3.7 k

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
price change

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

Smart Contract Security – Pitfalls and Solutions

Smart contracts are becoming increasingly prevalent as the world moves towards a more digital and automated future. Still, they are far from being the panacea of all technological ills. Smart contracts are self-executing contracts with a predetermined set of rules. They are stored on the blockchain and run by computers, which makes them tamper-proof and reliable. However, as with any new technology, smart contracts have associated risks. This article will explore some of the most common pitfalls and how to…

Looking for Crypto Marketing? Here are The Best Crypto Advertising Agencies in 2023

It is vital to have a strong marketing strategy if you wish to succeed in cryptocurrency. This is where crypto marketing agencies come in. You may successfully promote your project and reach your target audience through a crypto marketing agency.  This article will explore the top crypto marketing agencies in 2023. Moreover, we will look at their services and how to choose the right one for your project.  We will also discuss the benefits of using a crypto marketing agency.…

The Risks of Investing in Crypto Projects without Smart Contract Audit

Smart contracts are self-executing contracts that run on blockchain technology. They are stored and verified on the blockchain, which means they are transparent and cannot be tampered with. This makes them a secure way to conduct transactions without needing a third party.  Despite their many advantages, some risks exist with using smart contracts. One such risk is investing in crypto projects that have yet to have their smart contracts audited by a qualified auditor.  Without an audit, it cannot be…

SuperBots Trading in DEX – The Future of DeFi Trading is Here

Trading in decentralized finance is evolving rapidly and empowering people worldwide to access new forms of income. Spearheading this revolution are platforms like SuperBots, a BSC-based protocol enabling users to deposit their capital in vaults for secure and efficient trades on decentralized markets. SuperBots accelerates the mainstream adoption of DeFi trading through high-performance bots that automatically trade for their owners. This way, users can achieve profitable trades, regardless of their experience or skill. Furthermore, the platform does not charge any…

Top Smart Contract Audit and KYC Companies in 2023

It's no secret that business is undergoing fast change. Companies must adapt when new technologies, like smart contracts, emerge to remain competitive. A crucial part of this adaptation process is ensuring compliance with regulations and safety. This is where a company's KYC (Know Your Customer) process or smart contract audit come into play.  To ensure that your company is compliant, working with a reputable smart contract auditor or KYC provider is essential. This blog article discusses the benefits of using…

Automated Trading with No Subscription Fees – How UpBots is Revolutionizing the Trading Industry

Cryptocurrency trading has enhanced the universe of assets available to traders worldwide. However, this practice is challenging for inexperienced or unskilled traders. Furthermore, the ongoing bear market makes trading costly and inconvenient when most platforms charge upfront or subscription fees. As a result, many people avoid entering the market. UpBots aims to change that and take the trading industry to a new level through innovative and affordable solutions. For one, its automated trading service allows users to trade in CEX…

Top 5 KYC Solutions for Crypto or NFT Projects

As the importance of blockchain technology grows, many people look for ways to get involved in the crypto world. One of the most important aspects of any cryptocurrency or blockchain project is KYC/AML.  Without proper KYC/AML procedures, your project could be at risk for fraud and illegal activities. This article will discuss the types of KYC solutions available and how to choose the right one for your project.  We will also provide tips on how to implement these solutions properly.…

DeFi Scams – Most Common Scams in the DeFi Space

In the world of Defi, scams are unfortunately all too common. This article looks at popular Defi scams, how they operate, and how to protect yourself. We'll also provide tips on what to do if somebody scammed you and how to report a scammer. Finally, we'll discuss the implications of DeFi scamming and present examples of successful prosecutions. What Are DeFi Scams, and How Do They Work? Decentralized Finance (DeFi) is a term that has gained enormous popularity over the…

5 Trading Bots Platforms to Automate Your Crypto Trading in 2023

Crypto trading bots enable investors to automate buying and selling based on advanced technical indicators. These innovative tools compete to provide the highest percentage of profitable trades even during bear markets when trading winnings are at a minimum. Therefore, it’s no surprise they have become the favorite cryptocurrency trading solutions for beginner and expert traders alike. As a new trader, you can use trading bots to emulate the successful strategies of more experienced traders. Alternatively, if you possess the know-how…

NFT Scams – Most Common Scams in the NFT Space

As the popularity of NFTs (non-fungible tokens) continues to grow, so does the potential for scams.  This article examines popular NFT scams and offers suggestions for avoiding them. We'll also discuss the future of NFT scam prevention and how to report one. A Closer Look Into NFTs and Their Popularity The past year has seen a surge in the popularity of non-fungible tokens. These digital assets are unique, and nobody can replicate them, making them ideal for collectors and investors.…