All thanks to the internet and the online world, a new era of financial systems has already descended upon us.
Blockchain was first introduced to the world in 2008, and since then, there have been debates about the potential of this technology to revolutionize the finance world. Several people thought of it as another scam that would not go far, while others invested in projects related to blockchain as they believed that this was the future and soon everything would run on the blockchain.
While we may not have completely transitioned into the blockchain world, big headways have been made. One such proof is the popularity of concepts like DeFi and dApps. They are both new-age applications as an alternative to traditional financial activities. DeFi and dApps are taking off due to the transparency and efficiency of the blockchain network.
If you want to understand more about the world of digital finance and what the DeFi represents, here is a simple guide to cover it all for you. Keep reading!
What Is DeFi?
DeFi (Decentralized Finance) is an ecosystem that uses cryptocurrency and blockchain technology to create a financial system without intermediaries. It is called the ecosystem of decentralized finance. It comprises applications that work on a distributed ledger.
The distributed ledger, as the blockchain technology is called, is available to be accessed by the public. Anyone who is on the blockchain network has a similar copy of the ledger, which cannot be changed, unlike the private ledgers owned by banks and financial institutions.
Since the core technologies for DeFi are public, it gives back control to the public by eliminating the need for an intermediary. This way, the buyer and the seller can directly connect and make transactions on their own. Doing this means you don’t have to give any third party a percentage of your money or investment. You keep what you earn.
This power that DeFi gives back to the ordinary person is what’s getting the technology so much traction. Decentralized Finance is based on blockchain, which essentially works on three basic principles.
DeFi works on the underlying principle that all applications are trustless, which means that there is no need to get through or get verification from a third party source or an intermediary.
The transactions carried out in the DeFi ecosystem are transparent, meaning anyone on the blockchain network can access them. They are available for the entire public to see.
All the transactions taking place within the DeFi environment are immutable. Once a transaction has been made on the blockchain network, it cannot be changed or altered, nor can anyone copy it.
What Are dApps?
In technical terms, dApps are digitally programmed applications that are run by using smart contracts on the blockchain network. They can also be run on P2P networks and are similar in functionality to the normal apps you use on phones and computers but with a wider set of features.
dApps function in the decentralized finance space. Whatever DeFi aims to achieve, it does it with the help of blockchain, cryptocurrency, and dApps.
Features of dApps
dApps are based on the principle of complete decentralization, meaning that there is no third-party interference in functionality, and all transactions are recorded on a public ledger. They are also open-source; the code used to build the app is available for scrutiny. The general public can vote to get changes made to the app.
On top of that, dApps are incentivized so the user can generate tokens after completing certain tasks, such as going through transactions. Another core feature of these applications is protocol, which suggests that all the users and community around the dApp must consent and agree with the ideal cryptographic algorithm.
Difference Between dApps and DeFi
The main difference between DeFi and dApps is that while DeFi runs completely on the blockchain network, dApps can run on P2P networks as well. Another differentiating point is that dApps are based around smart contracts which, once launched, cannot be altered and need public consensus to be changed. There is no involvement of smart contracts in DeFi.
DeFi is created on dApps, but dApps are not limited to financial cases only. They can be used for educational purposes, gaming, gambling, and other fields. The similarity between the two concepts is that they both are decentralized and have all the characteristics of a decentralized platform without an intermediary.
Benefits of dApps
One of the major benefits of using dApps is that it is built on open source code that can be accessed and audited by the users themselves. This brings total transparency to the table.
Another benefit is that the blockchain protocols use PoW and PoS consensus mechanisms to ensure the dApps are secure and incentivized. PoS and PoW work to ensure complete network security and decentralization.
Moreover, dApps are available for use by the entire global population. There is no restriction on phones or computers. As long as you have an internet connection, you can use the app. The dApps also give you incentives in the form of tokens to maintain the transparency and effectiveness of the applications.
Are dApps and DeFi the Future?
dApps aren’t just for simpler activities. They are being used to build interoperable platforms where users can use a wide range of services simultaneously. DeFi Ethereum dApps is one such case that is being created with compostability in mind. This means that users can access an almost limitless range of activities on the digital platform.
dApps can also be used in almost any type of industry. In the traditional apps, we provide our information on the web, which is then gathered and sold off by a few centralized entities. In the case of dApps, this won’t be an issue as there is complete privacy for the user.
As such, more people will want to move toward decentralized dApps. This gives power back to the user, which is a strong narrative to take over traditional web apps. Whether or not dApps and DeFi will grow to completely take over the web as we know it now remains to be seen.