![]() Like all DeFi protocols, DEX links users directly without intermediaries. Decentralized Exchange (DEX): a platform used for trading different currencies (national and crypto), e.g.Here are some of the most well known DeFi protocols: Now that we have a better understanding of DeFi protocols, it is time to get familiar with the main types, their functions, and features.Īs mentioned above, DeFi protocols are represented by user-friendly decentralized applications that provide access to financial services allowing several market players (buyers, sellers, lenders, or borrowers) to be involved at the same time on peer-to-peer conditions. To sum up, DeFi protocol is the background of a dApp, therefore these two words are often used interchangeably in DeFi. Protocols simplify programmers’ work as well as the provision of services in DeFi. Thus, it will be a much less time-consuming, more secure, and easier process. All you need to do is change the conditions on the protocol so that they suit your transaction. Instead of writing a completely new code from scratch, you can just use a protocol, a code, that has already been written for the same reason earlier and has a history of running well. For instance, imagine you are a programmer and you need to write a code for a transaction that provides a loan from one person to another based on some conditions. Let’s shed some light on what exactly distinguishes them.įirstly, a DeFi protocol is not just a list of recommendations for writing a code, it is a code itself, used for designing dApps. Therefore, the definition of an IT protocol is taken for granted and copy-pasted to describe a DeFi protocol. But the problem is that it is only because most of them are written by people who are not insiders in the crypto world. It’s a description of specific conditions required for a code to run accurately and serve its purpose.īut is the definition of a protocol the same in the IT world as it is in DeFi? If you do research on the Internet, many articles will claim that yes, it is. Simply, it is a standardized set of rules written for further codes to be created. The term protocol has been used in the IT-sphere for a while before the existence of decentralized finance. What are DeFi Protocols and why are they important?Īs mentioned before, the protocol layer is an essential part of the Defo ecosystem. This was created to be user-friendly and to make certain transactions faster. A good example of this integration is a platform for lending and borrowing that allows the user to carry out both transactions simultaneously. In other words, it is a program we install on our gadgets to surf different websites and platforms.Īnd the final layer is the aggregation layer, which offers users a wide range of financial services all conveniently located in one place. You can think of the protocol as the backend and the dApps as the front. In contrast to a protocol that is used by developers, an application is an interface for consumers. The application layer is made up of decentralized applications (dApps). There are several types of them including cryptocurrencies (coins like Ether, Bitcoin, etc.) and digital assets (virtual versions of traditional stocks and shares). The asset layer - cryptographic tokens, generated by protocols is the alternative to money in the crypto world. Protocols enable the creation of the asset and the application layer. The protocol layer is responsible for programming applications and governing specific activities or tasks. This is due to the importance of the protocol layer - which is written on blockchain standardized codes (protocols). ![]() This is the base layer used for the system to run, it would be impossible for DeFi to exist without the blockchain. The first one is the settlement layer, the Ethereum blockchain that serves as the foundation for writing code and designing applications. Its system is designed in layers that are responsible for various processes and enable the smooth functioning of transactions and contracts.ĭecentralized finance is based on 5 layers: What are the layers of DeFi?Įvery system is comprised of different parts and DeFi is no exception. This time we are going to delve into the definition of protocols and take a closer look at the most popular and valuable ones that support the decentralized finance ecosystem. In the previous article you had a chance to get a better understanding of DeFi, its history and core features.
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