In 2023, the crypto community appears to agree that both Ethereum and Bitcoin will not succeed as a kind of peer-to-peer electronic payment. Nevertheless in the crypto-deFi realm, trillions of money continue to exchange hands. It makes sense that business owners are eager to build a deFi application and participate in the thriving cryptocurrency market.
In this blog, we’ll go over all the specifics of deploying a DeFi app, which business owners frequently neglect, and offer helpful advice for making DeFi apps successful.
Key Takeaways:
- You must make decisions on the blockchain and the tokenomics of the product at the very least prior to developing a DeFi app. Any subsequent decisions on technologies, protocols, etc. will be guided by these choices.
- After it has been released on a blockchain, a truly decentralized application cannot be altered. Thus, a suitable migration plan for upcoming updates needs to be thought out beforehand. DeFi programmes that use admin keys are vulnerable to hacking.
- Using tried-and-true UX/UI techniques from the “web 2.0” area and streamlining onboarding as much as you can are the keys to developing a top-performing DeFi app development platform.
Understanding DeFi vs. Dapps
Any blockchain software that relates to finances is referred to as DeFi, which stands for decentralized finance. As you are aware, transactions are the lifeblood of blockchains.
In reality, the foundation of any blockchain is immutable, secure, anonymous, and intermediary-free transactions. It makes sense that many blockchain applications are by nature Defi.
Decentralized applications, or dApps, are dapps. DeFi apps, as well as anything in between, such as a blockchain app for obtaining patient consent or an EHR system on a distributed ledger, are all included in the obviously very broad phrase that describes any blockchain application at all.
We could also add CeFi, which in the context of cryptocurrencies refers to applications like CoinBase. It’s a centralized business entity, a private business with a physical headquarters, and it has all the other characteristics that traditional off-chain businesses often have.
Each CeFi application is technically controlled and operated entirely by its proprietors on servers that are owned by them. These apps still link to blockchains, but they don’t depend on them for their essential functionality.
We’ll talk primarily about developing DeFi applications in this blog. Hence, any decentralized blockchain-based software that works with cryptocurrencies and deFi tokens.
The Future of Decentralized Finance
DeFi is developing into a cutting-edge digital economy:
- The total value locked (TLV) increased by 1,120% to $150 billion in 2021 as a result of decentralized protocols growing by 650%.
- Your friends begin enquiring about NFTs and cryptocurrency investment.
Many DeFi apps are becoming widely used. Individuals are learning new ways to invest in and make money using applications powered by cryptocurrencies, such as farming, staking, trading, etc.
Crypto crime also gives the area an eerie appearance. DeFi protocols lost $2.3 billion in 2021 as a result of security flaws, according to blockchain analytics company Chainalysis.
UX/UI is another barrier to the widespread use of DeFi applications. Many pieces of DeFi software are created and developed by programmers experienced in cryptographic techniques. The interfaces that developers create, however, frequently appear overwhelming to beginners since they require users to understand novel tokenomics concepts before they can keep up with all the UI technology.
However, in search of rapid profits and enjoying user-friendly interfaces, many beginners find themselves using centralized cryptocurrency programmes similar to centralized cryptocurrency exchanges.
As a result, creating an effective DeFi app requires creating engaging retention mechanisms and adhering to security best practices. Also, the latter involves instructing customers on how to safeguard their cryptocurrency assets.
Different DeFi Applications
Please be aware that even though we have listed these as various kinds of DeFiapps, it is possible to successfully integrate these functionalities into a single DeFi app.
DEX
DEX or just swaps are by far the most common DeFi applications. For instance, during its busiest periods, UniSwap hosts one-third of all transactions on the Ethereum blockchain.
In addition to trading, users can deposit and lock their crypto assets to make them available for trading in liquidity pools (also known as field farming).
NFTS
The most recent cryptocurrency fad is the minting, selling, and (recently) trading of digital works of art.
DeFi Bank
Interest rates are greater in DeFi apps that connect to algorithmic protocols than they are in conventional banks. DeFi banks provide numerous staking and reward schemes.
Lending/Borrowing
Despite concerns that there are currently not enough borrowers, the second-most popular market for crypto DeFi software has more users who want to lend money and make money.
DeFi Crowdfunding Platforms
Decentralized systems for crowdfunding enable entrepreneurs to raise money openly without overfunding.
DAOS
Decentralized autonomous organizations (DAOS) are autonomous bodies that make decisions on their own. Everyone who owns a DAO token (such as MakerDAO’s ERC20 tokens) is eligible to vote on the project’s direction.
Asset Tokenization
A straightforward method of displaying ownership rights to various physical objects on a blockchain is through asset tokenization.
How to Create a DeFi App
How can a DeFi app be created that gains enough traction and is long-term financially viable? Any DeFi app can be reduced to its bare minimum to reveal software that:
- Runs on a specific blockchain (or over many chains)
- With smart contracts encoding its business logic (tokenomics)
- Provides the user interface (web, mobile, or desktop applications)
- Connects to cryptocurrency wallets, or provides a wallet
- Communicate with off-chain data
Developing a DeFi app is rather simple when it comes to user-facing web or mobile applications. The necessary actions are:
- Development process
- Discovery phase
- Design and prototype
- Quality assurance (QA)
- Maintenance
The procedures listed here are mainly concerned with designing memorable user interfaces and adapting the software feature set to shifting market demands. We still need to create a financial app, but it will work on a chain instead.
