DeFi and crypto have a lot in common, but they're also distinctly different. Decentralized finance is digital system that replaces financial intermediaries. Think of it as an alternative to banks. DeFi's goal is to create an alternative to the traditional banking system through blockchain and smart contracts. Crypto, on the other hand, is a digital currency. It is a medium of exchange and alternative to common currencies, like the U.S dollar. It promotes peer-to-peer transactions by bypassing a central authority.
Decentralized finance started in 2009, the same year Bitcoin was launched. There are now 6.5 million DeFi users worldwide. People are optimistic about its market performance in 2024.
It was predicted that 2024 is going to be a bull run year for crypto. The declining U.S. interest rates and ETF approval are indicators.
Bitcoin hit all-time high on March 14, 2024 at $73,800. This was widely reported by media outlets and has stirred interest among investors. In effect, crypto investors feel more confident in their investing decisions. This leads to increased buying.
If you're new to DeFi and crypto, know their differences and similarities before jumping in. This article covers all you need to know about cryptocurrency and decentralized finance. Crypto tokens and coins are also explained in the article. Read along, whether you're an investor or just curious about these financial innovations.
Decentralized Finance
A financial ecosystem that uses blockchain technology to offer financial services
A financial services provider
Built on blockchain platforms like Ethereum, Binance Smart Chain
Includes lending, borrowing, staking, yield farming, decentralized exchanges (DEXs)
Examples are Aave, Uniswap, Compound, and MakerDAO
Cryptocurrency
A digital currency that uses cryptography for security.
It's a medium of exchange
Built on blockchain technology like Bitcoin and Ethereum
Includes currency and token use for transactions and investment.
Examples are Bitcoin (BTC), Ethereum (ETH), Litecoin (LTC), Ripple (XRP)
Similarities Between DeFi and Cryptocurrency
Key Differences Between DeFi and Crypto
Decentralized Finance
Cryptocurrency
By Definition
DeFi is a broader concept. It’s an alternative to traditional finance but without middlemen or intermediaries.
Crypto is a digital currency that uses cryptographic techniques for security. It is a medium of exchange and a unit of account.
According to Purpose
DeFi creates a decentralized financial ecosystem that eliminates intermediaries. It provides everyone with open access to financial services.
Crypto is a digital alternative to traditional currencies. It allows direct peer-to-peer transactions by skipping a central authority.
Manner of Use
DeFi includes decentralized exchanges (DEXs), DeFi lending platforms, stablecoins, prediction markets, and yield farming.
Crypto is used for online payments, remittances, and as an investment asset. Examples are Bitcoin (BTC) and Ethereum (ETH).
Technology
DeFi uses smart contracts on blockchain platforms to automate and enforce financial agreements.
Crypto relies on blockchain technology to secure transactions, but does not provide financial services.
Need for Intermediaries
High risk because of smart contracts and hacks.
Risk of price volatility, regulatory changes, and security issues related to exchanges and wallets.
Reddit Commenters Warn About Crypto and DeFi Investing
This Reddit commenter warned about the unpredictability of DeFi. He recommends researching different strategies on YouTube and reading books on Bitcoin investing.
Another one warned that crypto is extremely unsafe. It has very few tokens and protocols. He used FTM and Harmony One as examples. They became extremely popular and died off in a few years.
Non-custodial wallet is better than centralized according to this Reddit commenter as long as you never share your seed phrase with anyone.
This guy suggested keeping some assets in a DeFi wallet. Staking can be rewarding, but it also has a steep learning curve.
Why DeFi and Crypto Might Not Be The Best Investment
DeFi and crypto might not be the best investments because they're unstable and inconsistent. Cryptocurrencies are notorious for their dramatic price swings. In November 2021, Bitcoin peaked at nearly $69,000 but fell to around $16,000 by November 2022. This shows how drastic crypto can decline in just one year.
DeFi and crypto are also prone to cyber attacks. DeFi-related hacks amounted to $2.5 billion in losses. The crypto market is also a hotbed for scams. This includes Ponzi and "pump-and-dump' schemes. The Federal Trade Commission reported cryptocurrency scam losses have exceeded $80 million. It has increased by 10% since last year. Overall, it's not an investment I would recommend for beginners. It's too risky and definitely not worth trading your 9-to-5 for.
What is Decentralized Finance?
