Blockchain, an emerging technology, has changed the way the world interacts and transacts. While this decentralized technology gained momentum due to Bitcoin’s meteoric rise, this has become an important part of the tech industry and is serving as the base for numerous innovative and unique solutions, including DeFi.
Here, it’s important to note that Bitcoin and DeFi, though seem similar given their financial context, have different concepts and meanings and have quite a few differences between them. Wondering what is the difference between DeFi vs Bitcoin? To understand the difference between the two concepts, it’s essential to explore the concepts in detail.
What is DeFi?
DeFi, or decentralized (De) finance (Fi), is a financial marketplace hosted on public decentralized blockchain networks, like Ethereum. Think of this financial services system as a decentralized bank that supports all transactions and most of the services a traditional bank offers without the interference of any centralized authorities. Better yet, there’s no lengthy paperwork.
For instance, if you want to borrow some money, but don’t want to go through the long and tedious process outlined by traditional banks, you can borrow money directly from a borrower without lengthy processes, paperwork, or unnecessary delays. Wondering how DeFi makes this possible? Through smart contracts.
When you take loans in DeFi, you have to offer the lender some cryptocurrency collateral (in the form of other tokens) whose value is more than the borrowing amount. Here’s the best part. You don’t have to worry about the collateral or the lender stealing it from you, after all it has a higher perceived value than the amount you’re borrowing. The smart contract authorizing this transaction will keep the collateral in custody until the loan is repaid.
Similarly, you can lend, earn interest, trade derivatives, barter assets, and more through DeFi. The reason why DeFi is emerging as an alternate financial system is because it is faster and eliminates third party involvement. This helps eliminate associated charges, making transactions between two people fair.
Moreover, the technology is not contained by boundaries, promotes decentralized identities since it is pseudonymous, and is peer-to-peer (P2P) because there are no centralized authorities overlooking or managing the transactions.
Now that you’re clear on what DeFi is and have a general understanding of its workings, let’s explore the exciting realm of Bitcoin.
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What is Bitcoin?
Bitcoin (BTC or BXT) is the first cryptocurrency and was introduced to the world in 2009 by Satoshi Nakamoto (it is not clear if it is a single person or a group). Bitcoin faced a lot of criticism when it was launched, but has become the leading cryptocurrency in the world, given its market capitalization of over $800 billion.
In fact, Bitcoin has become so popular that it has been adopted by El Salvador as its native currency. This digital currency gained popularity because it gives people a way to transact with each other in a secure manner. Geographical boundaries, traditional finance services, and centralized authorities don’t define or control the transactions.
Wondering where blockchain comes into the picture?
For starters, Bitcoin is hosted on the blockchain technology. Two, blockchain keeps the transactions secure and allows peer-to-peer trading using nothing more than a stable internet connection and smart device. Blockchain also keeps a record of all the transactions processed using Bitcoin, promoting transparency.
The best part, though? Bitcoin is not a mere digital currency. Following Bitcoin’s success, thousands of other cryptocurrencies were launched and while a few have become incredibly popular, the original digital currency still reigns supreme.
Most individuals buy a fraction of a Bitcoin (since buying 1 BTC is extremely expensive) to dip their toe in the world of crypto and see what all the fuss is about. A few prize it as a store of value, like gold. The digital currency is also used as an alternate venue of investment.
For instance, if someone has some money leftover after they take care of their expenses and investment in traditional investment vehicles, they might purchase some BTC to diversify their investment portfolio and gain rewards.
With the concepts out of the way, let’s explore the differences between the two concepts.
Difference Between DeFi and Bitcoin
DeFi and Bitcoin differ in multiple ways. The following are the primary differentiators between the two:
1. Concept
The biggest differentiator between DeFi and Bitcoin is their concept. While DeFi is a decentralized financial services system, Bitcoin is a cryptocurrency. Simply put, DeFi is the environment that facilitates Bitcoin transactions between two individuals or parties.
Even though the two concepts are related and tied together due to their underlying technology, blockchain, they are different concepts. Think of DeFi technology as the bank or a financial services provider and Bitcoin as the currency that makes the world go round.
2. Use cases
The first and foremost use of Bitcoin is as a digital currency. Individuals use it to transact without involving centralized authorities and other third parties. The ease of use, enhanced security, real time updates, and lack of authorities governing the trades have made these digital currencies a favorite among crypto enthusiasts.
Bitcoin is also being used as an investment vehicle and store of value. It’s now being put in the same category as gold by a few investors. But there’s no denying that investing in this digital currency allows an investor to test out the crypto landscape and diversify their investment portfolio.
On the other hand, DeFi functions as a decentralized financial ecosystem. As such, it facilitates lending, borrowing, and trading like a traditional financial services provider. DeFi also makes taking insurance easier.
The process is almost similar to the traditional banks’ with a teeny, tiny difference. There are no people involved. This means there’s no risk assessment officer, loan officer, and so on. The risks are calculated and the loans are processed using the DeFi blockchain insurance code.
DeFi also makes flash loans possible and empowers retail traders to earn profits. Traders can apply for a loan and get it approved within seconds. They then use this loan amount to purchase an asset on a decentralized exchange and sell it on another platform for a profit. They take advantage of the price difference between the two platforms and return the original loan amount while pocketing the profits.
Similarities Between DeFi and Bitcoin
Though the two DeFi and Bitcoin are different concepts, they aren’t completely isolated from each other. For starters, DeFi and Bitcoin have the same underlying technology: blockchain. They both aim to bring equality to the world and want to give more control and power to individuals. They are both incredibly secure and promote trust and transparency.
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