Differences between TradFi, DeFi and CeFi

Module: 1.1 Differences between TradFi, DeFi and CeFi

Aqua Protocol (Stablecoin on TON)


Welcome to the “DEFI Academy from Ethereum to TON” basic course! In this and the following articles, we will delve into the foundational concepts of decentralized finance across three sections:

  1. Basics of DeFi
  2. Examples of DeFi services
  3. Activities and ways to earn in DeFi.
  4. Security

In Module 1.1, we’ll start by exploring what DeFi is and how it differs from traditional (Trad-Fi) and centralized finance (Ce-Fi).

What is DeFi?

DeFi, short for decentralized finance, is an ecosystem of financial applications built on blockchain networks. Its primary goal is to create an open and transparent financial ecosystem, accessible to everyone without central management. To better understand DeFi, let’s compare it with Trad-Fi.

Trad-Fi is a collective term for traditional finance, including retail banking, commercial banks, investment banking, and related financial services sectors.

DeFi offers an accessible and transparent financial ecosystem to anyone with an internet connection, while Trad-Fi often requires stringent Know Your Customer (KYC) checks.

It’s crucial to note that DeFi is resistant to censorship, thanks to the absence of a central authority that could restrict user access. Meanwhile, Trad-Fi is prone to censorship: banks can restrict access or prohibit the use of financial services.

Trad-Fi is distinguished by a high level of regulation, controlled by central authorities, providing significant client protection through established legislative norms. In contrast, DeFi is in an experimental stage and lacks comprehensive regulatory standards, requiring users to exercise vigilance and caution.

This means that DeFi typically does not offer the same level of client protection characteristic of traditional financial services.

In conclusion, DeFi and Trad-Fi represent two fundamentally different approaches to financial services, each with its advantages and limitations.

Examples of DeFi Use in High-Inflation Countries

For instance, in countries like Turkey and Argentina, where inflation is a serious issue, people actively use DeFi to protect their assets from the devaluation of the national currency. By investing in stablecoins or providing loans on DeFi platforms, they can preserve their savings and even earn profits amid economic instability.

What is Ce-Fi in the Context of the Cryptocurrency Industry?

Ce-Fi, or centralized finance, specifically refers to financial services provided through centralized cryptocurrency exchanges. Unlike DeFi, where there is no central participant and the focus is on users owning their private keys, fully holding their funds, and interacting with smart contracts, Ce-Fi takes a different path:

Centralized exchanges in Ce-Fi act as custodians, and users generally do not own their private keys, trusting the exchange to secure their assets and provide access to a variety of financial services.

In the cryptocurrency industry, DeFi and Ce-Fi play different roles, each offering unique advantages and limitations. Ce-Fi attracts regular users with its user-friendly interface and low technical requirements, offering convenience and access to a full range of services, making it suitable for both beginners and experienced traders. Thanks to deep liquidity, Ce-Fi platforms support active trading and offer services for exchanging fiat money for cryptocurrency and vice versa. Notably, since Ce-Fi platforms hold user funds, they can facilitate account recovery in case of lost passwords or incorrect transactions. Conversely, DeFi requires a higher level of technical expertise. Users have control over their private keys, granting them full autonomy but also responsibility. This means that if private keys are lost, funds are sent to the wrong address, or there are hacks in DeFi services, there is usually no recourse.

DeFi is an experimental and risky space, requiring users to navigate cautiously to protect their assets. Despite these limitations, DeFi has the potential to bring financial inclusion and freedom to a larger population worldwide. As of 2023, the leading decentralized exchange Uniswap even surpassed one of the largest centralized cryptocurrency exchanges in trading volume on the futures market, indicating strong growth in the DeFi sector. Common DeFi uses include lending and borrowing, decentralized exchanges, liquidity provision, staking, and yield farming, which we will explore in more detail in Section 2. However, DeFi applications extend beyond these examples. Decentralized banking services, including mortgages and insurance, have the potential to eliminate intermediaries and significantly reduce costs. Moreover, the DeFi ecosystem continues to explore numerous use cases, reflecting its ongoing innovative development in this exciting field.

Access to DeFi services is relatively straightforward. You only need a cryptocurrency wallet and some cryptocurrency assets. There are many wallet options, including browser extensions such as Metamask, mobile wallets like Trust Wallet in EVM networks like Ethereum, and many others (Ton Spaces, TonKeeper in TON).

When using DeFi services, it’s important to remember that depending on the blockchain you choose, different types of cryptocurrencies may be required to pay transaction fees. For example, operations on Binance Smart Chain will require BNB, Ethereum operations will need Ether, and in the TON network, Toncoin. These fees go towards rewarding those who maintain the security and functionality of the blockchain.

If you’re looking for convenience, it’s worth noting that some centralized exchanges offer access to DeFi. This can make the process easier, but you might have to pay slightly higher fees. Interestingly, thanks to some blockchains with low fees, DeFi protocols can successfully compete with traditional financial services.

In our next section, we will delve deeper into the history of the DeFi sector’s development to better understand how it has evolved to the present day.

This course was prepared by Julia Palamarchuk (co-founder of Aqua Protocol — the first CDP stablecoin on the TON blockchain, over-collateralized by liquid staking tokens).

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Aqua Protocol (Stablecoin on TON)

AquaUSD is the first TON-native decentralised over-collaterized interest-bearing stablecoin backed by liquid-staked assets