- As it is known that technologies evolve, people need to ensure that the terminology around them also evolves.
- There is also rapid growth and evolution in the decentralized technology space, and it is also hard for the novice to understand.
It is also very important for people to know the different key concepts and terminology that form the core of DeFi. This is sometimes critical for new users coming into the space as well as established investors who have more and more experience. On the other side, both are always at risk of miscommunication between themselves and their particular projects. This is an area where standardized language always becomes critical for projects.
What Is TradeFi?
So, TradeFi is nothing but traditional finance, which is the financial model of the vast majority of people with whom they are already familiar. All these models are always developed or built on fiat currencies, which are those issued by a central institution and provide the services that people regularly use.
There are also new products that may have developed within this area and people need to know that the fiat-based traditional finance systems are always well established and have been around for centuries.
What Is DeFi?
In many ways, DeFi (decentralized finance) is considered the polar opposite of TradeFi. There are third parties that maintain custodial control of the assets in traditional finance. People need to make sure that in DeFi, the ultimate goal is nothing but a fully self-custodial, censorship-resistant control of people’s assets.
Also, in crypto and DeFi, the phrase ‘code of law’ is often used as the smart contracts that always manage the assets that are visible to all parties and it can also be fully verified by anyone who is looking at a protocol.
What Is CeFi?
CeFi is something that is called centralized finance and is the term that is used separately from TradeFi just because it can represent centralized institutions that always offer services based on theoretically decentralized products. People need to make sure that exchanges are also considered as a main example of this particular model. There are fiat markets that are very highly regulated, along with the financial bodies that must tightly regulate any company that is exchanging fiat currencies.
Why Does This Matter?
So, in this particular theory, people should understand what they are investing in, along with the benefits and risks of that particular model. Also, in terms of TradeFi vs. DeFi, some boundaries are currently fairly clear.
Here, the ultimate challenge comes just because of CeFi institutions that are operating using decentralized products. So, the very first challenge is risk, and as mentioned earlier, operating with fiat currencies and the transactions that always affect them first is something that is highly regulated.
Later, the second challenge is that of the reputation of the DeFi industry, which is due to activities within CeFi. However, both industries always operate around the movement of cryptocurrencies and different blockchain-based tokens.
Conclusion
Lastly, different CeFi projects have issues, and yes, this can affect both the reputation of deFi projects and their volume of TVL. Also, at Spool, the ultimate goal is true DeFi, where the entire code drives the solution and yes, external control cannot be exerted on the user’s funds.
Moreover, as a part of that, people need to ensure that any user entering the space understands both the importance of true DeFi and how to identify if any project is DeFi or CeFi.
