Get the weekly summary of crypto market analysis, news, and forecasts! This Week’s Summary The crypto market ends the week at a total market capitalization of $2,17 trillion. Bitcoin continues to trade at around $62,300. Ethereum experiences no changes and stagnates at around $2,400. XRP is down by 2%, Solana by 1%, and Dogecoin by 3%. Almost all altcoins are trading in the red, with very few exceptions. The DeFi sector decreased the total value of protocols (TVL) to around…
DeFi vs. dApps: How do They Work and What’s The Difference?
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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, 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, as they have similar concepts. This guide will delve into DeFi and dApps and provide insight into their differences.
Decentralized Finance Explained
DeFi is ‘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. DeFi gives users complete control over their finances and lowers financial risk.
DeFi Leverages Blockchain
As mentioned before, DeFi employs blockchain in storing, managing, and minting crypto assets. Blockchain keeps 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. In addition, 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 helped propel DeFi’s growth.
Following the said growth spurt, DeFi has witnessed a steady uptrend. As a result, the value of DeFi’s applications has significantly grown in two years since its emergence.
According to DAppTotal, DeFi’s applications are worth over USD 1.22 billion as of Sep 12, 2019, which improved from USD 1.280 million a year ago. Furthermore, the total ETH and EOS locked in dApp circulations are 3.11% and 10.02%, respectively. The figures show that DeFi apps have grown enormously, indicating a bright future for 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 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, auditing transactions, and getting 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 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 operate on P2P networks. However, 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 similar to traditional websites, with the front end utilizing the same 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 task such as verifying transactions. For example, a common way of incentivizing validators is by using cryptographic tokens.
- Protocol– To demonstrate proof of value, users or communities around dApps must agree on an ideal cryptographic algorithm, i.e., PoW and PoS.
Top dApps in the blockchain 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 is 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
Unsurprisingly, many people in the crypto space often confuse these two terms. For example, 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.
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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.
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