CeFi vs DeFi Borrowing

Crypto borrowers now face a basic split: hand collateral to a company and get human underwriting, or lock crypto in code and borrow against it automatically. (coinbase.com) In centralized finance, or CeFi, a lender controls the account, sets the terms, and can offer customer support, legal contracts, and sometimes bank-wire or dollar payouts. In decentralized finance, or DeFi, smart contracts hold the collateral onchain and liquidate positions by preset rules when collateral value falls too far. (milo.io) (aave.com) That difference starts with custody. Coinbase’s current borrowing product lets users borrow up to 5,000,000 USDC against Bitcoin and up to 1,000,000 USDC against Ether through an integration with Morpho, but the borrower must create a smart wallet and transact onchain. (coinbase.com) On Aave, a borrower’s safety is tracked by a “health factor,” a single score that falls as debt rises or collateral drops; once it goes below 1, the loan can be liquidated. On Morpho, liquidation starts when a position’s loan-to-value reaches the market’s liquidation threshold and a third party can repay debt and seize collateral at a discount. (aave.com) (docs.morpho.org) Maker, the protocol behind the Dai stablecoin, uses a similar overcollateralized model: users lock crypto in a vault and generate Dai against it, and the vault can be liquidated if collateral falls below the required ratio. The protocol’s technical docs describe that system as open to “anyone, anywhere,” which is the core appeal of DeFi borrowing. (docs.makerdao.com) (community-portal-staging.makerfoundation.com) CeFi’s pitch is convenience, but its risk sits with the operator. The Securities and Exchange Commission said in February 2022 that BlockFi would pay 100 million dollars in penalties and stop unregistered offers of its interest accounts, calling it the first case of its kind for a crypto lending platform. (sec.gov) The bigger warning came from the 2022 lending blowups. BlockFi filed for Chapter 11 on November 28, 2022, Genesis Global Capital filed on January 19, 2023, and Celsius entered bankruptcy after freezing customers, leaving borrowers and depositors tied to court proceedings instead of instant withdrawals. (restructuring.ra.kroll.com) (genesiscap.co) (cases.ra.kroll.com) Celsius’s court-appointed examiner found the company used customer crypto in ways many users did not understand, including rehypothecation, a practice that reuses pledged assets to back other trades or loans. That is the counterparty risk DeFi users say they are trying to avoid when they keep collateral inside transparent smart contracts instead of a lender’s balance sheet. (jenner.com) DeFi carries its own tradeoff: the rules are visible, but they are unforgiving. If crypto prices fall fast, liquidation bots do not negotiate, extend grace periods, or wait for a support ticket. (aave.com) (docs.morpho.org) That is why the CeFi-versus-DeFi choice usually narrows to one question: whether a borrower trusts a company to hold collateral and make exceptions, or trusts code to enforce the margin call exactly as written. (coinbase.com) (aave.com)