Blockchain and cryptocurrencies are gaining wider acceptance from institutional investors and the wider community in general, which means there are finally the conditions for innovative projects to thrive. The DeFi ecosystem has exploded in popularity in the last year, making financial instruments automated and more democratic. With the amount of investment and excitement, more decentralized exchanges (DEXes), lending platforms, and payment platforms are being created in an effort to get a share of this growing industry.
In this blog post, we’ll define the DeFi sector, look at some of the different products on offer, and then delve a bit deeper, highlighting what goes into developing a DeFi app. Read on to see why this is such an exciting space to be in.
What is the DeFi ecosystem?
The DeFi ecosystem is simply all the products that allow users to conduct financial operations on blockchains. Decentralized finance is:
- Efficient – Although there are some kinks to be ironed out, generally DeFi promises greater efficiency through automation, with speedy and lower-cost transactions and settlement when compared with traditional financial institutions.
- Empowering – A double-edged sword if you forget your private key, but for those who choose to engage with the DeFi market, you are in complete control, being able to conduct any desired financial operation 24/7.
- Democratic – No matter what country you come from, no matter your credit score, you have the ability to trade as easily as the Wall Street broker with a 6-figure salary. If your country has an unstable financial system or charges exorbitant interest rates for loans, DeFi can be a much fairer place to move your money.
Of course, as with any nascent industry, there are risks and drawbacks that must be taken into account, chiefly bugs or failures in smart contracts leading to hacks, lack of help from a central authority if something goes wrong, and occasionally difficult to use platforms that are not only uninviting but can cause inexperienced users to lose money.
While acknowledging these risks, there is still optimism, demonstrated by two indicators. Firstly, the DeFi industry’s Total Value Locked (TVL) has risen from US$15 billion at the start of 2021, to a whopping $60 billion at the time of writing. Secondly, in recent news, Consensys, a company that creates Ethereum-based decentralized solutions, closed a US$65 million fundraising round, with JP Morgan, Mastercard and UBS as key institutional backers.
What DeFi products are there?
A decentralized financial sphere aims to provide easy access to a whole host of different products. Here are the most notable applications and services to date:
- Lending platforms – Like with other DeFi applications, smart contracts automate the lending of digital assets, with changing interest rates based on the abundance of particular tokens in the system. Lenders gain passive income by locking up their tokens in a liquidity pool and earn interest based on the rate paid back by the borrower. The lender can also receive governance tokens which confer voting rights and another chance to grow profits if their price rises.
As with traditional DeFi lending services, borrowers need to “over-collateralize”, or offer assets more valuable than the loan value. Maker, Compound and Aave are the most well-known lending platforms, but others such as InstaDapp and Liquity are currently garnering significant investment. - DEXes – In contrast to centralized exchanges like Binance, Coinbase and Kraken, a decentralized crypto exchange operates without intermediaries, meaning users can connect directly to trade assets.
Without centralized wallets, users have full ownership of their funds, and with protocols like Uniswap, the traditional order book format is done away with in favor of a mathematical formula that prices assets according to the number of tokens in its liquidity pool.
The popularity of Uniswap, Curve, and Sushiswap (among others) has meant that many traders want to either buy DeFi coins or benefit from interacting with DeFi protocols in a safe way. This is why centralized exchanges such as Binance are offering more and more DeFi crypto opportunities, such as DeFi staking, yield farming and liquid swaps.
- Prediction markets – Prediction markets allow users to bet on the outcome of future events. Projects like Augur allow users to bet using cryptocurrencies, with low fees and no limits on deposits and withdrawals, features that are commonly associated with centralized betting platforms.
- Yield farming – Put simply, yield farming crypto involves providing liquidity to a protocol by locking up crypto assets in exchange for rewards. These rewards include interest paid by borrowers on their loans and the distribution of governance tokens. yearn.finance is one DeFi application that allows users to maximize their passive income by aggregating the best rates from other DeFi protocols for users to take advantage of.
- Derivatives – These protocols allow users to purchase and trade derivatives linked to cryptocurrencies, fiat currencies and real-world assets. Prices are updated in real-time through the use of oracles such as Chainlink. Synthetix, the largest derivatives platform, allows users to purchase derivatives (although users do not gain dividends from these assets), bet on inverse derivatives, and like other protocols, stake assets to provide liquidity for the ecosystem.
- Asset management tools – There is a certain allure to being your own asset manager, trading top DeFi coins and using a range of financial instruments to maximize returns. There are many different apps and browser extensions out there to choose from, built on different blockchains and offering a range of functionality to interact with DeFi products, while keeping your assets secure.
