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The downfall of FTX at the end of last year has made the crypto industry review the power well-known crypto moguls and enthusiasts have over the industry in general and some projects in particular. Moreover, it once again sparked conversations about the downsides of centralized finance (CeFi), which regrettably has an infrastructure for such disasters.
While centralized platforms and services have certain advantages that currently make them among the most popular and trusted crypto projects (such as adequate liquidity and accessibility), the safety concerns may outweigh the benefits in the long run. This is where decentralized finance (DeFi) comes in.
From a blockchain perspective, decentralization involves transferring control and decision-making from a centralized entity to a distributed network, thereby reducing the amount of trust users place in a service-providing organization. Therefore, it enables crypto companies to allow their clients to maintain their financial freedom and avoid compromising the functionality and safety of the network.
So, what are the main differences between DeFi and CeFi? Let's compare the two based on such factors as trust, transparency, anonymity, and points of weakness.
When using centralized services, users have to entrust third-party organizations with the storage and management of their funds. This is similar to the traditional banking system, where corporations have decision-making power over people's assets. While centralized services help many users start their crypto journey without needing to study blockchain and related technologies, they also gain the power to dictate their own terms and even change them whenever they wish. Unfortunately, such imbalanced relationships may sometimes lead to unwise decisions, which users may not be aware of and hence cannot prevent.
Decentralized networks allow users to have complete control over the safety of their assets without having to trust any single organization. However, this also means that users have more responsibilities when managing their assets, which requires a higher level of knowledge and experience.
The next factor, transparency, follows the previous one. When using crypto apps and services, users take a major risk by trusting a company or a particular person. Many scandals related to the crypto industry, including the previously mentioned FTX collapse, confirm the significance of distributing influence and responsibility within a project.
Therefore, many decentralized projects are now establishing decentralized autonomous organizations (DAOs) to ensure complete transparency and equality in decision-making. DAOs enable companies to bring together like-minded individuals working towards a common mission or project without entrusting any individual or group with financial, organizational, or other decisions. As a result, decentralized projects eliminate the possibility of manipulations within the company that can damage people's trust and lead to irreversible consequences, including the loss of funds.
Many people cannot access banking services due to lack of documentation, distance from financial institutions, high fees, etc. This restricts their participation in the economy and access to services like loans. Centralized finance services may cause similar issues due to different authentication procedures. Although KYC can prevent illegal activity, it also leads to loss of anonymity, which is unacceptable for many crypto users who seek greater privacy and freedom.
While centralized services are often pressured by some central authority (for instance, the company’s board or some financial regulator) to demand some form of verification, decentralized companies allow their clients to preserve anonymity. Moreover, some DeFi projects acknowledge the problems a lack of verification may bring and are currently working on creating authentication procedures that still protect user identity, including solutions based on zero-knowledge technology.
Centralized platforms and services are often more user-friendly, and many new users feel more secure knowing that a company is responsible for their assets. However, the downside of centralized networks is that they have a significant security flaw. Hackers only need to target one central point to gain access to the entire system, making them more vulnerable to attacks. Furthermore, even without attacks, such networks are more susceptible to systemic failures because a malfunction in one part of the centralized system can significantly affect the overall performance. Decentralization can effectively reduce points of weakness in systems, making them more resistant to errors and hacker attacks.
The crypto industry has two competing approaches - centralized and decentralized projects. While some believe that centralized projects will always have their prominent place, others bet on decentralized services to become the industry's driving force. Both approaches have their advantages and disadvantages, and only time will tell which approach will be the most successful in the long run. So far, DeFi and CeFi are actively contributing to the growth and adoption of crypto products and services.
Kinetex is designed to work effectively with both DeFi and CeFi. The Kinetex dApp has two modes: Liquidity Aggregation and Flash Trade. The Liquidity Aggregation mode aggregates liquidity from over 200 sources, including DEXes and DEX aggregators, and the Flash Trade mode (currently in development) will connect DeFi and CeFi with the help of professional market makers who can bridge liquidity between chains and platforms.
Kinetex Network: Website | Kinetex dApp
