Defi, dApps and Dex can be quite confusing. But not with us!
Cryptocurrency and Blockchain are transforming the financial system. These evolving systems are the next big thing to happen to money in the coming years.
The traditional way of banking, transactions and other financial services will change drastically over time. Even other sectors like insurance companies and stocks firms have started to explore the workings of Defi.
With the wide adaption of Defi in the financial sector, you might not need to refer to the bank for loans and transactions. Even your insurance claims will also get decentralized.
However, these decentralized systems are still in the development stage. There’s a lot of work that needs to be done to actively accept these systems in the financial ecosystem.
Still, you can’t afford to ignore these new blockchain concepts. At Cryptohodly we simplify crypto and Blockchain concepts for the ease of your understanding.
What is DeFi?
Defi is Decentralized Finances. These are financial services with no central authority.
Today, all the financial services that you use are centralized. It means that there is a person, institution or governing body that controls the financial processes.
For example, when you use your credit card to pay for the bill, you are not directly transferring money to the retailer. It is your bank that transfers money on your behalf. Here as you can see you are dependent on the bank for your transaction. Moreover, your bank controls the money. It acts as the governing body or a middleman.
When you send money, apply for a loan, buy shares or stocks all are controlled by an institution. The involvement of a third party in the financial process creates space for risks. There are risks of mismanagement, fraud, delay and human error.
In the case of Defi, there is no role of the third party of a central governing body. This reduces the risks. By using decentralized money like crypto we can build exchanges, insurance companies and more.
Decentralized finances use several high techs like open-source technologies, blockchain and proprietary software. They also use smart contracts which facilitate a direct agreement between two parties.
Smart contracts are digital automated agreements that execute themselves automatically according to terms and conditions.
The main aim of decentralized finance is to remove the middle man between the transacting parties. To ensure this aim it uses stablecoins, use cases and software stacks to build such applications.
Decentralized finance makes use of technology to disintermediate centralised models and allow anybody, regardless of ethnicity, age, or cultural identity, to access financial services from anywhere.
Defi services and apps are generally based on public blockchains, and they either replicate existing products built on common technical standards or offer novel services tailored to the Defi ecosystem.
Defi applications give consumers more control over their money through personal wallets and trading platforms that cater to individuals rather than institutions.
Key takeaways
- Defi facilitates peer-peer transactions with the help of software written middleman rather than a company or institution.
- The scope of Defi is not restricted to the only financial sector.
- The Defi infrastructure and components are still in the development phase.
- Defi gives you more control over your money instead of institutions.
What is dapps?
dApps stand for decentralized applications. It is similar to your social media platforms.
You use your Facebook or Instagram accounts to interact with the Fb or Insta community. Similarly, dApps are used to interact with the Blockchain network.
These are decentralized digital applications that run on a Blockchain or P2P network.
For example, Ola is a digital application that you can use on your phone to book cabs. It is run on a computer system that is controlled and owned by a company.
Though you use the Ola app through your phone as per your requirement the entire app is controlled by a single organization. The company has full authority over its workings and backend.
In the case of dApps that runs of P2P network or Blockchain network, multiple users feed and consume content. These users are the ones in control.
dApps based on crypto blockchain are public, open-source and decentralized. Here all the users exercise the control instead of a single company or person.
Take an example to understand. You must have heard that Facebook or Twitter usually delete sensitive content on its platform. Because these are centralized apps the company has the authority to delete the post or message that you share online on their network.
Now if someone creates a DApp like Twitter based on blockchain, where all users are allowed to post. No single company will have control over what you are sharing on the network. Once you post no one can delete it. Not even the app developers can alter or delete your post.
Key takeaways
- dApps are decentralized applications.
- It runs on the P2P network or blockchain network.
- Users have control over the network instead of a company.
What is dex?
Dex is a decentralized exchange. These are cryptocurrency exchanges that allow direct crypto transactions on its platform without any involvement of a third party.
A decentralised exchange (DEX) connects cryptocurrency buyers and sellers through a peer-to-peer (P2P) marketplace. In contrast to centralised exchanges (CEXs), decentralised platforms are non-custodial, which means that when transacting on a DEX platform, a user retains possession of their private keys.
DEXs use smart contracts to self-execute under predetermined conditions and record each transaction on the blockchain in the absence of a central authority. These safe transactions are a growing section of the digital asset market, and they are paving the way for new financial products.
For example, centralized crypto exchanges control which cryptocurrency to list, security, fair market pricing, regulatory compliance and consumer protection. CEX acts as a custodian of your crypto investments and controls your private keys.
On the other hand, DEX uses a non-custodial framework based on self-executing smart contracts. Here you are in control of your private keys and crypto funds. They also do not follow anti-money laundering protocols and KYC.
Key takeaways:
- DEX are non-custodial P2P decentralized apps that connect crypto buyers and sellers.
- Users on the DEX platform are in control of their crypto investments and private keys.
- DEX platforms give you the diversity to invest in over 7400 cryptos available in the market.
- With DEX you have the advantage of lower transaction fees, trustless transactions and more privacy.
Conclusion
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