DeFi Infrastructure: Key Components of DeFi Applications and How They Differ from Traditional Finance
Decentralized Finance (DeFi) is transforming the modern financial industry. Right now, there are major changes in the infrastructure of financial applications that could fundamentally affect our perception of control, transparency, and risk in the future.
What DeFi applications have in common
DeFi applications are financial applications that have no place for a centralized counterparty. DeFi is implemented in the form of decentralized exchanges, credit platforms, stablecoins, synthetic assets, etc. However, despite their versatility, all these DeFi applications have a number of components in common:
- Basic blockchain as the main ledger;
- Open source and transparency;
- The ability to interact and program;
- Openness and accessibility.
Basic blockchain as the main ledger
Unlike traditional financial applications built on basic banking systems (Fiserv, Jack Henry, FIS, etc.), DeFi uses blockchain.
Ethereum, Solana, Bitcoin Ultimatum, Binance Chain are just a few of those used to build DeFi applications. All of them ensure the correspondence of input and output data processed directly in the blockchain.
Open source and transparency
Whereas traditional financial applications are originally created with closed source and are built on proprietary systems, DeFi is run on a fully open-source base and public blockchain. Thus, ensuring the transparency of the system as a whole.
The ability to interact and program
As stated above, DeFi applications are completely open-source, the same goes for the interface and smart contracts. And since the software developers use the same platform (basic blockchain), these applications are fully compatible, allowing them to interact with other DeFi applications in the ecosystem.
In the traditional financial system:
Financial applications are built on a separate infrastructure;
Not available for the creation of services by other developers;
Despite the existence of common standards, achieving consensus in the market is not an easy task, as banking organizations keep developments hidden from others.
It is thanks to DeFi’s interoperability that so many innovations are being implemented. This ability allows developers to be creative in translating their ideas into products and services. In addition, developers can use a finished product by focusing on the things that make it special.
Openness and accessibility
When interacting with traditional financial applications, a new user often has to go through a series of checks, including disclosure of income, credit history, and, in some cases, even meet in person, simply to use a particular product
As a result, these verifications may discriminate against the user in lending, and it might even go as far as a refusal to provide basic banking services, or, conversely, by opening lines of credit without the user’s consent, charging illegal fees, etc.
DeFi however, does not ask for the user’s income, there is no need for a credit check, and in most cases, it is not even necessary to disclose your identity.
Most importantly, there are no institutions or intermediaries in this sector that can interfere with providing the wanted services. No matter which country you come from, everyone is equal in the DeFi sector.
The Future of Financial Applications
It is worth noting that the pace of innovation in DeFi is realized dozens of times faster than in the traditional fintech industry. It takes weeks, not years, to build and create a new application. Therefore, we believe that in the future, DeFi will forever change the way the world of finance works today.