DeFi vs Crypto: What's the difference?
DeFi vs Crypto: What's the difference?
Welcome, premium subscribers! Thank you for subscribing. What will be shared today and the days ahead are alpha from our Economics Design's researchers.
Please keep these mails secret and do not share them with any one because these alphas are confidential. Enjoy your reading.
Introduction
What we’ve been noticing
Blockchain, the technology that makes both decentralised finance (DeFi) and cryptocurrency or crypto possible, has come a long way since Bitcoin, the most well-known cryptocurrency, was first introduced in 2009. The two terms, DeFi and crypto, have been commonly used side by side so much that many people think both are the same thing. But no, they are different from one another. The main goal of this article is to highlight the differences between the two, as well as providing you with an understanding of both. We’ll look at the key differences between DeFi and crypto, and explore why each has its own unique benefits.
Let’s look at the most important factors differentiating DeFi from crypto, and how the use of these technologies can help us move towards financial freedom.
Key Topics this Article will Cover:
DeFi vs Crypto: What's the difference?
Impact of DeFi and crypto on the global financial system
What are the risks involved?
Conclusion: Our verdict. Is it worth getting involved?
DeFi vs Crypto: What's the difference?
Crypto or cryptocurrency, is a type of digital or virtual currency that uses cryptography for security and is decentralised, meaning it is not controlled by a central authority such as a bank or government. Cryptocurrency received its name because it uses encryption to verify transactions. This means advanced coding is involved in storing and transmitting cryptocurrency data between wallets and to public ledgers called blockchain. The first cryptocurrency was Bitcoin, as mentioned above, it was first introduced in 2009. Bitcoin is not only the first but is the most well-known cryptocurrency to this day, but there are many others such as Ethereum, Ripple, and Litecoin.
DeFi, short for decentralised finance, is a broader concept that encompasses a wide range of financial applications built on blockchain technology. These applications can include lending, borrowing, insurance, trading, payment services, and more. DeFi applications can be built on various blockchain platforms and can include the use of various types of digital assets, including cryptocurrencies. Bitcoin for example, can be used as collateral or a store of value in some DeFi applications, but DeFi is not limited to just Bitcoin and can include other digital assets, such as other tokens and cryptocurrencies. DeFi aims to provide the same financial services as traditional finance, but in a decentralised and open manner, using smart contracts and other blockchain technologies.
Read our article, “DeFi Explained: A Beginner's Guide to Understanding and Getting Started”, to learn more about DeFi.
In summary, cryptocurrency is one type of digital asset that can be used in DeFi, but DeFi is not limited to just cryptocurrency and encompasses a wide range of financial applications that can be built on blockchain technology. Despite all their differences, it is necessary not to think of crypto as something entirely different from DeFi. In fact, we should think of it as an essential component of the bigger decentralised financial world.
Impact of DeFi and crypto on the global financial system
DeFi is a rapidly growing trend in finance, taking components of traditional finance and transforming them into trustless and transparent protocols via smart contracts and tokens. Decentralised applications (dApps) run on the blockchain and eliminate the need for a central authority like in traditional finance. Cryptocurrencies like $BTC and $ETH are now becoming more widely accepted for payments and stablecoins like USD Coin ($USDC) have made significant progress towards being an asset that will maintain its value without future depreciation. At the same time, the blockchain technology that underlies DeFi and cryptocurrencies, and supporting financial infrastructure are getting closer to being able to offer a system of financial rails that run alongside traditional financial infrastructure.
DeFi projects are tackling long-standing problems and addressing inefficiencies in our current system, improving financial inclusion, increasing liquidity and reducing costs. Even beyond finance, there is a growing interest in DeFi and its potential to improve existing systems. The potential to open up banking services to more people. One good example is Binance. It's an alternative savings app that lets users store, trade, send and receive funds, and earn interest on their funds. As it is borderless, anyone with an email address and internet connection can access it. With the way things are now, sending money across borders would be more expensive. DeFi makes it possible to get better interest rates and lower costs.
Although DeFi and crypto are still in their infancy, there are already plenty of real world applications that show how useful they can be. And these might be just the tip of the iceberg.
What are the risks involved?
While decentralised systems have the potential to disrupt traditional financial systems and offer new opportunities for investors, there are a number of risks associated with them. It is important to carefully consider these risks before investing.
Some of the risks are as follows:
Volatility: The prices of blockchain based digital assets, such as tokens, crypto and NFTs can be highly volatile, which can lead to significant losses if the value of the assets drop unexpectedly.
Lack of regulation: DeFi is a relatively new and largely unregulated space, which means there may be fewer protections in place for investors compared to traditional financial markets.
Security: DeFi protocols, smart contracts, and cryptocurrencies are vulnerable to hacking and other forms of cybercrime, which could result in the loss of funds.
Fraud: There have been several instances of fraud in the DeFi space and crypto market, including the use of fake exchanges and Ponzi schemes.
Technical issues: Crypto and DeFi rely on complex technology, and there is a risk that bugs or other technical issues could lead to losses for investors.
Complexity: It may be difficult for some investors to fully understand this emerging industry. This can make it challenging to assess the risks and potential rewards of investment.
Conclusion: Our verdict. Is it worth getting involved?
DeFi and crypto are two different technologies, but both have the potential to revolutionise how we interact with the world. DeFi is all about building decentralised applications (dApps) that make it easier for people to use their money without relying on a third party, while crypto is all about creating a new form of digital currency that can be used for transactions online. Both technologies have their own benefits and drawbacks, so it’s important to understand the differences and the risks before investing.
Watch the video below to learn more about the difference between DeFi and crypto on a technical level. Don’t forget to like and subscribe so you don’t miss out on important updates and our newly uploaded videos.
Got a question for our author regarding this article? Contact her at:
Lisa JY Tan | Founder and Managing Director
E: Lisa.T@EconomicsDesign.com | W: EconomicsDesign.com