The world of finance is an age-old practice that has evolved and taken technology under its grasp with its evolution. The Internet made it easier for banking, trading, and more. Web 3.0 and dApps are the next phase of this roadmap. Any financial transaction on Web 2.0 depends on centralized banking systems across the globe. A few financial institutions get to decide the valuation of assets and facilitate buying and selling of those assets.

The Bitcoin protocol, however, changed that. Loosely defined, Bitcoin established itself as an independent peer-to-peer financial entity that stands differently from the traditional economic frameworks. It paved the way for a fair financial services system where decision-making doesn’t rely on a single entity or organization.

DeFi or Decentralized Finance leverages the peer-to-peer idea of Bitcoin and incorporates facilities for transactions, trading, and other financial services on public blockchain networks. The system is fair, distributed, secured, and accessible to anyone

Finance from Web 1.0 to Web 3.0

Before delving into how decentralized apps function on Web 3.0, let’s have a look at the historical context in the evolution of the internet itself from a lens of the finance industry.

Web 1.0 was the first phase when the internet was accessible to few people on the planet. There were static pages that users could read. The communication was one way, and hence there was no way for an end-user to interact with the pages. It means that financial bodies with their websites could only inform their customer base or provide FAQs.

Web 2.0 brought interactivity to the internet, which meant people could now write comments, submit forms, and access other ways of interacting with sites. What most of us access today is an evolved form of Web 2.0 with enhanced security. We interact on social media, access mails, book tickets, bank online, etc. The common thread across these services is that they are all centralized. One company/entity provides a collection of services and has centralized databases. The same applies to banking systems. A person accesses all kinds of transactions via the services through a centralized system of a few entities. Web 3.0 removes this dependency. Instead of a set of central bodies, the transaction history, and data AKA, the ledger is shared in the blockchain network. The rules/protocol applies to each contributing node in the blockchain, hence a decentralized database.

This brings us to the next topic and a core concept – coins vs. tokens.

Coin vs. token

Blockchain networks require capital to run, and there are exchanges within these networks of diverse nature. Blockchains employ two kinds of mechanisms to employ various transactions – coins and tokens. Often these two terms are used interchangeably.

Coins are native to the network and are generally used for transaction fees or reward people who contribute to a particular network. They operate at the base level. ETH coin is native to Ethereum. On the other hand, tokens operate at Level 2s or above the base layer and need validation from the underlying layer with different usages, like NFTs representing digital assets. ERC-20, NEO, Nep-5 are examples of tokens on Ethereum. Both coins and tokens represent values; the difference lies in their utility. DeFi tokens represent a diverse set of cryptocurrencies inherent in automated decentralized platforms that operate on smart contracts.

Bridging Web 3.0 via DeFi dApps

Blockchain operates fundamentally differently from Web 2.0 as we know it. Networks like Ethereum enable developers to write smart contracts (codes for specific purposes) that run on the network after verification by other nodes in the same network. This allows coders to add features to the existing network so future dApps can use it.

However, for an end-user who is only interested in availing the financial services like buying NFTs or trading in cryptocurrencies, the interactions take place via user interfaces which are mobile or web apps. In a way, dApps not only provide the backbone for financial transactions on blockchain networks but also bridge the features of Web 2.0 onto Web 3.

Types of Defi Apps

Let’s have a look at some of the apps for decentralized financing:

Crypto Wallets

Crypto wallets are basic dApps that facilitate the ability to transact on blockchain networks. Analogous to ordinary wallets, crypto wallets give users a view of their blockchain holdings and enable sending or receiving cryptocurrencies. Crypto wallets use key-value pairs linked to each account for access and security.

DEX or Decentralized Exchanges

Like fiat currencies have their values and exchanges, the same stands proper for cryptocurrencies. DEX or
decentralized exchanges are the kind of dApps that facilitate trading. The transactions in the current banking system are bound by intermediaries, while DEX operate without them. They are transparent, secure, and accessed via compatible wallets.

Crypto Payment Solutions

DeFi is one of the sectors to exist on the blockchain. There are decentralized e-commerce platforms, CMS, NFT marketplaces, and more. Crypto payment solutions facilitate transactions across industries with lower fees than current banking systems.

Crypto Derivative Services

Trading makes a big part of DeFi, and crypto derivatives are speculation-driven exchanges between two tokens. Parties agree on buying/selling price on a decided date irrespective of the market price. Investors capitalize when underlying asset prices undergo change.

Contribution to DeFi

Blockchain technology reduces the barrier of entry to make meaningful contributions in the upcoming version of the internet – Web 3.0. If you want to leverage the open-source, trustless, and secured features of blockchain and create a business around it.

Launching Coins – ICO and IDO

Finance on blockchain also opens new doors for investments. Companies offer IPO and raise capital from public investors. In the crypto sphere, it is attained via ICO and IDO. ICO or Initial Coin Offering is when a company is seeking to create a new coin that offers tokens that may carry some utility from the product developed by the company. Investors who buy an ICO receive digital certificates or tokens that define the project’s goals, the time required for completion, the amount of capital needed, etc.

IDO or Initial DEX Offering is also the process of crowdfunding, only, in this case, the coin or token is launched via a decentralized liquidity exchange. This crypto asset is dependent on liquidity pools where traders swap coins and tokens. For DeFi projects, IDO is the go-to funding solution.

Conclusion

DeFi is the first use-case of blockchain and the Bitcoin protocol introduced an alternative for currency we have known so far. This use-case and associated defi, tokens, coins, dApps, and investment offerings are only bound to grow with the growing adoption of blockchain among the masses.

Frequently Asked Question