Author: Ryan Sean Adams
Translator: Chain to Allen
DeFi (Decentralized Finance), a decentralized financial system. The DeFi concept has been particularly popular in the past two years, especially in the first half of this year. Its main features are license-free, anti-censorship, and minimized trust. However, there are still problems with a single application scenario, most of which flow to exchanges and other issues. expand. The integration of CeFi and DeFi will be an opportunity for new digital banks in the future. It should be noted that CeFi mentioned in this article is a centralized financial system under a crypto economy.
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Do you remember the Battle of the Five Armies in The Hobbit?
A dwarf army from Lonely Mountain fights human and elven troops, and three armies are ready to fight on the battlefield-for wealth and honor. Because they belong to different tribes and have different values, they endlessly die.
But a new challenger appeared … two orc army rushed down the mountain. Claws, teeth, blades, wolves-orcs want to kill everyone.
As a result, the dwarves, humans, and elves suddenly found common ground and united against their common enemies.
Orc army confronts elves, humans and dwarves-maybe this is a description of cryptocurrencies and traditional finance
This reminds me of cryptocurrencies.
DeFi and CeFi compete for the same treasure. They have similar services-credit, interest, stablecoins, exchanges, assets-but use a different approach. One does not require permission and the other requires permission, which is an irreconcilable difference.
They are ready to fight.
But new challengers have appeared … traditional finance and the central bank's army. Isn't it like the Battle of the Five Armies mentioned above.
CeFi vs DeFi
I think there must be a battle between CeFi and DeFi. In fact, the two are now competing, and the competition will continue to intensify.
What are CeFi and DeFi?
CeFi refers to centralized trading platforms such as Binance, BitMex, Coinbase, and lending platforms such as BlockFi and crypto.com.
DeFi includes Maker, Uniswap, Set Protocol, Compound, Synthetix, etc. They provide services similar to CeFi, but they are built on Ethereum with a license-free programmable protocol.
CeFi and DeFi are both part of the crypto financial system, and both use cryptocurrency as the currency layer. However, for users, CeFi is closed and users need to obtain their permission to use it; DeFi is open and open source and can be used without permission.
CeFi has existed since the birth of cryptocurrencies. But DeFi was born after the emergence of Ethereum, and it needed to rely on programmability to flourish.
CeFi and DeFi's Capital Competition
- (Exchange) Coinbase vs Uniswap competing for liquidity and trading volume
- (Lending) BlockFi vs Compound Competitive Lending Capital
- (Stablecoin) USDT vs DAI competing for stablecoin funds
- (Derivatives) BitMex vs DyDx competing for derivatives
- (Investment) Bitwise vs Set for Index Fund Capital
CeFi competes with DeFi over who can get as much value as possible. The currency of the Web2.0 era is data, and giants such as Google and Facebook are data integrators. Cryptocurrency belongs to capital, and its essence is money. Therefore, to become a successful CeFi or DeFi project, you must become a fund integrator.
The respective advantages of CeFi and DeFi
There is no doubt that at this stage CeFi occupies an absolute dominant position in both the number of users and the amount of funds. DeFi is still far from CeFi. But we should note that DeFi is still young. Soon after Maker was founded, Compound only had less than a year of history, but the pool of funds for the two has already reached 500 million US dollars, an incredible growth rate.
- User experience (but the gap is closing, such as the Argent wallet)
- Liquidity (but DeFi is global and does not split liquidity through geofences)
- Fiat channel (but Wyre and other companies are providing fiat entry for DeFi)
- Speed (but some technologies are improving and the gap may be closed)
- Global (anyone in the world with an Ethereum address can access it immediately)
- Unmanaged (usually the custody of assets is owned by the user)
- Programmable (can be freely combined and create new products)
- License-free (no license required to build, fork, or use)
Some DeFi projects have even reached a high degree of decentralization. Uniswap is a purely trust-free exchange-with only users, tickers, and public ledgers, it resists censorship and regulatory pressure. After all, a steady stream of banking is needed to get a steady stream of funding.
Remember that $ 20 billion ICO frenzy? Scam, stupid. That's right, but it is undeniable that a stupid, blind, neutral DeFi can do something CeFi can't. By using ERC20, anyone can issue a token. Just like anyone can build a website, the Internet tells us that license-free is powerful.
Therefore, despite the current gap between DeFi and CeFi, in the fast-growing crypto world, Today's Star may at any time become a yellow flower of tomorrow.
Looking to the future
The bottom layer is cryptocurrency, and the top layer is CeFi and DeFi. This is the cryptocurrency system, and that's it. Therefore, it is important to ask ourselves, how will the top level develop? Here are some possibilities:
Blurred boundaries -As CeFi and DeFi mature, the boundaries between the two will become blurred. CeFi may become more like DeFi. DeFi will become more like CeFi, and most of it may become a fusion product. Binance launches Binance Chain and DEX, trying to become DeFi. Maker's launch of multi-collateral DAI will also make them more like CeFi.
CeFi replicates DeFi- Binance is one of my favorite examples of this strategy in practice. They directly copy the projects that are clearly feasible in DeFi. Launchpad or IEO is a replica of ICO. Binance chain corresponds to Ethereum. BNB is the reserve asset of Binance economy. Maybe it won't be long before we can see the Binance version of Compound.
CeFi integrates DeFi -this is actually my long-term judgment. I think CeFi and DeFi will eventually work together. CeFi will use protocols such as Maker to provide lending services or launch Set Tokens. Users can borrow Compound directly from Coinbase. CeFi will be built on DeFi, just like BTC, ETH and ERC20. In this transition, I hope that unmanaged currency protocol aggregators like InstaDapp and Zerion will open up a space.
Keeping an eye on CeFi and DeFi is important because it will determine how we will fund our future. According to what is happening now, both BTC and ETH development paths will be deeply affected.
Crypto vs. real world
If you zoom out, the war is not just between CeFi and DeFi. The two will grow together and they can help each other even in competition.
This is the war between the crypto economy and the traditional economy: cryptocurrencies vs fiat currencies, systems that rely entirely on banks vs systems that rely more on protocols. Just like the Battle of the Five Armies, at some point orcs will emerge, and this will be a battle between the crypto economy and the traditional economy.