Welcome to our Blog. In a previous blog. We did an overview of Web3. I was about to dive deeper into each of Web3’s concepts like Metaverse and GameFi, but I remembered that most of my subscribers were people. First time using crypto and would be confused if DeFi’s role in Web3 wasn’t fully explained.
Almost everything about cryptocurrencies, metaverse, NFTs, and Web3 is connected to DeFi, but many people don’t understand what it really means in practice and don’t know how to tell the difference.
Therefore, in this article, we will explain the difference between DeFi and Web3, in the most practical terms possible.
An Overview: DeFi and Web3
First to distinguish DeFi and Web3. We need to understand what is DeFi and what is Web3
What is DeFi?
DeFi stands for “Decentralized Finance.” This is the system by which financial products are available on a public, decentralized blockchain network. This indicates that anyone can use them without going through a middleman like a bank or financial institution.
DeFi is an overlapping network of dApps and smart contracts built on the Ethereum blockchain. This model focuses on financial applications such as lending, exchanges, derivatives, trading, etc. DeFi can help you easily control your assets as well as be able to trade, lend, invest, and pay…
DeFi is considered a financial model that goes against the traditional (CeFi – Centralized Finance). In CeFi, you hand over financial control to an intermediary (bank or financial institution) and trust that they will do a good job of managing your assets. Through the use of open protocols and transparent data, DeFi aims to create a new financial system, democratize the existing system, and make it more fair.
What is Web3?
Web3 (also known as Web 3.0) is an upgraded version of Web 1.0 and 2.0, which is based on blockchain technology aimed at expanding Internet users’ activities. With Web3, you can operate independently through a huge database in the world but no longer through Big Tech companies (Google, Apple, …) concentrate. These two make up the crypto-economic protocol.
In Web3, developers typically don’t build and deploy applications that run on a single server or store their data in a single database (usually hosted and managed by a single developer). Single cloud provider).
Instead, web3 applications either run on blockchains, a decentralized network of many peer nodes (servers), or a combination of the two forming a crypto-economic protocol.
These applications are often referred to as dapps (decentralized applications) and you will see that term used frequently on Web3.
In order to achieve a stable and secure decentralized network, network participants (developers) are incentivized and compete to provide the highest quality services to anyone using the service.
When you hear about web3, you’ll notice that cryptocurrency is frequently part of the conversation. This is because cryptocurrencies play a large role in many of these protocols. It provides a financial incentive (token) to anyone who wants to participate in the creation, management, contribution, or improvement of one of the projects.
These protocols can frequently provide a variety of services such as computing, storage, bandwidth, identity, storage, and other web services typically provided by cloud providers in the past.
Key Features of DeFi and Web3
Next, we will have to distinguish between the features of DeFi and Web3.
It is also possible to get a clear impression of the characteristics of DeFi by reflecting on the benefits they bring. The real benefits represent the value proposition provided by DeFi or the features you can include in your DeFi solutions. Here are some notable features you can find with DeFi.
- Unauthorized: DeFi does not follow the usual accessibility guidelines applied in traditional finance. In contrast, it follows the permissionless, open access model.
- Programmability: It is important to note that the majority of DeFi solutions currently available are based on the Ethereum blockchain. Therefore, the opportunity to access smart contracts with more programmability in DeFi can help with automatic execution.
- Transparency: Every transaction must be broadcast to other users on the network in the case of the public Ethereum blockchain.
- Immutability: The exchange of information and financial transactions in DeFi requires ensuring the integrity of the data. Therefore, it is essential to have tamper-proof data coordination throughout the blockchain’s decentralized architecture.
- Interoperability: Ethereum’s composable software stack helps ensure that DeFi protocols and applications are tailored to integrate with each other and complement each other. DeFi brings the right flexibility to developers and product teams.
Some main features of Web3 are as follows:
- Open: Web3 applications will be built as open source. The community, developers, and team all have the right to contribute to developing the application more comprehensively.
