DeFi vs dApps

DeFi & dApps

 

Decentralized Finance (DeFi) and Decentralized Apps (dApps) are the two major innovations in the blockchain that leverages blockchain technology. These two innovations eliminate the need of third-parties, ensuring decentralization and the uses’ control over the finances.

Note: -DeFi has been adopted by Nasdaq to disrupt the traditional banking system.

DeFi is a decentralized ecosystem built on top of public distributed ledgers, for the facilitation of the permissionless financial services such as investment, wealth management, trading, monetary payments, and insurance. It achieves this by leveraging blockchain, specifically Decentralization Applications (dApps). The traditional financial system is transformed into trustless and transparent protocols that run without centralized oversight. DiFi gives users complete control over their finances and lowers financial risks.

The opposite of centralized finance, DeFi encompasses P2P financial services that runs on public networks envisioned to represent banking services on the principles of trustlessness, transparency, and immutability. The Ethereum network powers those services. The smart contract on the DeFi applications enhance the resiliency and transparency of the entire financial system.

Some of the common DeFi aApps include EtherData (Decentralized P2P trading platform for ETH and ETH-based (ERC-20)) 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); and InstaDapp.io (All-in-one banking protocol that combines Kyber Network for token swap and MAKER DAO). Some of the core features of DeFi are:

·      Trustfulness

·      Permissionless

·      Programmable

·      Transparent

·      Censorship Resistant i.e., anyone is allowed to use all financial instruments regardless of the censorship agreement.

Decentralized Applications (dApps) are programmed or digital applications that run on blockchain using smart contracts. dApps are not limited to running on blockchain alone, as they can operate on P2P networks. To understand more on dApps, you need to comprehend smart contracts https://immtalimm.blogspot.com/2023/08/what-is-smart-contracts.html. In short, smart contract is a transaction protocol or computer program involving a self-executing contract encompassing the terms of the agreement between buyer and the seller being directly written in a coding language called Solidity https://immtalimm.blogspot.com/2023/08/what-is-solidity.html; and is placed in a distributed, decentralized blockchain network such as Ethereum. Thus, dApps are computer applications that communicate with the blockchain and use smart contracts to manage all network users’ interactions. While conventional sites use API to connect to a database, smart contract uses smart contract to interact with the blockchain. Its analogous to internet as blockchain; www as smart contracts; and youtube/facebook as dApps. Some of the core features of dApps are:

·      Decentralization

·      OpenSource

·      Incentivized

·      Protocol (dApps must agree on cryptographic algorithm such as PoW or PoW (read more at https://immtalimm.blogspot.com/2023/07/proof-of-work-vs-proof-of-stake.html)

Some top dApps include Chainlink. EOS Dynasty, Circulor, Cipher, KYC-Chain, etc.

dApps are powered by the blockchain or P2P networks, thus the absence of single point of management is the key characteristics of all dApps (smart contracts or the pieces of code are a backend mechanism that lets users interact directly with the dApp).

Non-DeFi Apps on the other hand include games, exchanges, collectibles, marketplaces, and social apps which are developed for meeting the purposes other than the financial needs of the users.

Difference between DeFi and dApps

While both DeFi and dApps are decentralized and have similar features, the primary difference is that DeFi is built on dApps. The other difference is while DeFi is exclusively meant for financial use, dApps are also developed for gaming applications, gambling, education, etc. The third difference is that dApps can run on P2P networks unlike DeFi as the latter is completely limited to blockchain network. In addition, dApps leverage the smart contracts and once launched, required a consensus to alter.