CeFi vs. DeFi -- Comparing Centralized to Decentralized Finance
This work addresses the need for clarity in distinguishing CeFi and DeFi services, which is crucial for users and developers in the financial technology domain, though it is incremental in nature.
The paper systematically analyzes the differences between Centralized Finance (CeFi) and Decentralized Finance (DeFi) across legal, economic, security, privacy, and market manipulation aspects, finding that certain DeFi assets like USDC or USDT stablecoins may not classify as true DeFi and could endanger economic security in DeFi protocols.
To non-experts, the traditional Centralized Finance (CeFi) ecosystem may seem obscure, because users are typically not aware of the underlying rules or agreements of financial assets and products. Decentralized Finance (DeFi), however, is making its debut as an ecosystem claiming to offer transparency and control, which are partially attributable to the underlying integrity-protected blockchain, as well as currently higher financial asset yields than CeFi. Yet, the boundaries between CeFi and DeFi may not be always so clear cut. In this work, we systematically analyze the differences between CeFi and DeFi, covering legal, economic, security, privacy and market manipulation. We provide a structured methodology to differentiate between a CeFi and a DeFi service. Our findings show that certain DeFi assets (such as USDC or USDT stablecoins) do not necessarily classify as DeFi assets, and may endanger the economic security of intertwined DeFi protocols. We conclude this work with the exploration of possible synergies between CeFi and DeFi.