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What is DeFi? How is it different from Crypto and Bitcoin?

Eric Dadoun

CEO at Dezy
Published on 11.10.2021
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Here you will find Defi, Crypto and Bitcoin explained in a way that addresses the risks and opportunities Singaporeans should know about.

We’ve all read about individuals who made millions and changed their lives through cryptocurrencies. Or heard of cases where investors lost a lot of their hard-earned savings through cryptocurrency busts, scams and hacks.

So, which is it: Are cryptocurrencies and DeFi the revolution in finance as prophesied? Or are they merely a risky fad that will soon wither and fade?

For newcomers, it is not easy to make sense of the cryptocurrency space. When you do your research you’ll find articles and notable figures articulating views that support both sides.

We’ll give you an objective understanding of the topic, so you can be equipped to further explore the exciting possibilities of cryptocurrencies. All while keeping your feet safely planted on the ground.

And if you’d like more of such content subscribe to Financial Freedom, our newsletter that brings innovations and opportunities in the world of decentralised finance, direct to your inbox.

What is Fiat Currency?

Let’s start with what we’re most familiar with – fiat currency.

We might not always use the term, but what we traditionally think of simply as ‘money’ is fiat currency. This refers to money issued by the central bank of a national government. You can think about Singapore Dollars, the US Dollar, and the Chinese Yuan as fiat currency.

Fiat currency is not backed by any physical commodity, and derive their value from the ‘full faith and credit’ of their respective countries. Given their status as legal tender, fiat currency is extremely handy for purchasing goods and services.

However, the value of fiat currency is particularly vulnerable to inflation and devaluation. Especially when a central bank decides to arbitrarily and aggressively increase the supply of fiat currency circulating in the monetary system. Everyone paying attention to the stimulus packages that nation-states have been handing out since the onset of Covid-19?

The average yearly inflation rate in the United States is upwards of 2%, while Singapore’s annual inflation rate fluctuates from a low of 1% to a high of around 5%. It is worth noting that in comparison, most fixed deposits and cash management accounts provide returns of less than 1% per annum over the same time period. Which means your money sitting in your bank, isn’t even beating inflation. 

Here’s a quick look at fixed deposit products by Singaporean banks:

Bank fixed deposit rate comparison Singapore

What is Cryptocurrency?

As its name suggests, cryptocurrency offers a digital medium of exchange. Cryptographic principles are used to store, transmit and secure these tokens. Once created, cryptocurrencies can be transferred among users on a public blockchain in a decentralised manner with privacy. These transactions are done without the involvement of intermediaries like banks or payment processors.

Cryptocurrencies can also incorporate features like self-executing smart contracts, thanks to blockchain’s ability to contain and run code. A smart contract is a self-executing contract with the terms of the agreement between buyer and seller being directly written into lines of code and stored on a blockchain.This opens the door to a whole new generation of financial instruments, from insurance to investments. Let’s not forget humble cash management products and other short-term savings instruments.

Besides having utility as means of value exchange, crypto enthusiasts and entrepreneurs are also actively exploring new and innovative ways blockchain technologies can be used, such as for digital artists to protect and promote their work or for estate planning instructions to be automatically executed.

What are Bitcoin and Ethereum?

Now that we’ve introduced the concept of cryptocurrencies in the previous section, we’ll turn our attention to two of the biggest and most popular cryptocurrencies right now: Bitcoin and Ethereum.

Created in 2009, Bitcoin is one of the earliest and arguably the most popular cryptocurrencies to be widely bought and mined. From its humble beginnings, it has since been catapulted into public consciousness and the subject of discussion and speculation among ordinary people, billionaire innovators like Elon Musk, Ray Dalio and Jack Dorsey, investment banks like Goldman Sachs, and mainstream financial institutions in Singapore.

Today, Bitcoin is:

  • Accepted as a form of payment in many online products and services
  • Accepted by some brick-and-mortar establishments
  • Often used to purchase other cryptocurrencies.

Ethereum was first conceptualised in 2013. It was one of the first widely-used cryptocurrencies that natively supported smart contracts. This is possible thanks to specially-written apps using the Ethereum protocol, which can be deployed and run in a decentralised manner.

Transactions made possible by Ethereum include the creation and exchange of Non-Fungible Tokens (NFTs), launch of Initial Coin Offerings (ICOs) and decentralised financial (DeFi) solutions. We’ll go over the latter in the subsequent sections.