- Trustless: Gives users the freedom to interact publicly and privately without having to trust any intermediary.
- Permissionless: Everyone, including users and providers, can participate without the permission of any organization.
- Ubiquitous: Web3 will make the Internet available to all of us, anytime and from any location. At some point, Internet-connected devices will no longer be limited to computers and smartphones as in web 2.0. Because IoT (Internet of Things) technology will enable the development of a multitude of new types of smart gadgets.
Decentralized Finance: A Subsection of Web3
While Web3 is predicated on using blockchain technology to create a fairer internet, DeFi is the web3 version of a more transparent financial system. To this end, DeFi is rapidly becoming a new paradigm that enables new forms of value and utility not seen in the traditional financial system.
Originally via Ethereum, and now via other Layer-1 blockchains, DeFi solutions are driving financial utility in numerous ways through smart contract technology. The majority of these solutions allow users to manage their funds in a noncustodial manner through the DeFi crypto wallet.
Let’s explore some of them in more detail:
Decentralized Exchange: A decentralized exchange (DEX) is a peer-to-peer (P2P) marketplace that allows buyers and sellers of cryptocurrencies to interact. In contrast to centralized exchanges (CEXs), DeFi platforms are non-custodial, meaning users remain in control of their private keys when transacting. In the absence of a central authority, DEXs use smart contracts that execute themselves under established conditions and record each transaction to the blockchain.
Lending, Borrowing, and Staking: The versatile peer-to-peer money market hosting a variety of products and services is probably the most common use for DeFi platforms. The decentralized currency market allows users to borrow, lend, and stake crypto assets by providing liquidity to the protocol through different types of collective liquidity pools (LPs). The DeFi lending market continues to grow as more approaches to capital deployment and investment take on a regular basis.
Synthetic Assets: Synthetic assets enable the creation of blockchain-based tokenized assets that mimic real-world assets such as stocks (stocks), bonds, commodities (e.g., gold and silver), indices, fiat currencies, and interest rates.
Non-fungible Tokens (NFTs): NFTs are immutable, verifiable cryptographic assets that can represent anything from trading tokens to artwork to special access tokens. NFTs have continued to expand their market share and are becoming one of DeFi’s largest markets. These assets commonly use in blockchain platforms that use play-to-earn (P2E) systems that reward users for their in-game efforts. Furthermore, it has become common for NFTs to trade and exchange on the NFT marketplace to buy and trade NFT crypto art, digital art, music, and other media.
In addition, DeFi crypto options are increasingly being deployed to transfer, use, store, and trade a variety of crypto assets such as stablecoins, governance and utility tokens, and payment provider tokens accounts, among others. DeFi, through multiple Layer-1 blockchains, also use an interoperable framework for the management, transfer, and use of central bank currencies (CBDCs) between accounting and financial infrastructures redundant.
How do DeFi and Web3 impact each other?
DeFi and Web 3 interact with each other as Web3 establishes both the technological and economic framework for the DeFi sector.
As technology in the financial sector, Web3 allows
- Ensure seamless and permissionless cross-border transactions with low cost and without bureaucratic defects
- Transparency of user interactions and tamper-proof records of transaction facts (like price, total debt volume, etc.)
- Privacy and full control over financial data
- A trustless governance model based on smart contracts, eliminating any risk of manipulation and 3rd party interference, and
- no legal paperwork and requirements of regulatory/monitoring agencies.
As the economic framework, Web3
- Democratize access to finance so that everyone can explore finance without any qualification requirements,
- Allows one to create unlimited sources of income creatively
- depends on the banks
- Financial globalization and the resulting change in the entire macroeconomic model.
As DeFi and Web3 evolve. The combination of the two is one of the most incredible examples demonstrating how cutting-edge technology. That can revolutionize the existing order of things and open a unique path toward opportunities .
Above are all the differences between DeFi and Web3 that you should know. These are two very potential models for the future and bring great benefits to investors. Hopefully, you will dig deeper into DeFi and Web3 when investing in the crypto market.
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