- P2P marketplace – Much like all the other DeFi products available, decentralized marketplaces offer the ability to trade goods using cryptocurrencies outside of the dominant centralized platforms such as Amazon.
While there are P2P marketplaces such as OpenBazaar, many of the top trading platforms by volume deal in NFTs and involve not just Ethereum, but Flow, Wax, and Binance Smart Chain (BSC) protocols.
Now that we’ve looked at some examples of what is possible in the world of DeFi, we can now get down to the nitty-gritty, and examine what goes into building a DeFi project of your own.
How do you make a DeFi project?
If creating a DeFi project were easy, everyone would be doing it! Of course, the first step is to have a unique idea. Successful projects like Maker and Curve Finance saw a gap in the market that they could fill. Providing a secure and user-friendly solution involves strategic planning and practical implementation, usually over a period of 3-5 months. Here are some of the general elements that require consideration:
- Planning, development and testing estimates – While decentralized applications take 3-5 months to complete, more accurate planning will help you and your team budget and gather/allocate resources more efficiently.
- Business analysis – A good idea needs to be subjected to rigorous assessment in order to determine whether there are competitors who have, or are creating a similar project, and whether there is sufficient demand for the application to turn a profit.
- Technical analysis – Research needs to be conducted to determine which technologies will allow the functionality of the application to be best met and whether there will be constraints that hamper the project’s development.
- DeFi integration – DeFi applications operate in an integrated ecosystem, so sufficient planning needs to go into deciding which apps your project will connect to.
- Gathering a team – Some companies opt for an in-house team, while others outsource to an external development team. In most cases, hiring a team involves software developers who handle the writing of the application itself, and also front/back-end developers who work with UX and UI elements.
- Continued upgrades and bug fixing – Moving past the development window, how will the application be updated and maintained?
- Promotion – The DeFi space is a competitive and growing arena. How will you gather not just an audience, but a dedicated community to help engage with and promote your application?
The points above focus on the creation of a DeFi project in its entirety, but now we’d like to give a bit more information about the development process; specifically, choosing a blockchain, development environment, and programming language.
- Blockchain
At the time of writing, DeFi Pulse lists all of the top 20 (by USD locked) DeFi projects as being built on the Ethereum blockchain. While this has helped boost the Ethereum Ecosystem, it has also been taxing for the network, with slower transactions and increased fees. Despite Ethereum 2.0 promising to remedy this with increased scalability, there are other blockchain competitors such as NEAR, Solana, and Polkadot that are worth consideration. Each has its pros and cons, and serious research needs to be undertaken to decide which blockchain is best for your project. The choice of blockchain will have cascading effects, influencing the choices of coding language and development environments down the track.
- Development Environment
Like when building any software, an Integrated Development Environment (IDE) makes writing and testing code much easier. As stated above, the Ethereum Blockchain is the most commonly used Blockchain for creating decentralized applications, so naturally there are many web-based and desktop IDEs created specifically for Ethereum smart contract development. If you’re considering building on another blockchain, they also have their own development environments. NEAR Protocol says that their online IDE allows users to run and deploy in one click, with templates and a familiar layout to make development easy.
- Language
Once again, the choice of language will depend on the blockchain and development environment used. C++ is the recommended language for developing smart contracts on EOS, JavaScript is used on the NEO blockchain, and of course, Solidity, influenced by C++, JavaScript and Python, is employed when working with the Ethereum Virtual Machine (EVM). While there are preferred languages when working on certain blockchains, this doesn’t mean they always need to be employed; for example, Rust, an increasingly popular language for smart contracts, was used to create the NEAR protocol and is the blockchain’s preferred language for smart contracts. However, Rust (among other languages) can also be used to write smart contracts on the Ethereum blockchain without any problems.
When these three components are addressed, developers can properly get to work creating smart contracts and ERC-20 tokens for decentralized P2P transactions.
Contact INC4 for all aspects of DeFi development
We have only scratched the surface of what it takes to build a decentralized ecosystem that is stable and secure enough for users to properly engage with. Luckily, INC4 has been here before and knows the steps required to facilitate a successful lending platform, decentralized exchange, wallet, staking platform, or custom dApp. We provide complete outsourced teams for full-cycle development as easily as we can give you the one or two specialists needed to cover a skill gap in your existing team. Check out our DeFi page to see more and get started with a dedicated team that you can trust.
