What is the Difference between Crypto and DeFi?

How are crypto and DeFi defined?

The prospect of decentralization has created a rapid shift in how users understand and perceive new technological advancements that’s why it’s essential to highlight differences between terms. Crypto is a blockchain-secured virtual currency that provides utility to the decentralized network, whereas DeFi represents a range of decentralized financial services that use various cryptos as an exchange unit.

As more people gain exposure to blockchain technology as a whole, there seem to be a lot of misconceptions in terms of what each term actually means. A 2021 survey has revealed that 1 in 3 people that have invested in cryptocurrencies over the past year know almost nothing about the tokens they’ve invested in. This further emphasizes the need to clarify the meaning of each word and particularly each type of blockchain byproduct that is currently in the market.

How do they work?

To answer that question, we must first emphasize that crypto and DeFi are based on blockchain technology. Blockchain is a decentralized system of networks that uses network validations to accept and add transaction blocks to the blockchain. Simply put, a blockchain does not rely on a centralized entity and uses a consensus mechanism formed out of network participants.

Crypto or cryptocurrency is a decentralized virtual currency used for peer-to-peer transfers on the blockchain network. DeFi, on the other hand, is an abbreviation of Decentralized Finance which allows users to access a network system and use financial services. DeFi uses cryptocurrencies as a unit of exchange as cryptocurrencies like Bitcoin have been developed as a peer-to-peer system to bypass centralization and prevent government censorship.

Crypto is the virtual token used on blockchain protocol to facilitate transfers or provide utility by accessing new platform features – like using smart contracts on Ethereum.

DeFi allows users to borrow, lend, swap, and transact cryptocurrencies within the parameters of its blockchain protocol. By offering new avenues for marginalized groups to access banking-like features, all within a decentralized network, DeFi protocols create new use cases for blockchain technology and help bypass governmental gatekeepers.

Each DeFi protocol is developed on an existing blockchain protocol. The most popular network is Ethereum; however, according to DeFiLlama, Ethereum TVL DeFi dominance has shrunk to 50%. This is because high Ethereum fees and other Layer 1 protocols provide cheaper and faster transaction outputs.

In sum, crypto is the virtual currency used as a unit of exchange on blockchain protocols. Tokens can have different utilities; however, DeFi protocols use native protocol tokens (crypto) to provide network incentives, reward stakers who secure and validate the network, or those who provide liquidity to the network.