Cryptocurrencies are booming and have created a new wave of opportunities for users and investors. DeFi is the new term that is being used to describe the financial services available on the blockchain. Cryptocurrencies and decentralized financial services (DeFi) are a bit of a mystery to most people, even those that are deeply involved in the space. There are so many misunderstandings of the differences, how they work together, and the opportunities they present. In this blog post, we’ll clear up some of those misunderstandings and explain how cryptocurrency and DeFi work and what they have in common.
What Is Cryptocurrency?
A cryptocurrency is a digital asset designed to work as a medium of exchange that uses cryptography to secure its transactions, control the creation of additional units, and verify the transfer of assets. Cryptocurrencies are gaining popularity as a new type of investment. There are currently over 2,500 active cryptocurrencies, with some high-profile blockchain projects that are attracting a lot of attention.
What Is DeFi?
DeFi is short for decentralized financial services. It’s a term that has been gaining a lot of traction in the last year as people have been exploring the opportunities for decentralized cloud computing and decentralized digital exchange using blockchain.
A decentralized financial system is one where users are not dependent on any single provider to provide services that are important to them. It could be managing your money, managing your payroll, filing your taxes, trading digital assets, or insuring your assets.
DeFi: Practical Applications for Financial Inclusion
The goal for both cryptocurrency and DeFi is to create open-source systems that enable the world’s underserved to participate in the digital economy. There are a lot more people that are not using digital finance than the number of people that are. This is a large and growing problem and one that both cryptocurrency and DeFi are trying to tackle.
Cryptocurrency is used to create and manage the secure, decentralized, and trustless infrastructure that is required for financial services to be decentralized and open-source. Cryptocurrency startups have raised hundreds of millions of dollars to build these systems. Some of the most well-known projects are Ethereum, Stellar, and Tezos.
How Cryptocurrency and DeFi Differ
When people talk about the advantages of cryptocurrency, they often point to its ability to enable financial inclusion. However, cryptocurrency is not a financial system in and of itself, but rather a digital asset designed to work as a medium of exchange that uses cryptography to secure its transactions, control the creation of additional units, and verify the transfer of assets.
Cryptocurrency’s ability to enable financial inclusion is due to the protocols and systems that support the use of digital assets to provide users with the ability to store funds, provide a decentralized and trustless exchange, manage the security of funds, and provide authentication and access control for each user. In other words, just like a computer can run many different software applications, cryptocurrency allows users to use different applications. Financial services can be provided with a wide range of different software applications.
How Cryptocurrency and DeFi Are Similar
Many of the things cryptocurrency and DeFi are different about are mostly a matter of degree. There are a few fundamental similarities though. The most notable one is the fact that both cryptocurrency and DeFi are open sources. Many of the best ways to solve specific problems that arise in financial services come from the open-source community working together.
Another similarity between cryptocurrency and DeFi is that both are decentralized technologies. Blockchain, the technology powering cryptocurrencies, is a decentralized technology that does not require any central authority to operate. Cryptocurrency and DeFi both use blockchain technologies to operate as decentralized systems.
How Cryptocurrency and DeFi Are Different
Perhaps the greatest difference between cryptocurrency and DeFi is in the goals of the systems that support each technology. As we’ve seen, cryptocurrency is designed to solve the problem of financial inclusion while DeFi is designed to provide financial services to the underserved. Another major difference between cryptocurrency and DeFi is the types of financial products each technology is used to create.
Cryptocurrency is used to create digital assets such as cryptocurrency, tokens, and digital collectibles. Digital collectibles are a type of financial product that is very popular with children and young people. Decentralized applications (dApps) are becoming a more important type of financial product as governments and corporations begin to use them to conduct business. Governments are looking at using dApps to pilot new ways of collecting taxes and enacting laws. Corporations are increasingly using dApps as a way to conduct business and manage assets.
Cryptocurrency and decentralized financial services (DeFi) are both decentralized technologies that create open-source, trustless systems for people to access financial services. They are both open-source technologies with broad adoption by the underserved. They are both decentralized technologies with similar goals but some significant differences in how they are implemented.