Cryptocurrencies vs Fiat Currencies – Key Similarities and Differences

What is DeFi - Fiat vs Cryptocurrencies

What is DeFi? 

DeFi is short for decentralised finance. This refers to financial products and services powered by decentralised blockchain technologies. Unlike the traditional financial world, banks, brokerages and other financial institutions are not necessary to facilitate transactions in DeFi ecosystems.

Instead of relying on third party middlemen, DeFi uses automated features like smart contracts and public ledgers to make it possible for buyers, sellers, lenders, and borrowers to interact with one another directly.

This decentralised nature reduces a single point of failure in the financial markets and could make transactions faster and cost less. 

An easy way to think about single points of failure is the shut down we saw with Facebook, Whatsapp, Messenger and Instagram. More than 3.5 billion people around the world use Facebook, Instagram, Messenger and WhatsApp to communicate with friends and family, distribute political messaging, and expand their businesses through advertising and outreach.

Now imagine if your internet banking went down for a couple of hours! Decentralisation strengthens a network so that it becomes resistant to shut downs as we saw in the case of centralised internet service providers. 

The Internet has made possible a whole range of world-changing applications, such as e-mails, mobile applications, e-commerce, video streaming and near-instantaneous communication.

Likewise, blockchain technologies and cryptocurrencies have made DeFi applications and services possible, including re-imagining blockchain-powered versions of real-world instruments such as high-interest savings accounts, investment services, and even loans.

Risks and Dangers Exist but are Not Exclusive to Cryptocurrencies and DeFi

Intermediaries being unnecessary for transactions, users not constrained by government regulations, and the ease of creating and launching new cryptocurrencies – these same attributes that make cryptocurrencies and DeFi so attractive and powerful are also what makes them risky.

This is because the ecosystem is vulnerable to hacks, scams, and a lack of redress when something goes wrong. As with any technological innovation, legislation takes time to catch up and as it currently stands, regulation and oversight of the DeFi sector are very loose, if not absent entirely.

Technology and protocols continue to evolve at an exciting pace. This implicitly involves a greater degree of volatility and uncertainty, which some might be uncomfortable with, despite appreciating the potential upsides.

Of course, it is worth remembering that many of these risks are also present in the existing financial system, including scams, Ponzi schemes, and even global market crashes, even with oversight and decades of refinement. Remember the 2018 global financial crisis? That was manufactured entirely by the highly regulated traditional financial sector.

Pros and Cons of Traditional Financial System vs DeFi

DeFi, cryptocurrencies, bitcoin and beyond

Best of Both Worlds? Bridging the Gap Between Two Co-Existing Financial Systems

The natural question would be whether it is possible to embrace the advantages made possible by DeFi. But do this without throwing the baby out with the bathwater when it comes to traditional financial instruments, which are predictable and well-understood.

Here is where DeZy comes in. As a FinTech built on decentralised finance rails, Dezy seeks to offer users access to the utility and high-growth possibilities of cryptocurrencies safely and securely – in a platform that is easy for everyone to understand and use.

As a start, Dezy offers a challenger product to some traditional savings opportunities, which are notorious for low yields that don’t currently outpace inflation.

Dezy facilitates your access to a highly diversified pool of decentralised finance protocols. How? Dezy is a tech stack that manages xSGD.  Thanks to economies of scale and efficiency in processing transactions, Dezy is also able to offer access to up to 5.65% a year without fees.

Set and forget returns and no fees aside, Dezy also does not have any lock-in, which means you can withdraw your funds and earnings at any time with no penalties. Thus, you enjoy better liquidity compared to traditional financial instruments and FinTech cash management products.

Finally, if you still need another reason to give Dezy a try - no minimum deposit. Deposit directly from your bank into your Dezy account. Learn more about the security measures we have in place to protect you, and your savings.

So, if you’d like the best of both worlds – combining the safety and security of traditional financial products, and the exciting potential of DeFi – then we invite you to join our growing Dezy community today.

If you made it this far, you’re probably excited about how we’re making decentralised finance easy, and we can’t wait for you to see what else we’re working on next. Join our mailing list to be the first to hear about it.

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    Dezy Pte Ltd UEN: 202116623N, 80 Robinson Road, #08-01, Singapore 068898