However, some additional focus is required on the blockchain-specific elements of developing a DeFi application, such as network selection, tokenomics, and others.
Please be aware that even while development teams define the majority of the following details during the discovery phase, because the crypto field is so dynamic, changes may still be made as the product develops.
The agile development methodology, fortunately, encourages such a flexible strategy and permits technical and UX changes in the middle of a project as long as they guarantee improved product-market fit.
Step 1: What Blockchain To Use?
The Ethereum network is currently by far the biggest DeFi platform. Total value locked (TVL) for the chain outperforms the rest of the field.
A price must be paid for such fame. Network congestion results in slower transaction speeds and greater costs as more people enter the DeFi economy, whether to trade or take their chances with NFTs.
How can we explain to someone who is unfamiliar with Ethereum that a straightforward transaction on our decentralized platform could cost them $60 to $120 in network fees?
It should come as no surprise that companies who create DeFi apps have been looking for alternatives. As you can see from the graph, competing blockchains began to seriously challenge Ethereum’s DeFi monopoly in 2021.
How do you pick a blockchain to build a DeFi app, then?
Assistance with Smart Contracts
Any DeFi app’s smart contracts are its beating heart because they include all of the application’s business logic. The chain must therefore support them. Thankfully, most modern blockchains do.
User Adoption
How many users are there in the chain and how powerful are they economically?
Network Charges and Transaction Speed
Of course, we want to strike a compromise between low costs and maximum speeds.
Technology Stack
What coding languages are necessary to create native DeFi applications? Is this a brand-new technology with limited development resources, or can we utilize Go or Solidity like on Ethereum? What kind of setting is there for development?
Developed Ecosystem
The variety of the DeFi apps presently available on the chain will also influence the decision. Has the popular Ethereum games Aave and UniSwap already made the switch to this new chain? Are there connections to other networks and open DeFi protocols on the blockchain?
You can choose the best chain to launch a DeFi app by finding the answers to these and related questions. Additional chains that frequently suggest themselves as potential candidates for a DeFi application include:
- Terra ($13,2 billion)
- Binance Smart Chain ($11,9 billion)
- Avalanche ($9,1 billion)
- Fantom ($8,7 billion)
- Solana ($7,6 billion)
- Polygon ($4,8 billion)
These chains likewise follow Ethereum in terms of TVL metrics. Of course, your product’s characteristics and whether or not it requires integration with other chains will also influence your decision.
Step 2: Defining Tokenomics
The most important component of any decentralized application is tokenomics. Of fact, setting up a DeFi app for some types of DeFi software, including portfolio managers, does not necessitate creating a crypto token.
The most popular decentralized financial applications, however, introduce novel coins and novel interfaces for interacting with them, for instance:
- Staking
- Making a donation to a liquidity pool
- Trading
You will also need to choose whether the token you create will be inflationary or deflationary, how it will be distributed or awarded to users, what consensus mechanism it will support, whether token holders will have any voting rights, whether it will be a stablecoin or not, and a whole host of other factors.
The smart contracts that act as immutable servers running on a blockchain technology will house all of these details. By the way, there’s something we need to talk about in relation to decentralization.
Step 3: Integrate Crypto Wallets
Users will obviously need a crypto wallet because every DeFi deals with cryptocurrency. Customers are typically given the option to connect their own wallets that they have grown to trust.
But, nothing precludes you from creating your own cryptocurrency wallet and providing customers with private keys (often in the form of a seed phrase). Why do the majority of decentralized applications recommend that users carry their own cryptocurrency wallets?
- Trust issue
- Focus on professional users
- Speedier time to market
Having your own cryptocurrency wallet coupled with your DeFi app is advantageous, especially if it provides any additional functionality beyond transactions, such as tracking yields. I advise using tools like Everchain, which support numerous tokens and coins from various blockchains.
We can leverage services like WalletConnect, which substantially simplify the integration process and need minimal user input to connect, to integrate with pre-existing non-custodial wallets.
Step 3: Working With Oracles
A DeFi may occasionally require off-chain data for proper execution. Consider the case where we are developing a DeFi app for travel insurance. For our smart contract to initiate transactions to clients qualified for insurance payouts, weather and airline cancellation data are required.
Oracles, often known as data feeds, provide this off-chain data. In an ideal world, we’d have to rely on products like ChainLink, whose oracles basically imitate blockchain activities by having independent nodes come to an agreement before uploading the results to a blockchain.
Otherwise, our DeFi software faces a serious risk from a centralized oracle that is vulnerable to hacking.
Cost To Build A DeFi Application
Depending on the extent, the price to create a DeFi app could range from $60,000 to $300,000, for example. Naturally, creating a DEX for trading tokens will take much more work than, say, creating a mobile crypto wallet or other simpler DeFiprojects.
One thing to keep in mind is that the cost is typically lower when developing a DeFi application that simply uses on-chain data and doesn’t perform any transactions on the blockchain. This is because no smart contract or blockchain programming is required because you are creating a web 2.0 application that reads data from one or more chains.