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CeFi vs. DeFi -- Comparing Centralized to Decentralized Finance

Author

Listed:
  • Kaihua Qin
  • Liyi Zhou
  • Yaroslav Afonin
  • Ludovico Lazzaretti
  • Arthur Gervais

Abstract

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.

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  • Kaihua Qin & Liyi Zhou & Yaroslav Afonin & Ludovico Lazzaretti & Arthur Gervais, 2021. "CeFi vs. DeFi -- Comparing Centralized to Decentralized Finance," Papers 2106.08157, arXiv.org, revised Jun 2021.
    • Handle: RePEc:arx:papers:2106.08157
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    References listed on IDEAS

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    Cited by:

    1. Jacopo Temperini & Marcella Corsi, 2023. "Democratizing money? The role of cryptocurrencies," PSL Quarterly Review, Economia civile, vol. 76(304), pages 51-66.
    2. Sun, Xiaotong & Stasinakis, Charalampos & Sermpinis, Georgios, 2024. "Decentralization illusion in Decentralized Finance: Evidence from tokenized voting in MakerDAO polls," Journal of Financial Stability, Elsevier, vol. 73(C).
    3. Xiaotong Sun & Xi Chen & Charalampos Stasinakis & Georgios Sermpinis, 2022. "Voter Coalitions and democracy in Decentralized Finance: Evidence from MakerDAO," Papers 2210.11203, arXiv.org, revised Jun 2023.
    4. Andrea Colombo & Luigi Bellomarini & Stefano Ceri & Eleonora Laurenza, 2023. "Smart Derivative Contracts in DatalogMTL," Temi di discussione (Economic working papers) 37, Bank of Italy, Economic Research and International Relations Area.
    5. Francesca Carapella & Nathan Swem, 2022. "Decentralized Finance (DeFi): Transformative Potential & Associated Risks," Finance and Economics Discussion Series 2022-057, Board of Governors of the Federal Reserve System (U.S.).

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