Decentralized Finance is the new way of handling financial activities without relying on traditional banks or financial institutions. Instead, DeFi uses technology to allow direct peer-to-peer transactions using blockchain technology. It aims to make financial services cheaper and more accessible. Anyone on the internet can use decentralized finance. Some DeFi applications enable crypto lending. They are also used to trade assets and earn interest without tapping a traditional bank.
Pros and Cons of Decentralized Finance
Pros of Decentralized Finance
Anyone with an internet can join
Lower transaction fees
Transparent and recorded on a public ledger
Users have full control of their digital assets
Cons of Decentralized Finance
Prone to hacks that could lead to financial losses
DeFi platforms are hard to navigate
No clear legal regulations
Highly volatile
Why Do We Need a DeFi Ecosystem?
We need DeFi ecosystems because they promote innovation in the finance space. Its open-source technology allows developers to create new financial products and services. This leads to diverse financial alternatives in the market. DeFi allows users to seamlessly move assets between platforms. This creates a fluid and flexible finance system. DeFi transactions are secured through cryptography. The decentralized design of this network reduces the risk of a single point attack.
Decentralized Finance Course
Decentralized Masters by Tan Gera is a DeFi course for beginners. This educational platform offers programs like the Decentralized Edge, Decentralized Accelerator, and Decentralized Clan. Tan Gera is a level 3 CFA with a background in investment banking. He claims that Decentralized Masters help investors make passive income without complex market analysis.
What is Cryptocurrency?
Cryptocurrency is a virtual currency that uses cryptography for security. There are no physical coins or notes. It only exists in electronic form. Unlike traditional currencies, crypto only operates on a blockchain network. It is a public ledger that recorders every transaction. The first cryptocurrency was created in 2009, Bitcoin. The anonymous group, Satoshi Nakamoto, was behind its creation and development. A lighter version of Bitcoin was launched in 2011, called Litecoin. Today, Bitcoin has become so popular. Its price went from $1 in 2010 to over $30,000 in 2024. Aside from investing, cryptocurrencies are now used for online purchases and remittances.
Peter Van Valkenberg Explains Bitcoin Crypto
Peter van Valkenburgh, Director of Research at Coin Center, describes Bitcoin as a public infrastructure for digital payments. Unlike traditional financial systems, it is open and not owned by any single entity. Anyone can create a Bitcoin address for free to receive payments. It does not categorize users according to race, nationality, gender, and creditworthiness. Since Bitcoin is decentralized, anyone can transfer Bitcoins to another without intermediaries.
Pros and Cons of Cryptocurrency
Pros of Cryptocurrency
No middlemen
No single points of failure
Globally accessible
All transactions are recorded on a transparent, public ledger
Cons of Cryptocurrency
Extremely volatile
Lack of legal regulations
Prone to hacks and scams
Not widely accepted as a mode of payment
Crypto Tokens vs. Crypto Coins
Crypto Token: A digital asset that uses another blockchain's infrastructure. Creating a crypto token is like renting a car. You pay a fee to use someone else's existing infrastructure. Ethereum is an example of a blockchain that supports tokens. The different tokens include platform, security, transactional, utility, and governance tokens.
Crypto Coin: A digital currency that operates on its own independent blockchain. The crypto coin has its own dedicated network that records and validates transactions. This also means the owner handles the management and maintenance of its operation. It includes writing the full code and ensuring the network's security.
Other Decentralized Finance FAQs
How To Invest in DeFi?
To invest in DeFi as a beginner, set-up your wallet first and purchase cryptocurrency. If you already have crypto assets, transfer them to your DeFi wallet by linking in the platform. Choose a DeFi investment strategy and monitor your earnings.
What is a DeFi Wallet?
A DeFi wallet is a digital tool that lets you store, manage, and transact with cryptocurrencies without using traditional banks. It promotes peer-to-peer transactions where you can invest, lend, and trade cryptocurrencies. You have full control over your funds because only you have access to a private key. DeFi wallets can be used from anywhere in the world as long as you have an internet connection.
What Online Business is More Stable and Consistent Than DeFi and Crypto?
The local lead gen business will always stay relevant because it directly contributes to the growth of local businesses. Small and medium-sized businesses in the U.S. spend approximately $50 billion annually on local media advertising to attract leads. There's a huge market of business owners who are willing to pay to get their business out there. I've been doing lead gen since 2014, and I make $50K monthly from my lead gen sites. It's the most stable and consistent online business for me.
