DeFi & dApps: What are They? How Do They Work?

DeFi & dApps: What are They? How Do They Work?

General Information Research Tutorials
April 25, 2021 by DanCurranJr
365
Decentralized Finance (DeFi) and Decentralized Apps (dApps) are the two major innovations in the crypto space that leverage blockchain technology. These two innovations help eliminate third parties, otherwise known as centralization, and give users control over their finances. Both DeFi and dApps are increasingly becoming common in the FINTECH industry as they provide users with
dapps

Decentralized Finance (DeFi) and Decentralized Apps (dApps) are the two major innovations in the crypto space that leverage blockchain technology. These two innovations help eliminate third parties, otherwise known as centralization, and give users control over their finances.

Both DeFi and dApps are increasingly becoming common in the FINTECH industry as they provide users with data privacy and eliminate monitoring by government and regulatory authorities. DeFi, in particular, has been adopted by Nasdaq and is set to disrupt the traditional banking system in the coming years.

It is not uncommon to confuse these two terms, seeing as they have quite similar concepts. In this post, I will delve into DeFi and dApps and provide insight into their differences.

Decentralized Finance Explained

DeFi is defined as ‘an ecosystem comprising applications built on top of public distributed ledgers, for the facilitation of permissionless financial services.’ DeFi is an ambitious financial project looking to decentralize major traditional finance use cases such as investment, wealth management, trading, monetary payments, and insurance. It achieves this by leveraging blockchain, specifically Decentralized Applications (dApps).

In turn, these traditional finance use cases or products are transformed into trustless and transparent protocols that run without centralized oversight. Thanks to DeFi, users enjoy full control over their finances and lower financial risk.

DeFi Leverages Blockchain

As mentioned before, DeFi employs blockchain in storing, managing, and minting crypto assets. Blockchain stores digital information within immutable trusted and distributed networks without the presence of a third party.

The use of blockchain in DeFi allows users to access a myriad of financial services, including cross-border transfers, payment, investing, borrowing, lending, and asset management, without a central authority’s involvement. Smart contracts on the DeFi applications enhance the resiliency and transparency of the entire financial system.

Coming of Age – DeFi’s Rapid Growth

DeFi started gaining prominence in the crypto space in 2018. A boom in Ethereum-based projects focused on building an independent, secure, and open financial system that helped propel DeFi’s growth.

Following the said growth spurt, DeFi has witnessed a steady uptrend. The value of DeFi’s applications has significantly grown in two years since its emergence.

According to DAppTotal, DeFi’s applications worth over USD 1.22 billion as of Sep 12, 2019, improved from USD 180 million a year ago.

The total ETH and EOS locked in dApp circulations are 3.11% and 10.02%, respectively. From the figures, it’s evident that DeFi apps have grown enormously, pointing at a bright future of DeFi development.

Currently, there are over 100 DeFi dApps that offer various financial services. Some of the common DeFi dApps include:

    • EtherDelta – Decentralized P2P trading platform for ETH and ETH-based (ERC20) tokens
    • Kyber Network – Decentralized on-chain liquidity protocol enabling token swap
    • MakerDAO Protocol – Decentralized stablecoin based on pawned Ethers
    • Augur – Decentralized prediction market platform
    • Dharma – Decentralized borrowing-lending marketplace
    • Loopring-Decentralized token exchange protocol
    • InstaDapp.io – All in one banking protocol that combines Kyber Network for token swap and MAKER DAO

DeFi Core Features

    • Trustfulness – any institution or employee does not manage Defi protocols; thus, the code can be trusted. They run on dApps, which operate based on smart contracts. Once deployed on a blockchain network, they can work without any interruption.
    • Permissionless – DeFi is permissionless, meaning that anybody can create DeFi apps or use the platforms without going through extensive registration processes synonymous with traditional banking. There are no gatekeepers, and each individual has full access to all financial services.
    • Programmable – DeFi contracts can be pre-programmed to suit an individual’s needs and use cases.
    • Transparent – DeFi code is usually transparent on the blockchain and open to finding bugs, audit transactions, and get to know the contract’s functionality. While DeFi is transparent, transactions are pseudonymous for users’ privacy.
    • Censorship Resistant – Unlike traditional banking, DeFi is censorship-resistant. Anyone is therefore allowed to use all types of financial instruments regardless of the censorship agreement.

Decentralized Applications (dApps)

Decentralized Applications are programmed or digital applications that run on a blockchain using smart contracts. dApps are not limited to running on blockchain alone as they can also operate on P2P networks. To better understand the concept of dApps, you’ll need to comprehend smart contracts.

