If you are not into the world of blockchain and cryptocurrencies, the three words of the title sure sounded Greek to you. However, these concepts are rapidly changing how business and economic transactions are done worldwide, and you need to know them.

Let's start at the beginning. As we all know, the current economy is based on the trust that all users have in centralized banking. Regardless of the institution of choice, we give our money to them to store in an account or to trade it in investments that we hope will give us returns. Even fintech, these "new economic technologies" work under the same system, digitalizing traditional banking services and taking them to more places and people. However, these services are still part of the conventional economy. They continue to be part of the centralized models regulated by monetary and state entities and use Fiat currencies. This traditional economy is known in the crypto world as TradFi or traditional finances.

After cryptocurrencies became popular and people began to invest in them, some companies known as exchanges started offering crypto wallets where people could store their digital money similar to a bank. These exchanges are currently the most popular way for people to keep their digital money and make transactions. These exchanges work like banks and can impose conditions on their clients, such as the number of transactions or what cryptos they receive. This centralized model, within the crypto world and the blockchain, is known as CeFi or centralized finance

Finally, the concept DeFi or decentralized finance is not new. It actually appeared for the first time in 2015, but it did not become popular until 2018, and just now, with the boom of cryptocurrencies, it has become an interesting industry that today has a value that exceeds 200 billion dollars. There is no third party in decentralized finance, so the user is solely responsible for their money, how and where they save it, and their transactions.

The economy of the future: Centralized or decentralized? That is the question

It is a fact that the economy has already changed. Even if the International Monetary Fund does everything possible to prevent cryptocurrencies from becoming one more asset, it is almost a fact that they will be established even more, and their use will be expanded to become just another currency within the global monetary ecosystem.

The central question is how this new financial ecosystem is going to move? Who will control all, and how will it be regulated? For cryptocurrency enthusiasts and the most romantic of the digital world, the answer is NOBODY. According to them, decentralized finance is the economy of the future. Transactions will be made directly from person to person. Banks and monetary entities will cease to exist since there will be no need for third parties.

These decentralized transactions will allow users greater freedom. They will offer higher interests and be much faster since they do not need KYC protocols or permissions. The transaction is made as long as the smart contract conditions are met.

For the most even-tempered, the economy's future is a fusion of DeFi and CeFi. However, although it is not yet very clear how it will be done, it is a fact that some people are not prepared, and others don't feel safe managing their funds autonomously and prefer to resort to an entity that fulfills this function.

Basically, CeFi regulates the crypto market in the same way that banks are regulated. As a result, even many government entities and central banks of different countries are using this method to access the world of cryptocurrencies through stable tokens or digital coins whose value varies in the same proportion as its support currency, usually the dollar.

However, this also comes with downsides. First, stable tokens depend on the traditional economy, so it is subject to the same stock market as Fiat currencies. This goes against the meaning of cryptos as decentralized assets with an independent value that would allow them to solve crises and get out of market manipulation.

On the other hand, CeFi organizations are regulated in much the same way that banks are. Although they are not a strict part of the system, the executive or a regulatory entity may force them to follow specific guidelines. An example of this occurred during the trucker protests in Canada. The state banned Cefi from cryptocurrency transactions for trucker funds to finance the protests. All donations came through Defi.

What advantages and disadvantages do DeFi and CeFi have?

Neither system is perfect. For many, decentralized finance means going from being in the hands of Wall Street capitalists to being in the hands of blockchain developers and putting our trust that smart contracts are made correctly and there are no scams, bugs, or malicious code hidden between the lines. Something that most users cannot verify even if the contracts are open source. 

On the other hand, we have DAOs or Decentralized Autonomous Organizations. Most smart contracts are developed by this type of company. Interestingly, there are no people in these companies who answer for anything. There is no customer service, no security clauses, and much less a person in charge who can be blamed for any loss, deception, or scam.

Basically, the risk of any transaction is entirely assumed by the user. Therefore, there is no way to recover your mone case of loss.

All this indeed makes the DeFi economy seem like an anarchist and anti-system utopia where every man is in for himself. However, the CeFi is not perfect either.

One of the disadvantages of this system is the lack of freedom. Transactions and actions are limited by a need for liquidity in exchanges. Like banks, There must be some money in the reserve to trade and pay interest, if all the money goes the system falls. Also, the coins are limited. Centralized exchanges only allow you to have a few major coins in your wallet, usually the most well-known, used, or stable ones.

Likewise, they limit high-risk investments, and their KYC protocols and permits require that your activity data be known.

In addition, many of their transactions are carried out on private blockchains and do not enter the public registry; this is especially the case with stablecoins that are generally linked to a state entity. This privacy goes against everything the blockchain is supposed to be and is one of the main reasons stablecoins are not popular within the crypto world.

Another interesting difference is that in DeFi wallets, users can not only store currencies but other assets such as smart contracts, NFTs, documents, etc. while only cryptocurrencies can be stored in CeFi wallets. If we take into account where blockchain technology is taking us. The ability to securely store certain information is a useful feature of DeFi that has so far been overlooked by authorities in their concern for controlling the economy.

Conclusion: the future of finance

The discussion of the future of the economy is not so simple.

The hope placed on cryptocurrencies to replace the Fiat economy and create a fairer world still sounds utopian. It is no coincidence that the countries with the highest adoption of cryptocurrencies tend to be countries going through an economic crisis, with weak national currencies and a banking system with very high unpayable interest rates and usury traits.

The question is how the blockchain will be regulated and preferably centralized and controlled. However, this question may not be the correct one. We are trying to impose known parameters on a totally unknown space. The new digital ecosystem cannot be governed by the laws of the fiat system, and we have to find a way for both DeFi and CeFi to coexist in a new digital economy. 

At the same time, we can’t set aside TradFi, the great forgotten of this new economic environment. We will soon realize that it cannot disappear, contrary to what many crypto believers think. Being part of this new digital economy not only requires an internet connection but also an economic education and knowledge of a system that not everyone has access to.