Defi Manual: Part 5 - Synergies
Defi and Cefi are ongoing debates of the future financial system will be like. Since I cannot predict the future, I may share one of the possible ways for Defi and Cefi to coexist in the future.
What is a Synergy?
Synergy is a way to combine two different systems and work together as one.
Benefits of Defi
The first thing you may think of Defi is decentralized. However, what is really decentralized? A decentralized system is fair and transparent. It also protected your privacy.
Downside of Defi
Some disadvantages of Defi you can experience are high transaction costs and confirmation latency that may delay your transactions. Also, the transaction is in one direction and cannot reverse if you send it by a mistake.
Benefits of Cefi
You may think there are not so many advantages of Cefi but there are. Security is the first benefit from Cefi in that they are heavily guarded and hard to penetrate through the system. Cefi is highly regulated so that it makes outcomes likely consistent with rules and regulations.
Downside of Cefi
Of course, many disadvantages of Cefi such as disregard of privacy, the unfairness of trading from the powerful players, and the system was closed-door decision-making process with uncleared insider rules.
How Cefi system can be rigged
There are 4 steps to rig the Cefi system: action, info, trade, and order.
Action: Cefi plays unclear rules for all players.
Info: Cefi players have advantages to receive insider information.
Trade: Cefi can fabricate trading volume.
Order: Cefi can piece buy or sell assets that no one detects before anyone receiving critical information and without noticing the market before buy-out or sell-off begins.
How Defi can fix Cefi rigged?
Action: Defi runs on a smart contract with clear rules.
Info: On-chain data is transparent and broadcast on the blockchain.
Trade: Defi traders need to pay transaction fees and the system works 24/7 with volume recorded in the blockchain
Order: Defi will need transaction fees to move the order and it is easily detected from the blockchain.
The synergy between Cefi and Defi
Both systems can work to fix each other and bridge together with gaps of each system that was created.
Cefi can fix Defi security concerns while Defi can fix Cefi insider trading concerns.
I share one of the possible ways that Cefi and Defi may work together in the future to create a synergy system. Of course, there are many more ways for them to work together or destroy each other. Who knows!