DeFi dApps are enabling anyone with an internet connection to participate in a new generation of financial services without the need for centralized permission structures and rent-seeking intermediaries.
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 designed to provide any type of web service (i.e., games, file-sharing networks, and social media platforms can all be dApps), the most widely discussed application for dApps is in the realm of financial services, as evidenced by the notable growth of the decentralized finance (DeFi) sector.
Starting with MakerDAO, the first noteworthy wave of dApps was launched in 2017, the same year that Ethereum Initial Coin Offerings (ICO) achieved widespread prevalence. Although the Bitcoin network supports dApps to some extent, the vast majority of dApps are built on Ethereum. DeFi dApps allow for lending, borrowing, and a host of other financial services typically offered by centralized service providers. DeFi projects have already captured billions of dollars in value and look to continue this trend as more and more people become aware and familiar with their unique value proposition.
Benefits of Decentralized Apps
Unlike traditional software that runs on centralized servers, dApps run on a decentralized network of censorship-resistant nodes that are difficult to shut down. Given the transparent nature of the blockchain movement, most dApps feature open source software, which users can examine and audit themselves.
Most blockchain protocols on which dApps are built are secured and incentivized through either a Proof-of-Work (PoW) consensus mechanism, a Proof-of-Stake (PoS) consensus mechanism, or a combination of both. While there are many other types of consensus mechanisms, these two are by far the most prevalent. These consensus mechanisms work to maintain network security while avoiding centralization issues in their own respective ways. Additionally, dApps are typically designed to incentivize users to maintain the security, transparency, and operational effectiveness of the dApp itself, typically through token rewards.
Perhaps most importantly, dApps are global and are available to the vast majority of the population via the internet.
dApps on Ethereum and Beyond
The launch of the Ethereum platform in 2015 led to the eventual creation and proliferation of dApps beginning in 2017. Most of the earliest Ethereum dApps were games or simple decentralized marketplaces, and the dApp ecosystem only truly began to expand across a broader range of industries in 2020. Ethereum, with its first-mover advantage, continues to dominate the dApp space, and the number of dApps and DeFi platforms on Ethereum has grown exponentially with transaction volumes in the hundreds of billions of dollars. As developers continue to imagine and develop entirely new types of dApps, new development is increasingly expanding beyond Ethereum, with other blockchains such as EOS and Cardano now building up their own respective dApp ecosystems.
From a financial services perspective, dApps can be designed to provide a wide range of functions, including:
Prediction markets and decentralized marketplaces
Automated contract settlement
In sum, dApps provide parallel services to the banking and financial services industry with some additions. With transparency and 24/7 activity at reduced costs, dApps arguably lower the barriers to entry for financial services.
By way of example, let’s say you need a fiat loan but don’t want to sell your cryptocurrency to obtain one. In this instance, you could use a dApp to get an immediate “flash” loan by simply putting up your crypto as collateral. The dApp would settle the transaction automatically and transparently via its smart contracts, which govern the dApp’s rules of engagement. 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
dApps are not just capable of being used for simple applications. Developers can design decentralized autonomous organizations (DAOs) that operate as apparatuses governed through code democratically voted upon by users. The emerging marketplace of DeFi Ethereum dApps is being built with composability in mind, which means different services can be used interoperably to fulfill a near-limitless range of intended use cases. Sometimes referred to as “money legos,” dApps can be stacked on top of each other and are highly modular yet intuitive and simple from an end-user perspective.
For example, the decentralized lending platform Maker and stablecoin DAI may 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 which may allow for the actualization of the DeFi 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. Internet users can participate in this new generation of financial services without the need for centralized permission structures and 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.
DeFi dApps are enabling anyone with an internet connection to participate in a new generation of financial services without the need for centralized permission structures and rent-seeking intermediaries. […]