Study smarter with Fiveable
Get study guides, practice questions, and cheatsheets for all your subjects. Join 500,000+ students with a 96% pass rate.
Blockchain technology represents one of the most significant disruptions to traditional financial infrastructure in decades, and you'll be tested on understanding why these applications matter, not just what they do. The core principles at play—disintermediation, trustless verification, programmable money, and tokenization—show up repeatedly across exam questions. When you understand these mechanisms, you can analyze any blockchain application, even ones you've never seen before.
Think of blockchain applications as solutions to specific problems in traditional finance: slow settlement times, high intermediary costs, lack of transparency, and limited access. Each application we'll cover addresses one or more of these pain points through cryptographic security, distributed consensus, and automated execution. Don't just memorize the list—know which problem each application solves and what underlying blockchain feature makes it possible.
The most fundamental blockchain innovation is removing trusted third parties from transactions. By distributing verification across a network, blockchain eliminates the need for banks, clearinghouses, and other intermediaries that traditionally validate and settle transactions.
Compare: DEXs vs. Blockchain Lending Platforms—both eliminate intermediaries, but DEXs handle exchange of assets while lending platforms facilitate temporary transfer with repayment obligations. If an FRQ asks about disintermediation benefits, lending platforms better illustrate cost savings, while DEXs better demonstrate security improvements.
Smart contracts transform blockchain from a simple ledger into a programmable financial infrastructure. Code replaces legal enforcement, automatically executing when conditions are met and creating "trustless" agreements.
Compare: Smart Contracts vs. DeFi—smart contracts are the mechanism, while DeFi is the ecosystem built using that mechanism. Think of smart contracts as the engine and DeFi as the vehicle. Exam questions often test whether you understand this relationship.
Blockchain's borderless nature makes it particularly powerful for international transactions and serving populations excluded from traditional banking. Settlement happens on the network itself, bypassing correspondent banking relationships and currency conversion delays.
Compare: Cross-Border Payments vs. Digital Identity—both address inclusion, but payments solve the transaction problem while identity solves the access problem. Many unbanked individuals can't open accounts due to identity documentation issues, making these applications complementary.
Blockchain enables new ways to represent, divide, and transfer ownership of assets. Tokenization converts rights to an asset into a digital token that can be traded, fractionalized, and programmed with specific conditions.
Compare: Tokenization vs. STOs—tokenization is the process of creating digital asset representations, while STOs are a specific application of tokenization for fundraising. An STO tokenizes ownership in a company, but you can also tokenize real estate, commodities, or intellectual property without conducting an offering.
Beyond consumer finance, blockchain provides enterprise solutions where multiple parties need shared, immutable records. The distributed ledger creates a single source of truth that all stakeholders can verify without trusting each other.
Compare: Trade Finance vs. Cross-Border Payments—both involve international transactions, but trade finance addresses the documentation and trust problem (proving goods were shipped, received, inspected) while cross-border payments address the money movement problem. Trade finance is about coordinating complex multi-party workflows; payments are about fast, cheap value transfer.
| Concept | Best Examples |
|---|---|
| Disintermediation | Cryptocurrencies, DEXs, P2P Lending Platforms |
| Programmable Finance | Smart Contracts, DeFi Protocols |
| Financial Inclusion | Cross-Border Remittances, Digital Identity |
| Asset Tokenization | Fractional Ownership, STOs |
| Enterprise Transparency | Trade Finance, Supply Chain Tracking |
| Capital Formation | ICOs, STOs |
| Trustless Exchange | DEXs, Automated Market Makers |
| Automated Execution | Smart Contracts, Collateralized Lending |
Both DEXs and blockchain lending platforms eliminate intermediaries—what specific problem does each solve, and why would a user choose one over the other?
If an exam question asks you to identify the blockchain application most relevant to the global unbanked population, which two applications would you discuss, and how do they work together?
Compare ICOs and STOs: what regulatory and investor protection differences exist, and why might a startup choose one fundraising method over the other?
Smart contracts and DeFi are closely related but distinct concepts. Explain the relationship and provide an example of a DeFi application that depends on smart contract functionality.
A trade finance application and a cross-border payment application both involve international transactions. In an FRQ asking about blockchain's impact on global commerce, how would you distinguish between the problems each solves?