260
views

DeFi vs. dApps: How do They Work and What’s The Difference?

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 guide, we 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 USD1.22 billion as of Sep 12, 2019, improved from USD180 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.   

Bitcoin live price
Btc
Bitcoin
$36.371
price
9.56862%
price change
BUY NOW

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. 

Stay up to date with our latest articles

More posts

What Is CBDC In Crypto?

The cryptocurrency trading revolution exploded more than ten years ago and led to an almost unprecedented economic and financial earthquake. As a result, people are learning to change their approach to payment and investment systems, pushing up the price of many cryptocurrencies. Such a rapid change has not gone unnoticed on the boards of the world's major central banks. In fact, in an increasing number of countries, central banks are working on launching centralized digital currencies, known as CBDC. This…

How Social Leaders on Shrimpy help Investors Maximize Profits from Crypto Trading

The emerging trend of social trading allows millions of investors to interact with their peers and learn from accomplished traders in the crypto market. Every market participant wants to become a profitable crypto trader and maximize earnings from the ongoing crypto boom. Unfortunately, navigating the highly volatile space while grasping the complex learning curve that involves fundamental/technical analysis can be rather daunting. Becoming successful in the crypto market requires time to develop a working strategy that empowers investors to execute…

Decentralized Exchanges 2022: Which is the Best Crypto DEX to Trade on?

Market experts believe that the survival and growth of crypto largely depend on decentralization. The good news is that decentralized exchanges or DEXs have become highly popular, and the crypto market sees this as an opportunity to save the essence of traditional blockchain. Each decentralized exchange platform has the potential to revive and thrive crypto market. Moreover, each new DEX platform comes with its own set of features. There are several methods to use DEXs and make money.  Decentralized exchange…

Top Crypto Exchanges for Beginners in 2022

Investing in crypto is not as complex as most people think. So if you’re curious and optimistic about the rise of crypto, there is no reason to hold back and dive into it. Remember, it is normal for beginner investors to get caught in the cobweb of endless crypto exchanges. As a beginner investor, your objective should focus on the best crypto exchanges to make the right investment decisions. Whether it’s Bitcoin or Ethereum, cryptocurrencies continue to be at the…

Top 10 Cryptocurrencies in January 2022

Cryptocurrencies had a great year in 2021. In this period, we have seen the market go from being classified as a billion-dollar economy into a trillion-dollar economy. Aside from that, cryptocurrencies are gaining visibility in the mainstream world with, for example, El Salvador's adoption of Bitcoin as the official digital currency. As a result, investors are looking for the "new Bitcoin" on the market, hoping to find a great alternative in so-called altcoins. Unfortunately, many traders value an altcoin exclusively…

The Story Of Bitcoin And Ethereum’s Reversed Blockchains

Decentralization is the primary selling point of the three worlds of Bitcoin, crypto, and the web. There are several reasons for this. Some are related to the increased transactional efficiency that decentralization can provide. Others are related to creating permissionless, censorship-resistant digital networks. The most important is that decentralization weakens any single-point-of-failure, hence bolstering network security. This not only keeps a network as close to unbiased and ‘neutral’ as possible but almost guarantees its immutability. Yet the crypto world hasn’t…

What Are the Best Crypto Prediction Sites?

There are now several websites that provide, besides crypto live prices, some forecasts on the future of the leading cryptocurrencies. However, considering the market’s high volatility and the few analysis tools available to the public for formulating these forecasts, it must monitor these portals carefully. This article will report some of the primary sources of price forecasts in the crypto industry. However, we remind you that the information contained in the text does not constitute financial advice, and we invite…

Why Do the Cryptocurrency Prices Go Down on the Weekends?

If you have been in the crypto world for a while, you will probably have noticed a typical behaviour of the market during weekends. With some exceptions, we are used to seeing the price of significant cryptocurrencies drop over the weekend. The phenomenon is known to those who operate in this market, but understanding precisely the causes seems to be rather complex. Therefore, this article will discuss a definitive answer by analyzing the various main factors involved in this market…

How to Track and Stay Updated with Cryptocurrency News

Cryptocurrency is a young market and, as such, very fast-moving. If we exclude the phenomenon of stablecoins, the prices of cryptocurrencies change continuously, with sometimes very high volatility. Since a volatile investment is, by definition, a risky operation, traders usually look for ways to reduce the possibility of incurring significant money losses. In this context, it is vital to stay up to date with market events, even if this can be complex. As seen in the past, a single tweet…

Keeping Consensus: Explaining Ethereum’s Difficulty Bomb

Ethereum’s difficulty bomb is a tool for maintaining network consensus between all classes of participants. This is a challenging task for Ethereum compared to Bitcoin, which performs frequent backwards-incompatible hard-forks. The most significant of these – Ethereum 2.0 – is yet to come. When it does, the difficulty bomb will be crucial in ensuring the community’s smooth transition to the new protocol. Review: Ethereum 2.0 and Proof Of Stake To understand the necessity of the bomb, we must review some…