What is the Difference Between DeFi and DeFi Protocols?
By Daniel Cawrey October 19, 2023
- Decentralized Finance, or DeFi for short, is an umbrella term used to describe a new wave of financial applications, or protocols, that are built on decentralized networks
- Accessible, transparent and secure financial services without intermediaries like banks is the aim of DeFi
- DeFi protocols are specific decentralized financial applications (dapps) that form a core of the ecosystem, with services such as lending, borrowing, trading and investing
- These protocols are the foundation of the DeFi ecosystem, enabling users to access financial services in a decentralized manner.
Decentralized Finance, or DeFi for short, is an umbrella term is used to describe a new wave of financial applications, or protocols, that are built on decentralized networks. DeFi aims to provide financial services that are accessible, transparent and secure to anyone, without the need for intermediaries such as banks or financial institutions. DeFi protocols, on the other hand, are the specific decentralized financial applications that form the backbone of the DeFi ecosystem.
It's important to keep in mind DeFi protocols are the building blocks of DeFi. These protocols enable users to access a range of financial services, such as lending, borrowing, trading,and investing. So while some may think "protocols" are just a cool term used with DeFi, it actually has a lot of meaning. It's what people are actually using within the DeFi world.
Are DeFi and DeFi Protocols Really That Different?
DeFi, as mentioned, is a big-picture term that encompasses a broad range of financial software applications that are built on decentralized blockchain networks. These applications are designed to provide an alternative to traditional financial services by leveraging the transparency, security and accessibility of blockchain technology.
To put it simply, DeFi is the concept of decentralized finance, a world where crypto, smart contracts and blockchains take over for banks and other financial institutions. DeFi protocols are the applications that make the DeFi concept a reality. DeFi protocols provide the functionality required to build decentralized applications, or dapps, for the really cool things that can be done with crypto.
DeFi protocols are the actual dapps that provide the infrastructure for these services. They are the building blocks of DeFi and enable users to access financial services without the normal intermediaries. Those intermediaries have often included banks or other gatekeepers in the past, cumbersome third-parties that move things super-slowly.
Protocols Pretty Important
Examples of popular DeFi protocols include Uniswap, Aave, Compound and MakerDAO. These protocols provide the infrastructure for decentralized exchange (DEX), lending platforms and stablecoin issuance, respectively. These are core services that help make up DeFi, especially on Ethereum, a very popular cryptocurrency and blockchain platform. However, there are hundreds of these services available, given the open and permissionless nature of these systems.
The top protocols across the ten largest blockchains. Source: DeFiLlama
Keep in mind that the above-named protocols are tried-and-true. They have been around for a long time, and the founders are well-known. These are the kind of details that need to be kept in mind when thinking about using DeFi protocols. Not all of them are created equal - it's important to do some research before investing any real money into a DeFi protocol!
In essence, DeFi protocols are the backbone of the DeFi ecosystem. They enable users to access a range of financial services without the need for intermediaries. Users just need to have some familiarity with how cryptocurrency, blockchain and smart contracts work. This provides the baseline transparency and innovation that DeFi technology has become well-known for. Simply put, without DeFi protocols, the DeFi ecosystem would not exist.
System of Rules
In a traditional sense, protocols are described in the dictionary as "the official procedure or system of rules governing affairs of state or diplomatic occasions". The best way to think of DeFi protocols is that they are the underlying services that run DeFi, powered by smart contract software code.
DeFi is a concept that encompasses a broad range of financial applications built on decentralized networks. DeFi protocols are the specific decentralized financial applications that provide the infrastructure for these services. And there are a lot of interesting services to play with in DeFi - flash loans, derivatives, staking and so much more to explore.
DeFi protocols are the foundational elements of the DeFi ecosystem. They enable users to access a range of financial services without intermediaries. What's more, these protocols are pretty cool to play with outside of the traditional financial system, a world where "crypto-natives" like to use cryptocurrency rather than just simply holding on to it.
While many people will just say they are using DeFi as a broader term, the stuff they are actually deploying cryptocurrency into is really a DeFi protocol.