Defi Manual: Part 1 - Cefi vs. Defi

I started my new series about Defi. I think it is the future of finance. Whether it will replace the current system or integrate it to make it a better place, we want to know what Defi really is and how it works. Of course, these will be multiple parts and they are short to read!

This part 1 article can help you to easily distinguish between Cefi and Defi. Well, I hope it does.

What is Defi?

It is a subset of blockchain technology and is short for decentralized finance. Being decentralized means there is no third party involves but pure peer-to-peer transactions.

The Cefi-Defi spectrum

There are 3 categories of digital finance: Cefi, Hybrid, Defi.

Ask 3 questions

There are 3 control questions to help you out and distinguish between those 3 categories.

1) Can a user control their own financial assets?

2) Can someone overrule a transaction execution beyond a user’s control?

3) Can someone use a protocol to overrule a transaction execution beyond a user’s control?

1) Can the user control their own financial assets?

If a user cannot control their own financial assets, it is automatically Cefi. Since the user has not custodial power of their own assets, there is a third party to handle assets’ transactions.

2) Can someone overrule a transaction execution beyond a user’s control?

If someone can overrule transaction execution, it is likely that there is a Cefi intermediary to settle potential disputes. 

3) Can someone use a protocol to overrule a transaction execution beyond a user’s control?

If someone designed a protocol to overrule transaction execution, it is likely that there is a Cefi component integrate into the Defi system.

Let’s do an example

Stablecoin - USDT

1) Can a user control their own financial assets?

Yes, the user can store USDT in the wallet.

2) Can someone overrule a transaction execution beyond a user’s control?

No, there is no intermediate party to reverse the transaction.

3) Can someone use a protocol to overrule a transaction execution beyond a user’s control?

Yes, the protocol may automatically burn coins to stay around $1 that users may not know when it will happen.

Therefore, USDT is a hybrid.

In conclusion

You can play around with the rules and see what you find out. You may surprise that many so-called Defi is actually a hybrid.

P.S.: I clean up my previous articles and make categories for you to reference.

Photo by Marco Nenzi on Unsplash
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Disclosure: I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose cryptocurrencies are mentioned in this article. This information is only for educational