About Decentralized Finance & Digital Gold – Cryptocurrency
Decentralized finance refers to financial activities conducted without the involvement of a traditional bank. Think about all of the activities in which you’d normally use a bank or some other financial institution — getting a loan, insurance, investing, even using a credit card. All of these activities are traditional-finance-based and have intermediary companies. Now people are creating these products in a completely autonomous way with cryptocurrencies.
It can seem counterintuitive — where else would you go for a loan, if not an established lender? But that’s one of the appeals to DeFi (Decentralized Finance). In the same way, people have increasingly brought smart technology into their homes, proponents say the cryptocurrency has the potential to automate and digitize more and more aspects of the financial system. The appeal of this happening outside the conventional — or centralized — finance system depends on who you ask.
Many peoples may not understand the appeal of a finance system that operates beyond government control. But things can be very different in countries with less financial stability. If cryptocurrencies offer as much or more stability as a given national currency, it’s an entirely different equation than if your national currency is safe and stable.
There are different types of accounts and tools in conventional finance — from savings accounts to investment accounts to credit cards — that are used for different purposes, different cryptocurrencies can have similarly unique uses in this emerging decentralized finance system.
Instead of going to a bank to draw out a loan, you might go to a decentralized application that’s not owned or operated by anyone in particular.
Where conventional loans involve humans at a bank who take part in the processing, reviewing, and approving loans, a DeFi loan — with funding in the form of cryptocurrency — could run via an app on a network like Ethereum with an algorithm processing it. The borrower would put up some cryptocurrency as collateral, which they’d get back minus interest when they repay the loan.
The code runs autonomously using smart contracts. So once the developers release the data they’re pretty much hands-off, and everything runs automatically so there’s no intermediary.
Ethereum’s website offers a comparison chart contrasting decentralized from traditional finance. Along with these technical differences, a big consideration to keep in mind is that the conventional financial system is regulated to serve the interests of everyday customers, while cryptocurrency and decentralized financial systems are largely unregulated, and subject to governance and oversight only by their creators/users.
Unlike the money kept in a bank account, the money you have in crypto may not be FDIC insured. Some exchanges offer this insurance while others don’t — something you’ll want to look into before buying crypto from one or another. For exchanges that don’t offer this insurance, there’s no guarantee you will be repaid if there is a hack or the exchange goes out of business.
|Decentralized Finance||Traditional Finance|
|You hold your money||Money held by financial institutions|
|Transfers happen in minutes||Payments can take days to process|
|Transactions are pseudonymous||Financial activity is coupled to your identity|
|Market is always open||Market closes|
|Built on transparency – anyone can inspect the system||Financial institutions are closed books|
Digital gold refers to cryptocurrency comparable to the real gold in its ability to store and increase in value. There’s a limited amount of gold on earth, in the same way, that digital gold cryptocurrencies have a limited supply.
People buy gold not because they expect to be able to go to the store and spend it, but because they expect it to hold its value and maybe probably, increase in value over time.
The primary example of a digital gold cryptocurrency is Bitcoin, though that was not its original intention. Bitcoin was originally put forth as an electronic peer-to-peer cash system, but its volatility, among other things, limited its potential for that purpose.
In use, such digital gold cryptocurrencies are bought and held for the same reason people would have diamonds, or some $100 bills, or some gold coins in a safe. Lite coin is another example — it’s been described as silver to Bitcoin’s gold.