DeFi vs Bitcoin: What is the difference?
Cryptocurrency has been changing the way how finance system works since its emergence. Over the last decade, Bitcoin has successfully established its leadership as the leading digital store of value. However, the DeFi (Decentralized Finance) offers more functionalities and possibilities compared to the simple peer-to-peer payment purpose that Bitcoin originally represented. In this article, we'll look at the key differences between DeFi and Bitcoin as well as the future connections that may arise.
From Bitcoin to DeFi
Bitcoin was first created by Satoshi Nakamoto in 2009. The primary goal of Bitcoin is to serve as a decentralized digital currency for peer-to-peer transfer, eliminating the need for traditional financial intermediaries, resisting inflation and providing users with a decentralized means of storing and exchanging value. It adopts a form of digital ledger and there are thousands of nodes on the decentralized blockchain recording every transaction made on the network. This underlying blockchain technology eliminate the need for traditional financial intermediaries and offers greater transparency, anonymity and accessibility than CeFi (Centralized Finance). Essentially speaking, Bitcoin opened the gate to Decentralized Finance.
Nevertheless, the DeFi known today by all of us had its roots in the Ethereum blockchain. Ethereum is an open-source public blockchain platform launched in 2014, and its most featured function is the smart contract, a special program that will be automatically executed when certain conditions are met. With this innovation, Ethereum became the first "programmable" blockchain that provides more functionalities than just peer-to-peer transactions. By building layer network and combining smart contracts, developers can develop a series of decentralized applications (DApps) on the blockchain rather than on company-owned servers. Consequently, various DApps and DeFi protocols emerged to provide financial services such as lending, trading, insurances and derivatives to the cryptocurrency market, making DeFi a huge hit around the cryptoworld.
Key Difference Between Bitcoin and DeFi
DeFi and Bitcoin actually represent different concepts, and there is a good analogy to explain the difference, which is E-mail and Internet. When the Internet was first opened to the public, it was only limited to e-mail. However, as the internet grew and became more popular over the next few years, everyone realized that there was a whole new world of endless possibilities ahead.
Similarly, when the blockchain world was focused solely on Bitcoin at the initial stage, it just enabled users to make P2P transfers anonymously. Yet in less than a decade, the true potential of blockchain technology has been revealed, and it's far from a monofunction of payment medium.
Briefly speaking, Bitcoin is a decentralized cryptocurrency that runs on its own blockchain. It adopts the proof of concept models, like Proof-of-Work (PoW), which employs miners to validate transactions. And for now, it is primarily used as a store of value and more rarely as a payment.
However, DeFi is a broader ecosystem. In addition to the original Ethereum, there are now many programmable blockchains with their own blossoming DeFi ecosystems. Generally, every DeFi ecosystem has its own DeFi token, and these tokens serve a specific use case within the project, which technically makes them a form of utility token, like BAT, ADA, and LINK. Also, the DApps built on the blockchain platform aim to provide users with services like lending, insurance, trading, payments, etc. Users can also become liquidity providers for decentralized exchanges (DEX) through these DeFi protocols.
Upcoming Bitcoin DeFi
DeFi yields a new standard for trust and economic opportunity. Thereby, the decentralized finance combined with Bitcoin is definitely an exciting development for the world's most trusted project.
While there exist differences between Bitcoin and DeFi, it doesn't mean that they can never have connection at all. In fact, the Taproot upgrade in 2021 enables the Bitcoin network to support decentralized applications, making Bitcoin a viable alternative to Etheruem for future smart contract development. With the immense amounts of capital and unrivaled security, the potential of Bitcoin DeFi will reveal a demonstrable advantage over existing DeFi solutions.
Although DeFi and Bitcoin are distinct technologies, both have the potential to transform the way we engage with the world. DeFi focuses on developing decentralized applications that allow people to use their money without relying on intermediaries, while Bitcoin seeks to establish a new form of digital currency that can be used in online transactions.
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