Because dApps are now giving value and service to customers, blockchain’s transformational effect on banking is no longer a possibility, but a fact.
Summary
Decentralized finance (DeFi) and decentralized applications (dApps) allow anyone with an internet connection to participate in a new generation of financial services. DeFi dApps are a powerful alternative to traditional financial services, and their popularity is growing because to blockchain’s trustless, irreversible, and transparent properties.
Contents
- Benefits of Decentralized Apps
- dApps on Ethereum and Beyond
- dApps Are the Building Blocks of the Future
- A Paradigm Shift in the World of Finance
Decentralized applications (dApps) are web services built on top of a blockchain. Using a blockchain like Ethereum allows applications to be trustless (i.e., they do not require participation or verification from centralized, third-party intermediaries), transparent (i.e., all transactions and activity are freely and easily accessible and viewable to the public), and immutable (i.e., all transactions and activity are validated and secured to the blockchain and cannot be tampered with). And, While dApps can be created to provide any type of web service (for example, games, file-sharing networks, and social networking platforms), the most extensively publicized application of dApps is in financial services, as seen by the significant growth of decentralized banking (DeFi).
The first notable wave of dApps began with MakerDAO in 2017, the same year that Ethereum’s Initial Coin Offerings (ICO) gained widespread popularity. Although the Bitcoin network supports dApps to some level, Ethereum is the platform of choice for the great majority of dApps. Lending, borrowing, and a variety of other financial services are all possible using DeFi dApps, which are normally only available through centralized service providers. DeFi projects have already raked in billions of dollars in revenue, and this trend is expected to increase as more individuals become aware of their unique value offer.
Benefits of Decentralized Apps
dApps, unlike traditional software, run on a decentralized network of censorship-resistant nodes that are difficult to shut down. Because of the blockchain’s transparency, most dApps use open source software that users can study and audit themselves.
Most blockchain protocols on which dApps are constructed use a Proof-of-Work (PoW) consensus mechanism, a Proof-of-Stake (PoS) consensus mechanism, or a combination of both to secure and incentivize them. There are numerous additional forms of consensus procedures, but these two are by far the most common. In their own ways, these consensus algorithms aim to ensure network security while avoiding centralization difficulties. Furthermore, dApps are often structured to provide users with an incentive — typically in the form of token rewards — to maintain the dApp’s security, transparency, and operational effectiveness. The fact that dApps are global and accessible to the great majority of the population via the internet is maybe the most crucial feature.
dApps on Ethereum and Beyond
Following the launch of the Ethereum platform in 2015, the production and dissemination of decentralized applications (dApps) began in 2017. The majority of the first Ethereum decentralized applications (dApps) were games or simple decentralized marketplaces, and the dApp ecosystem didn’t really take off until 2020. With its first-mover advantage, Ethereum continues to dominate the dApp space, with transaction volumes in the hundreds of billions of dollars, and the number of dApps and DeFi platforms using Ethereum has risen dramatically. As developers continue to invent and create totally new sorts of dApps, fresh development is progressively moving away from Ethereum, with blockchains like EOSIO and Cardano now developing their own dApp ecosystems.
Decentralized applications can be built to deliver a variety of financial services, including:
- Decentralized borrowing and lending
- Reserve banking
- Synthetic asset and derivatives trading
- Prediction markets and decentralized marketplaces
- Yield farming and liquidity pools
- Automated contract settlement
- Stablecoin interoperability
With some additions, decentralized applications provide parallel services to the banking and financial services industry. dApps arguably lessen the barriers to entry for financial services by providing transparency and 24/7 activity at cheaper prices.
Let’s imagine you require a fiat loan but do not intend to sell your cryptocurrency in order to receive one. In this case, you could utilize a dApp to acquire a quick “flash” loan by simply pledging your cryptocurrency as collateral. The dApp’s smart contracts, which control the dApp’s rules of engagement, would settle the transaction automatically and transparently. These same smart contracts would also promptly return your deposit once you pay back your loan or collect your deposit as collateral in the event that you default — all without a centralized intermediary.
dApps Are the Building Blocks of the Future
DeFi dApps are not just for simple applications. Developers can design decentralized autonomous organizations (DAOs) that operate as apparatuses governed by code that users democratically vote on. The DeFi Ethereum dApp marketplace is being designed with composability in mind, which means that multiple services can be utilized together to fulfill a nearly infinite number of use cases. dApps, sometimes known as “money legos,” may be layered on top of one another and are highly modular, yet intuitive and simple to use for end users.
The decentralized lending platform Maker and stablecoin DAI can function as building blocks to access dApp services on Compound, Yearn.Finance, Uniswap, and many others. Decentralized applications like Compound are algorithmically automated to maximize returns. Further, there are dApps that strictly focus on data and analytics and offer users an easy way to optimize their financial returns. In short, dApps are already furnishing the core functionality that may actualize the paradigm shift away from centralized financial services to a decentralized model.
A Paradigm Shift in the World of Finance
DeFi dApps represent a formidable alternative to traditional financial services, and they are growing in popularity thanks to the trustless, immutable, and transparent characteristics of blockchain. This new generation of financial services may be accessed by Internet users without the need for centralized authorization mechanisms or rent-seeking intermediaries. Given the number of innovative dApps that are already providing value and utility to consumers, blockchain’s revolutionary effect on finance is no longer an issue of potential, but a very real phenomenon.
