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In this article, we will discuss what is a DeFi app in detail. So, let’s start.
DeFi or decentralized finance refers to using decentralized blockchain technology for financial services such as financial transactions, trading, money lending, etc.
Blockchain technology ensures that a decentralized financial system is running on secure protocols and smart contracts that no single authority owns and is unalterable by any party.
Read our blog for more detail on what is DeFi.
What is a DeFi App?
DeFi applications are decentralized finance platforms in the form of mobile apps and websites that individuals can access to carry out deFi activities through smart contracts.
Different blockchain protocols such as ethereum, stellar, etc. are used to develop such DeFi apps. These DeFi apps are based on open-source code to ensure transparency.
Each DeFi app runs on a smart contract that dictates how to conduct financial transactions using it.
Some Prominent DeFi Applications
Let’s look at some common use cases of decentralized finance (DeFi) service apps.
DeFi coins are used to provide incentives to users using the DeFi platform. Some common DeFi coins are Ether, Solana, Cardano, etc. The major drawback associated with blockchain coins is their volatility, where price fluctuations are very common.
Stable coins are known as a major solution to the volatility risk of DeFi coins. The value of stable coins is linked with an external asset such as a fiat currency. As its value is pegged to another exchange-traded commodity, it is unlikely that a stable coin’s value goes below the value of that asset. This ensures low fluctuation in the value of a stable coin.
Dai and Carbon are examples of such stable coins used by DeFi apps.
Borrowing and Lending
DeFi apps improve traditional borrowing and lending apps by removing the need for a third party or an intermediary. Smart contracts are used to borrow or lend money on DeFi apps.
Similarly, there is a savings account that works like a traditional savings bank account but offers much higher interest rates. Depending on the DeFi platform, users can avail interest payouts daily, weekly, or monthly.
Liquidity mining or DeFi mining is a process where users lend their crypto assets like coins and tokens to different liquidity pools to earn rewards depending on their share of investment in a liquidity pool.
The reward is in the form of trading fees and governance tokens. It is a form of passive income where you are not required to constantly make investment decisions. The liquidity mining concept is different from proof-of-work (pow), as you can read here.
Decentralized Crypto Exchanges
DEX or decentralized exchanges enable users to trade their crypto assets using smart contracts. Assets such as tokens are submitted to smart contract addresses managed by a third party.
Users trade these tokens and withdraw them to their wallets when they like using smart contracts.
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Decentralized exchange is different from traditional trading in the sense that users can control trading through their own accounts as compared to traditional trading, where users deposit their funds to a centralized exchange account that is used for trading.
These are used to store crypto assets and perform transactions. DeFi wallets are held by the users themselves instead of some third party that keeps private keys to crypto wallets. With DeFi wallets, users are responsible for their private keys that cannot be generated again if lost.
MetaMask Wallet is one such example of a DeFi wallet.
The insurance industry is greatly affected by the decentralized financial system. DeFi platforms use historical data to predict future insurance payments for users. Users can opt for premium insurance policies using smart contracts and can pay monthly installments. In some cases, there is also an option to make a one-time insurance payment.
Interested in DeFi Apps Investment?
According to DeFi Pulse, the market worth of DeFi protocols has crossed 78 billion US dollars. DeFi apps are a vital part of the current DeFi ecosystem, revolutionizing financial institutions.
The time is right for you, as a CEO or CTO of your fintech business, to start investing in financial applications based on this emerging technology.
One of the major risks associated with DeFi apps is technology. DeFi apps use smart contracts that are pieces of code. The DeFi protocol is as strong as the developer code.
As CoinShares chief strategy officer, Meltem Demirors, said, “At the end of the day, the software is only as good as the coding that was done, and sometimes, there are unknown errors in the code that governs these protocols.”
For this reason, be vigilant while building your deFi app development team. Your software development team should have sound knowledge of the working of decentralized finance, the technologies behind its development, etc.
Reach out to us with the details of your DeFi projects through this quick form, and one of our technical managers will get in touch with you for further assistance with team building and project planning and management.
Top FAQs on What is a DeFi App
A DeFi application in the form of a mobile or web application allows defi users to access decentralized finance platforms. Decentralized applications work on the basis of smart contacts that dictate the use of the DeFi app for fulfilling DeFi transactions of crypto assets such as coins and tokens from users’ DeFi wallets.
DeFi applications are now being used for multiple financial purposes such as borrowing, lending, and saving money, carrying out decentralized trading, generating passive income through liquidity mining, getting insurance, etc.
A decentralized finance network has no intermediaries like traditional banks when it comes to financial activities. Any user with an internet connection and a part of a DeFi network can directly access other peers for finance activities like lending money and trading digital assets through initial coin offerings, tokens, etc. The DeFi network is built on blockchain technology, and it is secure, transparent, and unalterable by any party.