In 2021, decentralized finance and other blockchain-based solutions have reached unbelievable heights. According to DeFi Pulse, the total value locked in DeFi has surged by over 8x since July 2020. According to Markets and Markets, we’ll see the blockchain technology market exploding to nearly $70 billion by 2026. Finally, Cardano’s value, which is a major PoS platform, shot up by around 4x at the start of 2021.
All numbers point out that the DeFi market will gain or at least retain its traction in 2022 as well. However, in a field so vibrant and competitive, is it still possible to ride this hype wave? Yes, it is. There has never been a better time to build your own DeFi solution.
Today, we’ll find out all about DeFi development and what it takes to create a blockchain-based product.
What is decentralized finance?
Decentralized finance or DeFi-is a broad term used to classify decentralized applications that integrate traditional financial services into the cryptocurrency world. Unlike traditional centralized finance, DeFi transactions do not require any third-party intermediaries like banks to monitor or verify transactions.
What are the benefits of decentralized finance?
The narrative around decentralized finance usually revolves around the ground-breaking advantages of traditional systems. Due to their blockchain-based nature, the majority of these benefits rely majorly on the fundamental traits tied with the blockchain technology.
- Intermediary-free. Traditional financial transactions have to go through long internal bank checks and are regulated by other representatives. DeFi transactions, on the contrary, are handled automatically by predefined algorithms and smart contracts as well as carried out directly between users (peer-to-peer).
- Censorship- and fail-resistant. Since the system is based on blockchain, it can’t be tampered with or altered. This advantage also translates into higher stability of the network.
- Ease of access. Customers with bad or zero credit stories tend to be denied traditional finance services. Moreover, over a half of standard bank content is unavailable to the average American, which makes DeFi services a more accessible option.
- Lower transaction costs. Thanks to P2P transactions, decentralized finance services come with reduced friction and lower transaction costs for the creation and trading of financial assets.
- Transparency. Blockchain records are visible to everyone in the chain. This makes DeFi transactions visible and auditable.
Now that you’re more familiar with the core differentiators of decentralized finance, let’s go over to the main units of this technology.
What are the building blocks of DeFi?
The technology of decentralized finance rests on a wide range of other blockchain-based applications. All of them exist outside the DeFi framework, yet play an essential role in the development process.
Blockchain is a decentralized database that is stored simultaneously on multiple computers connected to each other on the Internet. For DeFi, blockchain platforms serve as a settlement layer for transactions. Currently, Ethereum is the gold standard for hosting decentralized applications thanks to a wide range of exclusive tools and smart contracts.
Tokens are digital assets that represent a tradable utility for trading or exchanging within a blockchain network. A prominent token example is Bitcoin which was among the first crypto tokens. Unlike crypto coins, tokens do not have their own blockchain, thus running on blockchains of crypto coins. Tokens also rely on smart contracts.
An online cryptocurrency wallet is a secure digital wallet used to store, send, and receive digital currency like Bitcoin. Wallets have a public address and a private key. The public address is used for transactions, while the private key is used for authorizing transactions. A crypto wallet allows people to acquire, store, and spend digital currency without using cash or credit cards.
Smart contracts, which are the backend of DeFi, ensure that the terms and agreements between parties are met. As such, a smart contract is a code or program that is executed automatically when the agreement is reached, instead of signing countless papers at the lawyer’s office.
Decentralized applications or dApps
Decentralized applications provide user-facing interfaces for executing DeFi transactions. Unlike traditional mobile applications, dApps don’t have a standard backend. Instead, they rely on smart contracts and use a standard combination of front-end frameworks.
As you can see, the decentralized finance ecosystem is a diverse one. Therefore, when building a DeFi system, you need to factor in the interoperability of your DeFi with other components.
Developing a DeFi: Step by step
From a lifecycle perspective, building a DeFi is no different from any other software. Therefore, the development stages follow the same principle. Let’s have a closer look at the main phases.
Blockchain development starts with in-depth business analysis. To do that, your team analyzes competitors, defines the target audience, and comes up with a set of must-have features. Market insights, in turn, go hand in hand with technical documentation.
Both convenient user experience and pleasant-looking interface are important to enable decentralized transactions. Historically, dApps have been criticized for mediocre and inconvenient interfaces. This can be explained by an unprecedented set of challenges DeFi UX/UI contains. Hence, companies need a seasoned team of UX/UI professionals to deliver amazing user experiences and seamless app flows.
Smart contract protocol development
Smart contracts operate as a backend for decentralized applications that will eventually manage peer-to-peer transactions. These are digital protocols designed to authenticate the conditions of a legal contract entered into by two or more parties. Smart contract architecture is susceptible to malicious attacks. Therefore, it’s necessary to run audits of architecture and apply industry-best practices when developing smart contracts.
When your solution is ready, your team will put it to extensive tests. However, vulnerability audits should be prioritized since blockchain-based protocols are immutable. Hence, they are impossible to tweak once deployed. Also, your developers should focus on comprehensive unit tests and functional tests.
The Bottom Line
Building a DeFi solution in 2022 has never been a better idea due to the ever-growing adoption of blockchain-based technologies. Being a strategic asset, DeFi applications unlock a whole wealth of new, unrivaled opportunities that secure your business well in the future. However, since blockchain-based solutions require unprecedented expertise, you should prioritize hiring a seasoned team of blockchain experts to build your product.