DApps and DeFi are popular terms you’ll encounter in the cryptocurrency world.
The Bitcoin Protocol, launched in 2009, laid the groundwork for a new era of peer-to-peer financial services.
Ethereum, the first blockchain with smart contracts, powers the Maker Protocol and supports complex finance applications.
The Ethereum blockchain now hosts roughly half of all functioning decentralized applications on the market, which provide a wide range of services previously only available to wealthy or institutional investors.
What is Decentralized Finance (DeFi)?
Decentralized finance (DeFi) is a new financial system based on distributed ledgers that are similar to those used in cryptocurrencies.
The system decentralizes authority over money, financial products, and financial services from banks and institutions.
It eliminates the fees charged by banks and other financial institutions for using their services.
Instead of depositing your money in a bank, you save it in a safe digital wallet.
Anyone with an internet connection can use it without needing permission.
You can transfer money in seconds or minutes.
What are Decentralized Apps (DApps)?
DApps, or decentralized applications, are blockchain-based versions of apps, popularized by Ethereum’s smart contracts.
They behave exactly like traditional apps — a user shouldn’t be able to tell the difference — but they have a far larger feature set.
DApps are a brand-new method to interact with personal finances.
Traditional finance conjures up images of money lending, borrowing, savings, and other related entities.
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Read: All You Need To Know About Cryptocurrency
Difference Between DeFi and DApps
DeFi and DApps are decentralized and have nearly identical functionality.
The main distinction is that DeFi is based on DApps and focuses more on business applications.
DApps create gaming, gambling, education apps, and private web browsers, not just financial applications.
Another key distinction is that DApps use smart contracts, which require consensus to change once released.
Unlike DeFi, limited to blockchain networks, DApps can run on peer-to-peer computer networks.
Read: Centralized Vs Decentralized Finance Applications
The History and Evolution
Bitcoin
One could claim that DeFi began in 2009 with Bitcoin.
BTC was the first peer-to-peer digital currency, as well as the first blockchain-based financial application.
Bitcoin’s creation enabled the entire cryptocurrency business, including decentralized finance, regardless of its DeFi status.
Bitcoin also enables decentralized payment transmission over the world, and payments are one of the domains of finance.
It seems a lot like DeFi to me.
Most importantly, Bitcoin paved the way for the development of Ethereum, which is now the default blockchain for all major DeFi protocols.
Ethereum
Lending, borrowing, trading, funding, and derivatives are all key services that every strong financial system requires.
Ethereum launched in 2015 and quickly attracted developers to create decentralized apps like CryptoKitties and financial applications.
Ethereum soon became the go-to smart contract platform to build on, thanks to its Turing-complete programming language Solidity and the ERC20 standard for establishing new coins.
However, MarkerDAO’s debut in December 2017 was a watershed moment for financial applications that allow users to do more with their money than simply transmit it from point A to point B.
Makerdao
Maker is one of the oldest DeFi projects on Ethereum.
It is a system that enables the creation of DAI, a decentralized stablecoin.
Rune Christensen founded the project in 2014, inspired by BitShares, a blockchain built by Dan Larimer.
DAI lets users use digital assets as collateral to create a cryptocurrency tied to the US dollar value 1:1.
Anyone could effectively borrow the Dai stablecoin against Ether (Ethereum’s native cryptocurrency) via this approach.
It made it possible for anyone to get a loan without having to rely on a centralized entity.
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The MakerDAO lending protocol and its Dai stablecoin laid the foundation for a new, permissionless, open financial system.
Other financial protocols followed suit, resulting in a more robust and linked environment.
Compound Finance, released in September 2018, provided a market for borrowers who took out collateralized loans and for lenders to profit from the interest rates that those borrowers paid.
Uniswap, launched in November 2018, enables users to swap Ethereum coin without requiring authorization.
Maker remains one of the most prominent DeFi projects and is unquestionably one of the first decentralized financial pioneers.
Compound Finance
Compound Finance is an Ethereum-based lending protocol.
Anyone can earn interest by lending their assets or borrowing assets against collateral.
Computer code automatically executes financial contracts on the platform, accessible to everyone worldwide.
Securing loans is based not on a person’s credit score or income and liabilities but on the assets they deposit in the system to cover the loan’s value.
Compound loans, like most DeFi loans, are over-collateralized.
This approach isn’t the most capital-efficient, but it does allow for permissionless and automatic lending.
If the collateral falls below the required ratio, the system sells the funds at a discount, liquidating them.
Balancer
Balancer is a decentralized exchange and asset manager built on the Ethereum network.
Fernando Martinelli and Mike Ray McDonald launched it in March 2020.
Balancer, like Uniswap, allows anyone to construct token pools that rebalance to maintain the same ratio among those tokens independent of price changes.
The only difference is that you can add several tokens and ETH isn’t required.
It effectively enables anyone to build something akin to an ETF ––an index fund comprised entirely of crypto assets.
Balancer distributed its governance token BAL to liquidity providers in June 2020.
Holders of BAL tokens can take part in the protocol’s governance system.
Yam finance
Yam Finance is a startup that rewards users with YAM tokens in exchange for cryptocurrency contributions into various liquidity pools.
It was created in August 2020 by a collection of cryptocurrency developers, investors, and entrepreneurs, including IDEO’s Dan Elitzer and Flipside Crypto’s Will Price.
It was one of the first ventures to focus on putting cryptocurrency tokens into DeFi platforms to earn the platform’s native tokens and interest rates.
The launch was contentious since it appeared to have been developed overnight by copying the code of various DeFi protocols and then placed on the main net without a rigorous audit.
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Read: Fintech Innovations in Blockchain: Shaping the Future of Finance
The Future
Ethereum 2.0, layer 2 solutions, and potentially other blockchains will provide much-needed scaling.
As a result, a new group of people can join DeFi.
It will also aid in discovering new use cases that would otherwise be impossible to implement due to high network prices.
Introducing additional, more traditional assets into DeFi by tokenizing or constructing synthetic representations of them will also offer up entirely new possibilities.
Conclusion
The evolution of DeFi and DApps marks a revolutionary shift in how we interact with financial systems.
From Bitcoin’s inception to Ethereum’s smart contracts, and the rise of MakerDAO, these innovations have democratized finance, making it accessible to anyone with an internet connection.
As we move forward, scaling solutions like Ethereum 2.0 and the tokenization of traditional assets promise to further expand the possibilities of DeFi.
This new era will likely continue to break down barriers, fostering a more inclusive financial ecosystem where decentralized applications play a pivotal role in our daily lives.
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