A smart contract is a transaction protocol or computer program involving a self-executing contract encompassing the terms of the agreement between buyer and seller being directly written in a coding language and placed in a distributed, decentralized blockchain network. In essence, dApps are computer applications that communicate with the blockchain and use smart contracts to manage all network users’ interactions.

dApps are quite similar to traditional websites, with the front end utilizing the exact technology to display pages. However, unlike conventional sites that use API to connect to a database, decentralized applications use a smart contract to interact with the blockchain.

Think of blockchain as the Internet, smart contracts as www. and decentralized applications as YouTube or Facebook.

Core Features of dApps

    • Decentralized– dApps are fully decentralized, meaning that all transaction records are stored on a public and decentralized blockchain network,
    • Open Source– dApps are governed by autonomy. Users must reach a consensus for a change to be implemented. Additionally, the code is made available for scrutiny.
    • Incentivized– users can generate tokens after completing a particular task such as verifying transactions. A common way of incentivizing validators is through the use of cryptographic tokens.
    • Protocol– Users or community around dApps must agree on an ideal cryptographic algorithm, i.e., PoW and PoS, to demonstrate proof of value.
    • Top dApps in the blockchain space include Chainlink, EOS Dynasty, Circulor, Cipher, KYC-Chain, etc.

Difference Between DeFi and dApps

Both DeFi and dApps are decentralized and have almost similar features. However, the primary difference is that DeFi is built on dApps, and it’s more concerned with commercial use cases. dApps aren’t limited to financial use cases as they can be used to develop gaming applications, gambling, education, web browsers with enhanced privacy, etc.

Another significant difference between the two is that dApps leverage smart contracts, which, once launched, require a consensus to alter.

dApps can run on a P2P network of computers, unlike DeFi, which is completely limited to blockchain networks.

Final Thoughts

It is no surprise that many people in the crypto space often confuse these two terms. DeFi is based on dApps and aims at decentralizing traditional financial industry services, i.e., decentralized lending, payments, cross-border transfers, mortgages, asset management, and investing.

dApps, on the other hand, is quite broad and provides decentralized applications leveraging blockchain and smart contracts in various sectors such as education, gambling, gaming, supply chain management, etc.

There have been several innovations in the tech world ever since the inception of blockchain and cryptocurrencies. DeFi and dApps are two of the most impactful innovations and aim to disrupt the financial sector.

These two innovations are well on their way to eliminating central authority by using blockchain technology.

Helpful? Useful? Enlightening?

Please consider making a small donation to CoinTutor.org. Any little bit helps the articles keep coming and the forums running. Pick a coin below, donate, and Thank You!

  • Bitcoin
  • Ethereum
  • MetaMask
  • Tether
  • Cardano
  • Xrp
  • Polkadot
  • Binance coin
  • Litecoin
  • Stellar
  • Bitcoin cash
  • Dogecoin
  • Usdcoin
  • Uniswap
  • Bitcoin sv
  • Tron
  • Cosmos
  • Monero
  • Tezos
  • Synthetix
  • Dash
  • Maker
  • Dai
  • Neo
  • Vechain
  • Ontology
Scan to Donate Bitcoin to 3GW2f1Du91uQFpVULZP4fwcLLTnfjUHDSY

Donate Bitcoin to this address

Scan the QR code or copy the address below into your wallet to send some Bitcoin

Scan to Donate Ethereum to 0x18b4388E6CE05b65F7Afd2a175ab9Da20324404D

Donate Ethereum to this address

Scan the QR code or copy the address below into your wallet to send some Ethereum

MetaMask

Donate to Coin Tutor Via Meta Mask

Scan to Donate Tether to 0x38D0d0039A238dE4e38FBf6dd53Aa81fdD90884E

Donate Tether to this address

Scan the QR code or copy the address below into your wallet to send some Tether

Scan to Donate Cardano to addr1qy3qmcf2dg4u0wytq3u33s8j8kzat60hsyrvmgftsvkhu73zphsj563tc7ugkprerrq0y0v96h5l0qgxeksjhqed0eaqq43up2

Donate Cardano to this address

Scan the QR code or copy the address below into your wallet to send some Cardano

Scan to Donate Xrp to rEbQS57RrYczvd16tLCrFrXfGufeyBUWQ

Donate Xrp to this address

Scan the QR code or copy the address below into your wallet to send some Xrp

Scan to Donate Polkadot to rEbQS57RrYczvd16tLCrFrXfGufeyBUWQ

Donate Polkadot to this address

Scan the QR code or copy the address below into your wallet to send some Polkadot

