DeFi and CeFi: Custody, Access, and Risk Tradeoffs
Summary
The document compares centralized finance (CeFi) services, operated by companies that hold customer assets, with decentralized finance (DeFi) applications that use smart contracts and user-controlled wallets. It outlines differences in custody, onboarding, compliance, transparency, customer support, and the responsibilities users take on when managing private keys. CeFi is presented as easier to access and more familiar, while DeFi offers permissionless participation and publicly visible transactions.
The discussion also lists risks on both sides: centralized platforms can fail or misuse customer funds, while DeFi users face contract flaws, exploits, and the possibility of losing access through key mishandling. It describes proof of reserves as a way for custodial platforms to publish evidence of asset backing. The examples are general rather than comparative performance analysis; claims about protections, yields, and platform features are not independently substantiated. The guide offers a framework for weighing convenience and support against control and technical risk, rather than a trading method or a universal recommendation.
Key ideas
- CeFi platforms custody assets and typically provide account-based access, compliance processes, and customer support.
- DeFi applications use smart contracts and generally let users control assets through their own wallets.
- Self-custody increases user control but makes private-key security and recovery the user's responsibility.
- CeFi carries intermediary and platform failure risks, while DeFi carries smart-contract and wallet-management risks.
- Proof of reserves can provide evidence about a platform's reported asset backing, but does not remove all custodial risk.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.