The Banking Executive Magazine - May 2022 Issue

Will DEFI Take Over Banks? the users are themselves responsi- ble for managing their own funds and activities. • Centralization: In a centralized fi- nance environment, exchanges or trading platforms are owned by a single entity or often a corporation. They provide a variety of services to make crypto more accessible to their customers. However, central- ized exchanges are in charge of everything including onboarding users and setting up ground rules. DEFI applications, on the other hand, aim to decentralize owner- ship and become community- owned. • Permission: In centralized finance, users must sign up and submit to KYC (Know Your Customer) regu- lations. This is intended to prevent criminal activities like money laun- dering and abide by crypto regula- tions. In DEFI, as long as users have a non-custodial crypto wallet, they do not have to submit to KYC or sign up for an account. In CEFI, it is possible to prevent trade and impose limitations on users. How- ever, the same is not possible in case of decentralized finance. De- centralized finance is permission- less whereas it is not the case with CEFI. • Trust: In centralized finance, users have no other choice but trust ex- changes and other centralized apps with their assets. In DEFI, users never have to trust anyone with their assets if they want to trade them using a peer-to-peer swap or anything. With DEFI, users trust that the technology will per- form as proposed to execute serv- ices being offered. On the other hand, with CEFI, users trust a busi- ness’s person to manage funds and execute the business’s services. • Asset Control: In DEFI, users have full control over their assets and own the key pair for their wallet. Moreover, users who participate in DEFI use decentralized applica- tions (dApps) built on the blockchain platforms to access DEFI services. In CEFI, centralized companies and institutions store client funds in their custodial wal- lets. These crypto wallets store users’ private keys. In return, these services provide customers with different services. Cryptocurrency trading is currently one of the most common solutions enabled by cen- tralized finance. • User preferences: If users prefer transparency and privacy, DEFI is the right model to choose. On the other hand, if the user priority is trust, sharing of risks, flexibility and increased options to invest, they should opt for CEFI. DEFI ADVANTAGES DEFI offers several benefits com- pared to traditional financial serv- ices. Using smart contracts and distributed systems, deploying a fi- nancial application or product is less complex and more secure. DEFI movement is shifting traditional fi- nancial products to the open-source and decentralized world while facil- itating financial freedom worldwide and removing the need for interme- diaries, reducing overall costs, and significantly improving security. DEFI advantages are: • Permissionless: Users do not re- quire permission to use DEFI. Users can directly access the serv- ices using a wallet and without providing personal information or depositing money with DEFI. This is because DEFI is openly accessi- the BANKING EXECUTIVE 12 ISSUE 161 MAY 2022 Table 1 highlights differences and similarities between DEFI and CEFI. Funds Custody Services available Personal Information Security Market Cap Customer Service Risk Factor The user has complete authority over funds custody. Borrowing, Lending, Payments, Trading Proof of Work Not accountable for funds. $16 billion* NA Security relies on the technologyused Outside of user’s custody Trading, Borrowing, Fiat-to-crypto, Payments and Lending Pluggable Framework Vulnerable in case of security bridges on the exchange. $324 billion* Provided by major changes. Centralized exchanges are responsible for security. DEFI CEFI