Blockchain technology has changed financial services, since it eliminates intermediaries to offer traditional services. Specifically, it is a network that allows any operation to be recorded, reducing the risk and costs of the parties involved. Cryptocurrencies and decentralized finance (DeFi) have emerged from this specific technology.
The World Economic Forum that interest in both “increased considerably during the pandemic.” Although they have the same origin and have gone hand in hand in popularity, they are different concepts. First of all, cryptocurrencies are digital currencies that are decentralized, that is, a means of payment that is not controlled or supported by an authority such as a central bank or a government.
In the case of DeFi, they encompass financial services beyond payments. Your applications may include loans, deposits or insurance, among others. Specifically, decentralized finance refers to a category of blockchain-based applications to develop decentralized financial services with the aim of replacing traditional forms. That is, they seek to operate without an intermediary and without the costs that these entail. To do this, they use smart contracts – popularly called smart contracts – and other block chain technologies.
They use the blockchain.
Regarding their differences, the IG platform states that “the value of cryptocurrencies such as bitcoin is stored within its own chain of blocks, while DeFi is a conceptual market that offers various cryptocurrencies on the Ethereum network.”
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 decentralized finance isn’t just limited to
Namely, cryptocurrency is a type of digital asset that can be used in DeFi, but decentralized finance is not limited to just cryptocurrencies and encompasses a wide range of financial applications that can be built on top of blockchain technology.
How to invest?
Investing in cryptocurrencies allows you to obtain a capital gain from the evolution of its market price. However, since it is a decentralized market, to be able to operate with cryptocurrencies you have to resort to a ‘wallet’. The eToro platform explains that it is “a tool that serves to store, administer and manage cryptocurrencies”. That is, a kind of digital wallet.
In the case of decentralized finance, the services they offer are known as protocols and it is also possible to invest in them. The first thing is to choose the project, there are many and very different ones, so it is important to know where the investment is going to be made. As with traditional investments, it is important to take into account the risks of the project, as well as the liquidity it offers in case you want to withdraw the money later.
In addition, to invest in DeFi the first thing is also to have a digital wallet -‘wallet’- in which to deposit the digital assets in which it is invested. It is important that this wallet is compatible with the DeFi project in which you want to invest and you must ensure that you correctly store the keys that give access. Next, digital assets, that is, cryptocurrencies or stablecoins – stablecoins are cryptocurrencies linked to a fiat currency such as the US dollar – will be needed to be able to operate with that wallet.
The steps to make the investment will depend on the DeFi project in which you are investing and its characteristics. And once the investment is made, it is important to monitor it and be aware of its evolution. Above all, evaluate its behavior, if it is generating the expected return and if any added risk arises.
