges, is FTX.
FTX owned by Sam Bankman-Fried, was definitely the biggest centralized exchange crash of 2022.
The following video contains a lot of technical words but it is still worth watching as it gives clear insight into the dangers of CeFi.
What is Decentralized Finance (DeFi)?
DeFi is the next wave of finance that is decentralized and is accessible to anyone. DeFi is not only about HEX, Bitcoin, Ethereum and the other crypto currencies, it’s also about the underlying blockchain technology and what it can do.
Decentralized finance involves the transfer of value from one person or company to another without having to go through a third party such as banks. It’s called decentralisation because the transaction happens directly between two parties without involving a middleman or an intermediary.
DeFi platforms are decentralized financial platforms that use network and blockchain technology to create applications that operate without a third party. It’s a type of open finance where anyone can participate in the creation of financial products.
Blockchain is the foundation of Decentralized Finance. With blockchain, we can record financial transactions into a secure and transparent ledger. We can then use this information to determine credit, fraud, and other financial actions.
Decentralized finance is a concept in which money is transferred from one user to another without the need for a central entity. This allows anyone to access financial services, like loans, insurance, etc. This eliminates the need for a bank or other financial institution.
DeFi applications are software applications that leverage the power of decentralized finance to provide financial services to individuals. These are all blockchain-based platforms that allow users to create and manage their own crypto-assets. They also provide users with the ability to use these assets for financial services such as loans, lending, and even trading.
Recently, there has been a shift away from centralized exchanges to decentralized exchanges (DEXs). DEXs have become an increasingly popular alternative to centralized exchanges for a number of reasons. Firstly, DEXs allow users to make trades directly with one another, without having to rely on third party services. Secondly, they are more transparent, and this can be a great advantage to both traders and investors.
The Advantages of Decentralized Finance (DeFi) Platforms.
DeFi (Decentralized Finance) services are becoming increasingly popular. There are many reasons why people use these platforms. One of the most important benefits is that users can control their own money.
Defi is the best when it comes to protecting personal data. But, because users are the sole owners of their data, individual users are responsible for managing the risks associated with funds being stolen or vulnerabilities to theft.
Users solely control their funds and activities. Smart contracts are designed to execute transactions when a certain condition is met. Since smart contracts are automatic, users can be sure transactions will be executed properly.
DeFi Is Permissionless.
Since it is permissionless, users don’t need permission to join a Decentralized Finance exchange also known as a DEX.
DeFi allows users to access a variety of services without the need to give up their personal information or deposits to third parties such as banks or CeFi companies. There is no need to create an account or provide a password, and all funds are stored on your device in the form of a token. The user is able to use the services without having to sign up, and can access the services through a wallet.
DeFi Is Trustless.
The main benefit of using DeFi services is that you don’t have to trust them to perform as stated. Users may ensure that DeFi services perform as planned by auditing their code and using external tools such as Etherscan to determine whether a transaction was completed correctly.
DeFi services are designed to be trustless, meaning that you don’t need to rely on any third party to verify transactions. In fact, you won’t even need to give the service your private key. This means that you’ll always know that your assets are safe.
The Disadvantages of Decentralized Finance (DeFi) Platforms.
However, since the process of cross chain exchange is cumbersome and complicated, DeFi platforms usually fail in providing a simple solution to this interoperability. But with growing technology, Decentralized Finance (DeFi) exchanges have been able to provide alternatives in this regard.
Some of the biggest examples of Decentralized Finance (DeFi) platforms that are working to improve DeFi are PulseX, Uniswap, Kyber, MakerDAO, PancakeSwap and many others.
Another disadvantage of DeFi is the learning curve.
It’s very important that you learn how to correctly:
- Set up your own wallet
- Protect your wallet access
- Send and receive funds
- Interact with DeFi platforms
- Detect scam platforms that could rob you
- Find out the best places to help your assets grow
DeFi Versus CeFi Conclusion:
We at HEXucation.com think that although CeFi has it’s place in the world, it does not represent the original intentions of crypto currency and blockchain technology principles…. which is – putting the power of financial autonomy (self governance) back into the hands of each and every one of us.
DeFi does that. We strongly suggest that everyone learn about DeFi and test it to ensure that it is a good fit for them.
This is a good first module. I’ve learned a lot about how banks and money actually work.
Yes, learning how banks and money work is the best foundation for learning about crypto currencies.
Many people don’t know that crypto currencies were created to directly address the issues that traditional finance has.
So many things I don’t know about money, how it came to be and the gradual change in its value…
Thanks for your feedback. Much appreciated.
This is great.
I’m now clear about the differences between DeFi and CeFi and their various advantages.