Scan to Donate Binance coin to bnb1mu5j9t5al68hrg4dwu34g2a8cn0qjegfc4fase

Donate Binance coin to this address

Scan the QR code or copy the address below into your wallet to send some Binance coin

Scan to Donate Litecoin to M8u4f6LL9APeLH5MAupK7geefMaBT7Pko6

Donate Litecoin to this address

Scan the QR code or copy the address below into your wallet to send some Litecoin

Scan to Donate Stellar to GAZUFMYP5IGQ3DUDADBBFKDLVBDM5DPDRRLTY4IZR5G7VANKGNH6NWJS

Donate Stellar to this address

Scan the QR code or copy the address below into your wallet to send some Stellar

Scan to Donate Bitcoin cash to qzm8xx7qqz6sttq4l5c44dua3ftaud9rvqdwypfd0f

Donate Bitcoin cash to this address

Scan the QR code or copy the address below into your wallet to send some Bitcoin cash

Scan to Donate Dogecoin to DAuyfeoKBtNhsjKmyvDtg1ANXvhXZpYHGE

Donate Dogecoin to this address

Scan the QR code or copy the address below into your wallet to send some Dogecoin

Scan to Donate Usdcoin to 0x38D0d0039A238dE4e38FBf6dd53Aa81fdD90884E

Donate Usdcoin to this address

Scan the QR code or copy the address below into your wallet to send some Usdcoin

Scan to Donate Uniswap to 0x38D0d0039A238dE4e38FBf6dd53Aa81fdD90884E

Donate Uniswap to this address

Scan the QR code or copy the address below into your wallet to send some Uniswap

Scan to Donate Bitcoin sv to 1EnacS3kV3d7jcHEJ8pc4hqeWcXgsidtdu

Donate Bitcoin sv to this address

Scan the QR code or copy the address below into your wallet to send some Bitcoin sv

Scan to Donate Tron to TF7TRB3sZkjYF44VVP1V5tyg8xY8UTXffY

Donate Tron to this address

Scan the QR code or copy the address below into your wallet to send some Tron

Scan to Donate Cosmos to cosmos1tws495gqqznj2l47v06adsfe4a7plqpug4txfh

Donate Cosmos to this address

Scan the QR code or copy the address below into your wallet to send some Cosmos

Scan to Donate Monero to 489Qx82MSwFAhRgXGoU9NrV3baCPB5vbm22EUkSizTSULcxqZ5ayisg5hWLYZegUxXJ6yuhCFGjxxaf1rQ4R67wuKh2Ykui

Donate Monero to this address

Scan the QR code or copy the address below into your wallet to send some Monero

Scan to Donate Tezos to tz1cRXMBHmqNx6NJywWEE8rnq4hkXtbHAjHm

Donate Tezos to this address

Scan the QR code or copy the address below into your wallet to send some Tezos

Scan to Donate Synthetix to 0x18b4388E6CE05b65F7Afd2a175ab9Da20324404D

Donate Synthetix to this address

Scan the QR code or copy the address below into your wallet to send some Synthetix

Scan to Donate Dash to XcYTxXipDksvyP2JJxxYe7YkKqxK5fBad5

Donate Dash to this address

Scan the QR code or copy the address below into your wallet to send some Dash

Scan to Donate Maker to 0x38D0d0039A238dE4e38FBf6dd53Aa81fdD90884E

Donate Maker to this address

Scan the QR code or copy the address below into your wallet to send some Maker

Scan to Donate Dai to 0x38D0d0039A238dE4e38FBf6dd53Aa81fdD90884E

Donate Dai to this address

Scan the QR code or copy the address below into your wallet to send some Dai

Scan to Donate Neo to AXqCkUcXbMGqs7JXkdCynz8AsejGTjmp3u

Donate Neo to this address

Scan the QR code or copy the address below into your wallet to send some Neo

Scan to Donate Vechain to 0x9AAD975d55684447AD7364105eb0aA91698fC4e6

Donate Vechain to this address

Scan the QR code or copy the address below into your wallet to send some Vechain

Scan to Donate Ontology to AZ3muytbGzc3D4CY33tRnRTnBxn39TYNdG

Donate Ontology to this address

Scan the QR code or copy the address below into your wallet to send some Ontology

Add a comment