A Comprehensive Guide to DeFi and DApps
Decentralized Finance (DeFi) and Open Finance is a movement that leverages decentralized networks to convert old financial products into trustless and transparent protocols that function with no intermediates.
Smart contract blockchains offer users a global, open alternative financial service, including savings, loans, trading, insurance, and more, accessible to anyone in the world. These smart contracts are programs running on a blockchain and can execute automatically when certain conditions are met.
DeFi and its DApps
These programs allow developers to build multiple complex functions than simply sending and receiving cryptocurrency, and are what we call decentralized apps, or DApps.
A DApp is an application created with decentralized technology, instead of being developed and controlled by a single, centralized entity or company. Although some of these concepts might seem a fantasy, such as automated loans negotiated directly between two people in different parts of the globe, without a bank as intermediate, many of these DApps are already running on various blockchains.
There are DeFi DApps that enable users to create stablecoins – cryptocurrency whose value is pegged to the U.S. dollar – lend out money and earn interest on their crypto coins, take out a loan, exchange assets, and implement automated, advanced investment strategies.
The Difference Between DApps and Traditional Means
So what makes these DApps different from their traditional bank of Wall Street counterparts?
At their basis, the operations of the businesses using DApps are not controlled by an institution or its employees; rather, the rules are put in a code or smart contract. Once the smart contract is posted on the blockchain, DeFi DApps can operate with little to no human intervention.
The code is visible on the blockchain for anyone to review, which creates a different kind of trust because anyone has the chance to understand the contract’s operability or find and report bugs.
The transaction activity is also transparent and available for anyone. Before this triggers some privacy concerns, we should note that the transactions are anonymous by default, which means they are not linked to users’ identities.
DApps are, basically, global apps, meaning that people from different parts of the world have access to the same DeFi services and networks. There might be some local regulations in special cases, but, technically speaking, most DeFi apps are accessible from all over the world with an Internet connection.
DApps are ‘permissionless’ to create and ‘permissionless’ to participate, which means anyone can develop DeFi apps, and anyone can use them. There are no doormen or accounts with protracted forms, but users are able to directly interact with the smart contracts found on their crypto wallets.
These apps are also incredibly flexible – if you don’t like a certain app, you can use a third-party interface for it or even build your own. Smart contracts are similar to an open API that allows anyone to develop an app.
Finally, the DeFi applications can be created or composed by merging other DeFi products, similar to some Lego pieces. For instance, stablecoins, decentralized exchanges, and prediction markets can be mixed to form an entirely new product.
How to Access These DApps
DeFi is one of the fastest developing sectors in the crypto industry. Even though DApps are relatively secure and trustworthy, DeFi users should do their research on new products and services offered on the platform. Similar to a computer code, smart contracts can be vulnerable to both unintended programming mistakes and malicious attacks.
To connect to these DApps, you’ll need a cryptocurrency wallet with a default DApp browser. You can also use the majority of these DApps on a desktop by selecting the online wallet option and scanning a QR code.