Lesson 3: dApps and DeFi

Welcome to the third lesson in Kriptomat Academy’s “Blockchain Use Cases” course. In this lesson, we’ll take a look at decentralized apps, especially those in the exciting field of decentralized finance, or “DeFi.”

dApps – “decentralized applications” – are computer programs that are stored and executed on the blockchain network. Like NFTs, dApps were first implemented on Ethereum.

• dApps are built with “smart contracts” – executable computer code that can be stored on the blockchain along with transaction records.
  
• dApps use smart contracts to interact with blockchains and the data they hold – including cryptocurrencies.
  
• Ethereum is the foundation for most dApps because it is the most widely used blockchain capable of storing and executing smart contracts.

Developers have shown great ingenuity in creating complex dApps

• One limitation is that dApps work only with data that is on the blockchain. Data from other sources must be imported to the blockchain, typically through use of a blockchain oracle.
  
• dApps for gambling and gaming are common. Other uses include decentralized crypto exchanges and NFT marketplaces.
  
• dApps have also been created for investing and managing finances. This dApp category is known as DeFi – short for “decentralized finance.”

DeFi apps are dApps for investing, borrowing and lending, staking cryptocurrency, and other uses.

• By combining complex smart contracts, DeFi apps can handle sophisticated financial transactions and investments without involving banks or other gatekeepers.

• The goal of DeFi apps is to give crypto users access to the same financial tools as people with the access and financial means to work with expensive financial advisors.
  
• DeFi apps allow crypto users to perform financial transactions quickly, inexpensively, and anonymously.

DeFi apps come in many flavors.

• DeFi applications bring crypto borrowers and lenders together without a trusted middleman, allowing lenders to make a higher rate of interest and lenders to pay less interest than if a bank were involved.
  
• This means that DeFi apps allow users to conduct sophisticated financial transactions without the need for bankers or brokerage houses.
  
• Other DeFi applications function as cryptocurrency exchanges, allowing crypto users to swap funds at favorable rates.
  
• DeFi also includes crypto insurance, investing, yield farming, and staking applications.

DeFi apps have come under government scrutiny.

• Around the world, governments are considering steps to regulate DeFi applications. Some have discussed subjecting them to the same laws and regulations as banks and investment houses.
  
• It is difficult for crypto users to judge whether a particular DeFi app comes from an established company with safeguards and extensive testing or from a smaller team that has skipped over basic security measures. Some of the most notorious crypto losses in recent years come from DeFi apps with security flaws.
  
• Millions of people use DeFi apps profitably every day, but a lack of disclosure and regulations means that investors, borrowers, lenders, and other crypto users must do their own investigating when choosing which apps to trust with their crypto.

So – what have we learned?

• dApps are most often found on the Ethereum blockchain because it was the first to host smart contracts.
• DeFi applications allow crypto users to conduct sophisticated financial transactions without the involvement of banks or advisors.
• Users are responsible for investigating DeFi apps and the teams behind them to avoid scams and security holes.

That’s the end of this lesson! Test your understanding and earn points toward a Kriptomat Academy certificate of achievement by taking the test!

What is the most widely used platform for decentralized applications?

Bitcoin because it has the largest base of potential users.

Shiba Inu because you can get the tokens very inexpensively.

Tether and other stablecoins because they have fixed value.

Ethereum because it was the first widely used blockchain to support smart contracts.

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Which of these is NOT a common use of DeFi applications?

Representing digital artwork in the collectibles market.

Matching anonymous lenders with borrowers and facilitating transactions between them.

Allowing investors to earn passive income by staking cryptocurrency.

Facilitating the exchange of cryptocurrencies between strangers.

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What is the relationship between dApps and smart contracts?

Smart contracts call on dApps to perform sophisticated functions.

dApps use smart contracts to interact with blockchains.

dApps are implemented solely out of smart contracts, which are used like building blocks.

Smart contracts run only on specific blockchains, but dApps can be hosted on any blockchain.

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What are some common uses of dApps?

Representing objects within a game or metaverse environment.

Gambling.

Replacing the browser on desktop PCs and laptops.

NFT marketplaces.

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What is the relationship between DeFi apps and trusted intermediaries like banks and brokerage firms?

DeFi apps interact with banks and brokerage firms to make ideal purchases for investors.

Banks and brokerage firms work behind the scenes to make transactions for investors who interact with a DeFi user interface.

DeFi apps allow users to make their own transactions and investments without the need of intermediaries like banks and brokerage firms.

DeFi apps licenses specify that the apps can be used only by qualified bankers and brokers.

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