CeFi vs. DeFi

The significant price appreciation of the crypto market from 2020 to 2021 was like no other seen before. From May 2020, the total crypto market cap rose from $243 billion to just over $3 trillion in Nov 2021; about 12x in as little as 18 months. 

A combination of factors led to this supercharged and stratospheric growth.

• The Bitcoin Halving in May 2020. Every 4 years a halving occurs where the amount of Bitcoin miners can earn by the protocol is halved. This, as historical data suggests, creates a supply shock, increasing the price of the asset incentivising more people to join the network further maximizing its security.
• Global Covid Restrictions. This resulted in billions of people having to stay at home with not much to spend their money on. It is estimated that 91% (7.1 billion) of the world’s population live in countries that were affected by these restrictions.
• Low Interest Rates. As a result of the Covid outbreak, banks were compelled to provide relief to borrowers and were therefore unable to promise the same interest rates on savings accounts during this period. Savings account interest dropped as low as 0.1% in some cases: the lowest they had ever been. The low global interest rates lead people to explore other investment opportunities with higher returns.  

With these factors conjuring up the perfect storm for crypto market growth, however cliche it sounds ‘What goes up, must come down’ especially when such substantial gains occur in the relative short term. The crypto market as a whole had over extended itself, and as of Nov 2021, the market started to cool off, losing two thirds of market cap, down to $1 trillion, in as little as 8 months (July 2022).   

During the last few months, crypto has seen some monumental shifts in terms of destabilization.

As the market cooled off, many CeFi entities had clearly overexposed themselves in terms of risk. Wild Bitcoin price predictions, speculating Bitcoin to reach a minimum of $100,000 by early 2022, were being thrown about by institutional leaders managing billions worth of crypto funds. These predictions resulted in HUMANS making risky decisions, as is the nature of Centralised Finance (CeFi).

As if the market conditions weren't already bad enough, the de-pegging of Luna in May 2021, caused a cascading and sequential collapse of invested centralized crypto entities, sending seismic shockwaves throughout the cryptoverse. Three Arrows Capital, a cryptocurrency hedge fund, was ordered to liquidate in June 2022, resulting in the crippling of BlockFi, a centralized hub offering an array of financial services including buying, holding and borrowing against your crypto. The company was negatively affected by Three Arrows Capital’s liquidation as they were a counterparty for an overcollateralized margin loan. 

Cascading down further companies such as Celsius and Voyager Digital, also heavily invested in Terra Luna, suffered the fallout and both filed for Chapter 11 bankruptcy. The outcome in terms of compensation for investors is bleak. It is yet, at the time of writing, unclear as to whether funds will ever be recoverable as each case is unique and complicated.

The overall market now sits in what is known as ‘crypto winter’, with many trying to predict and speculate the market bottom. However hard it may be, now is the time to gather yourself, focus, educate and build, because when the market bounces back, you want to be in the best position to understand risk and what best to invest in.   

Centralized Finance

CeFi developed quickly after the introduction of blockchain technology and attempts to emulate the services that traditional finance offers using crypto. CeFi platforms can offer a wide range of crypto-related financial services, such as crypto trading, lending, borrowing, staking and margin trading. Customers can benefit from a huge array of services and options including crypto to fiat conversions. A major component of CeFi to understand however is that deposited funds are not insured like they are in traditional finance, by the regulatory bodies of any said state. When placing crypto on CeFi platforms, you are handing over custody of your private keys, which means in essence, you don’t own them. By using CeFi you are placing your complete faith and the security of your funds in the people behind the business. In addition, to use CeFi, KYC needs to be performed, a process of handing over a lot of personal information.

Pros 

• Fast transaction processing
• User-friendly
• Wide range of financial services and options
• Customer support available
• Some level of consumer protection may be available in the form of private insurance through the company. 

Cons

• Higher transaction fees due to third-party compliance
• Lack of control over funds
• Personal information necessary
• Lack of transparency

Decentralized Finance 

DeFi again attempts to emulate the services of the traditional financial world yet with a fundamental difference. It is decentralized and works without the need to trust an intermediary.  Users trust the technology of the protocol will execute the services being offered. The terms are transparent and measurable. Any changes made to the protocol are often done via Decentralised Autonomous Organisations (DAO), a community that can vote on such changes. A very important difference is that users retain custody of their private keys, giving them full autonomous control of their crypto, also without the need to perform KYC. Risk is mitigated by adhering to a standard set of hard rules.   

Pros

• There is no intermediary between transactions operating within a trustless environment. 
• May offer more accessibility for loans and insurance without a credit score or requiring personal information. 
• Better interest rates and lower fees. 
• Retain custody of your keys
• Free from human decision-making 

Cons

• If you forget your password, you lose your assets since there is no governing body. This is the case for all crypto where you decide to retain custody of private keys. 
• No consumer protection.  

MELD is one such DeFi protocol building on the Cardano network. Having been witness to the collapse of CeFi entities over the last few months, MELD strives for security and excellence in the financing world, bringing state-of-the-art financing for everyone.

Whether you opt for CeFi or DeFi it’s important you know all the facts and risks surrounding how to manage your fiat and crypto. In a fast moving world where technology moves even faster, nothing is ever clear and the best we can do is to educate ourselves as best we can, analyze the risk and manage expectations.