Cryptocurrencies and the Decentralized Economy
Cryptocurrencies and decentralized economies have been around for quite some time now. However, it was only recently that I started paying attention to it and realizing the implications of such an idea.
This article aims to help us gain a better understanding of the cryptographic landscape.
What is Cryptocurrency?
Cryptocurrency is a digital currency that serves as a medium of exchange and a store of value. Cryptography techniques secure it, and it is almost impossible to counterfeit or double-spend. It also enables users to do transactions globally without any kind of geographic restriction or middleman.
Cryptocurrencies are a subset of alternative currencies, specifically digital currencies. Bitcoin, created in 2009, was the first decentralized cryptocurrency. It is the most popular and largest cryptocurrency by market cap.
Many other cryptocurrencies have since emerged over the years. These are frequently called "altcoins," as a contraction of “bitcoin alternatives." Some of them are Ethereum, Solana, Litecoin, Cardano, and so forth.
While some of them are like Bitcoin, others are based on different technologies and features that enable them to do more than just act as a store of value.
One of the distinctive features of cryptocurrencies is that they are decentralized and cannot be controlled or manipulated by governments or any central authority.
What is a Decentralized Economy?
A decentralized economy is one where there is no central authority that controls the economy. Instead, the economy is controlled by the market forces of supply and demand.
Decentralized economies are characterized by peer-to-peer transactions, decentralized decision-making, and distributed ownership.
Cryptocurrencies and decentralized economies go hand in hand because cryptocurrencies are designed to be decentralized.
In a decentralized economy, the power is distributed among the participants, and there is no single point of control.
Decentralized Finance
Decentralized Finance, or DeFi, is described as a “composable ecosystem of protocols built on Ethereum that enable the creation of financial applications." In other words, it is a financial system that runs on a decentralized infrastructure.
With DeFi, you can do everything that you can do with traditional financial products, but without the need for a central authority or intermediaries.
DEFI applications allow users to earn, borrow, lend, trade, and much more without the need for a third party and at a faster pace compared to banks.
Some popular DeFi protocols are MakerDAO, which allows users to create and manage digital collateral-backed loans, and Compound, which allows users to earn interest on their cryptocurrency holdings.
Another important aspect of DEFI is flash loans. A flash loan is a type of loan that is instantly available and does not require collateral. The loan is given and repaid in the same transaction.
Because the loan is given and repaid in the same transaction, there is no need for a third party to hold or manage the loan.
Flash loans are unique in their own way because a user doesn’t need to provide collateral or qualify for a credit check. Anyone can just ask the lenders whether they could borrow $100,000 worth of ether. And if it approves their loan, they can withdraw those funds, use them as leverage, and return the amount.
The use of flash loans has increased in recent months as it allows for the creation of complex financial products and protocols.
Decentralized finance is one of the most important aspects of a decentralized economy.
What role do Cryptocurrencies play in DeFi?
Cryptocurrencies are the foundation of DeFi because they are required to use most DeFi applications.
For example, MakerDAO requires cryptocurrencies like Ether as collateral and generates Dai, a decentralized stablecoin, for loans.
In DeFi, cryptocurrencies are used as collateral, to earn interest, or as a store of value.
Conclusion
The implications of a decentralized economy are far-reaching. When power is distributed among the participants, it leads to a more democratic and egalitarian society.
In a decentralized economy, there is no need for middlemen and intermediaries.
Cryptocurrencies and, especially, decentralized economies are still in their early stages, but they have the potential to upend traditional centralized economies. DeFi is one of the most promising applications of cryptocurrencies and decentralized economies.
While DeFi is still in its nascent stage, especially with the recent crypto winter settling in, it has the potential to grow exponentially in the coming years.
It will be interesting to see how they develop over time.
Additional Resources
Blockchains, Cryptocurrencies & the New Decentralized Economy – Blockchain at Berkeley
A Beginner’s Guide to DeFi – Binance Academy
Flash Loans in DeFi – Binance Academy
🙌🏻 Many thanks to CryptoShuriken for collaborating with me on this blog post. You can find him on Twitter.
