What’s the Difference Between DeFi Tokens and Coins? Let’s Find Out
New financial technologies (NFTs), blockchain, alternative coins (alt-coins), and stable coins (stablecoins) are all part of the rapidly evolving area of cryptocurrencies, and constant innovation is the standard in this space. Since systems and technology evolve almost every day, the average internet user may find these terms to be quite confusing.
Whether you’re completely new to the world of cryptocurrencies or have already invested heavily in them, there is always more to learn.
That’s why we’ll answer.
Why DeFi was created?
In contrast to banks and other financial institutions that act as intermediates when dealing with your money, decentralized finance, or DeFi, is an emerging financial technology that can help in eliminating this intermediary broker.
Binance, Coinbase, Kraken, etc. are well-known centralized cryptocurrency exchanges that facilitate the exchange of fiat currencies like the US dollar, British pound, and euro for Bitcoin and Ethereum, the two most popular cryptocurrencies and widely considered the safest and most stable investments.
While convenient, these platforms may be costly to trade on and risky to use because to their susceptibility to hacking. Another disadvantage of using centralized exchanges is that it takes time to execute transactions, which may be detrimental in the volatile world of cryptocurrencies.
What Are Smart Contracts?
DeFi is built on the Ethereum blockchain, which is the backbone of the decentralized financial industry. Smart contracts, which are specific collections of code that may automatically carry out the desired function (such as facilitating and carrying out transactions), are the foundation upon which Defi development services operates. Since the blockchain processes all transactions and not a third party that may be hacked or subject to fraud, this method is safe and trustworthy.
These agreements allow for the unrestricted trading of goods and money between any two parties since all rules are specified and enforced by the code. Meanwhile, this is in sharp contrast to fiat money, where the value of your currency may be manipulated by the government (which might potentially have negative consequences for your bank account).
Smart contracts have thrown open the doors of DeFi and now include services like loans, insurance, and lending, giving those who may have been denied access to financial services before a chance to do so (such as banks or government institutions).
In addition to being speedier, more efficient, and available to anybody, these services now offer permit complete anonymity.
Definition and Operation of Coins and Tokens
Both DeFi coins and fiat currency can be tracked in a public ledger called the blockchain, making them quite similar. In addition, each coin is individually valuable and may be redeemed for a specific good. Despite its similarities, a token is different since it may be considered more of an asset.
In contrast to coins, which are analogous to $100 bills, tokens are analogous to dwellings. A $100 bill has a stable value regardless of market conditions, in contrast to a token whose value might rise or fall at any time.
To put it succinctly, we are aware that tokens stand for assets. Things that can be physically held include travel documents, merchandise, and legal papers. Media such as animated GIFs, music, videos, and still images can also be uploaded. All of them, and notably digital artwork, are sometimes referred to as NFTs nowadays (non-fungible tokens).
There has been an increase in the demand for NFTs due to the increasing number of exhibitions and sales of new works by emerging artists from all over the world. For example, in the Bored Ape Yacht Club project, when 10,000 NFTs were sold, each one might cost as much as $400,000, one NFT alone may cost as much as $1 million.
One of the most well-known NFT ventures now is Bored Ape Yacht Club, which, because to its innovative concept and celebrity endorsement, has generated sales of over $2 billion. One other example is when Twitter co-founder Jack Dorsey auctioned off his first tweet as a non-fungible token (NFT) for $2.9 million.
You may be thinking, “How can I legally claim ownership of an online image that anybody may view?” Using the same scenario as before, we are aware that random people passing by can view your property, snap photographs of it, and then lay claim to it.
In any case, it is legally yours, as you are the single owner and its registration is in your name. Because it is technically yours to begin with, you may sell it if you so want.
The asset (NFT) itself is not stored on the blockchain, but proof of ownership is, similar to transaction records. The real asset may be stored anywhere the owner chooses, while many do so offline in cold storage hardware wallets for added protection against hacking.
Even if anybody can see, store, or use your NFT, it is still legally yours. Like an art museum collection.
These tokens are commonly sold on online marketplaces utilizing Ethereum in a fashion analogous to eBay. OpenSea.io is now the most popular NFT trade site, showcasing a variety of NFT projects including tokenized items, artwork, and music.
There is still a great deal of unpredictability in the market, and many projects have failed and lost almost all of their value like Jack Dorsey’s famous tweet did when it sold for only $280 at its last auction. Many people indulge in the pursuit of these NFTs either as a pastime or as a means of financial gain.
So, how exactly do Coins function?
Bitcoin, the first successful cryptocurrency, was developed by Satoshi Nakomoto as an alternative to traditional currencies and a decentralized platform for monetary exchange.
Coins often have their own blockchain system. For example, if I pay for anything using Bitcoin, the transaction will be recorded on the Bitcoin blockchain. If the same item is exchanged for Dogecoin, the transaction will be recorded on the Dogecoin blockchain. But tokens typically utilize the blockchain of other currencies (such NFTs).
The main purpose of DeFi development services coins is to act as an alternative to traditional currency. That’s right; you can use them to make purchases on sites like Amazon, Tesla, Microsoft, and Twitch, not only in the cryptocurrency market. A growing number of companies are offering to pay their employees in Bitcoin since this digital money is seen as a more prudent and stable choice by many young workers.
In contrast, tokens may be traded in for currencies but not the other way around.
In order to facilitate easier transactions in a country where 70% of the population does not have access to a bank account, El Salvador has recognized Bitcoin as an official currency in addition to the US Dollar.
Coin mining is an additional intriguing feature of digital currency. Mining is a method by which cryptocurrency is “created,” analogous to how the central bank of any nation controls the issuance of cash. The process is entirely under public control.
Still, you shouldn’t get your hopes up. You shouldn’t be fooled by its seeming simplicity. A state-of-the-art computer system is required for this process since it will need to do extremely complex calculations. A miner receives Bitcoin once these computations have been completed and verified.
However, this process can be quite pricey, unpleasant, and time-consuming for some people. However, it does help to increase overall Bitcoin circulation. This makes the miners an integral part of the crypto economy as a whole.
Dangers to DeFi
DeFi, like any other investment, is not without its risks. Although, greater danger must mean greater reward, right?
- Because DeFi is still in its infancy, it may have vulnerabilities that cybercriminals might take advantage of. So, it’s not a great industry overall. The quality of software depends on the skill of its developers, and faults in the code can have serious financial consequences.
- “DeFi rug pulls” are a common type of con. As the name suggests, picture yourself standing on a rug full of cash as someone yanks the rug out from under you. The DeFi domain is typically safe, but there are no standards in place to ensure that.
- This means that many DeFi development services may incorporate certain features into their smart contract, allowing them to liquidate any funds invested in their product and essentially steal them.
- Hackers can easily exploit security flaws in websites that facilitate the lending and borrowing of cryptocurrencies in order to steal the funds.
- One failing lending protocol website, Alchemix, let borrowers keep $6.5 million in collateral (things that might be seized if the borrower defaulted on the loan) without paying back their loans.
Why is DeFi the Wave of the Future?
Despite the risks and drawbacks as outlined, DeFi development services applications represent the future of finance since they provide millions of individuals across the world with access to basic financial services without the biases prevalent in the existing financial system.