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Telling CeFi and DeFi apart

Not by the name, but by three checkable questions: who holds custody, who can freeze, who changes the rules?

This lesson has had no expert review. It was written for this platform and against the evidence it cites; nobody has gone through it independently.

Learning objectives

  • You can classify an offering by three questions rather than following its self-description.
  • You can explain why “decentralized” is a property with degrees.

Check your prior knowledge

Answer these for yourself before reading on. Wherever you hesitate is where this lesson pays off.

Core concept

Fact

The self-description is not a criterion

“DeFi” is not a protected term and describes no fixed construction. Offerings using the label range from protocols running entirely on-chain to companies with an app, a customer account and custody. Only what is checkable serves for classification.

Interpretation

Three questions that carry the classification

First: who holds the keys — the user or the provider? Second: can anyone freeze individual users or balances? Third: who can change the rules, and how? The answers often come out mixed, and that mixture is precisely the finding.

Uncertainty

Decentralized is not a switch

A protocol can run on-chain and still be steered by a handful of addresses. A stablecoin can be freely transferable and still contain an issuer freeze function. The useful formulation is therefore not “is it decentralized” but “in which respect, and in which not”.

Definitions

Non-custodial in the glossary
The user holds the keys; no third party can dispose of the assets alone.
CeFi
Financial service with a company as counterparty and custodian.
DeFi in the glossary
Financial functions executed as openly accessible protocols on a blockchain.

Model

  1. Who holds the keys?

  2. Can anyone freeze individual balances?

  3. Who changes the rules, with what notice?

  4. Record the finding — including where the answer stays open

The three checks in order

Worked example

Three offerings, three answer patterns

Offering A
keys with the user, no freeze function, governance with timelock
Offering B
keys with the user, issuer can freeze, parameters changeable by the team
Offering C
keys with the provider, customer account, terms changeable unilaterally

All three may call themselves “DeFi”. The three questions separate them regardless.

A: on-chain with distributed control. B: on-chain with a central power to intervene. C: custody by a provider.

Reading: B is the case that occurs most often in practice and is named as such least often.

Retrieval

A stablecoin runs entirely on-chain, yet the issuer can freeze individual addresses. How do you classify it?

Exercise on real data

Pick two protocols and answer the three questions from their own documentation. Record where you found no answer — that is a finding, not a failure.

Look at this platform's protocols →

Application

Which document would you request from a provider to answer the three questions with evidence?

Related case studies

Institutional reading

Bank
Is there an identifiable counterparty — and if so, in which jurisdiction?
Advisory
Does the client know who can dispose of their balance if it comes to that?

Key takeaways

Evidence