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2020 has become a memorable year for the crypto industry in regards to many trends, main among which is the growth in popularity of DeFi. These are platforms and applications (dApps) based on them, which are decentralized alternatives to traditional financial institutions. It was they who moved the market and it is about their launch that we will talk further. In this article, we will tell you in detail how to create a DeFi platform, what is needed for this and how much it costs to develop such a project.
What is DeFi technology?
Decentralized finance, or DeFi, are financial instruments in the form of services and applications that are controlled not by centralized regulators and / or intermediaries, but by decentralized institutions and / or protocols. The main task of decentralized finance
is to remove unnecessary intermediaries and unnecessary control, as well as to make such services cross-border and more transparent.
The idea is simple. If all modern financial institutions (banks, exchanges, insurance companies, crowdfunding) are just software that is controlled by some legal entities or states, why not implement all these institutions on autonomous Ethereum smart contracts or another blockchain.
This is how protocols appeared that allow, without a central authority and intermediaries, to trade tokens on decentralized cryptocurrency exchanges
(Uniswap), manage monetary policy and issue stablecoins (MakerDAO), credit and lend money (Compound), rebalance assets (TokenSets), insure risks (Nexus Mutual), create derivatives (UMA) and generally do everything that traditional financial institutions do.
Benefits of DeFi Protocols
Decentralized finance is a relatively new and not yet established area in cryptocurrency infrastructure, and many points require study and adjustments. Because of this, it is still difficult to single out all the advantages of DeFi in comparison with traditional financial institutions. However, even now we can say for sure about some points:
- Transparency. DeFi platforms are developed on the basis of open source software, so that everyone can check their principles of operation, honesty, reliability and safety.
- Ease of access. Decentralized finance offer significantly easier access to cryptocurrency financial services. This applies to both bureaucratic and legal restrictions and the amount of funds.
- Increased speed and flexibility. Blockchain and smart contracts allow cross-border transactions in seconds, unlike traditional banks, where a transaction can take up to several days. Not to mention the processing time for loans, deposits, insurance, etc.
- Economic efficiency. DeFi platforms are removing most of the intermediaries, making financial services cheaper for end users and more profitable for service providers.
- Independence. DeFi users fully manage assets.
How secure is DeFi?
. DeFi protocols are considered one of the most reliable and secure because they are built on the blockchain. The information recorded on the blockchain cannot be changed, therefore, no one can falsify the data stored in it. In addition, the functions of managing and maintaining the health of the blockchain network
are distributed among many nodes, therefore, it does not have a single point of failure, which makes such systems less vulnerable to hacker attacks.
. Asset and DeFi management is carried out through automated protocols - smart contracts, where it is strictly prescribed what and how a particular DeFi protocol should do. This avoids most human error. In addition, smart contracts also remove corruption risks.
Open source code
. All DeFi platforms and their smart contracts are open source software. Thanks to which anyone can check how the system works and how reliable and safe it is.
Where DeFi is applied?
Credit and deposit platforms.
This is perhaps the most popular use case for decentralized finance. Platforms such as BlockFi, Dharma, Maker DAO, Compound and Zano provide customers with crypto loans without the involvement of banks and regulators. Some of these services also allow you not only to take loans, but also invest in cryptocurrency at 3-10% per annum.
Decentralized exchanges (DEx)
. Another very popular type of DeFi exchange
and platform. They allow you to quickly sell and buy virtual tokens for other defi tokens
and fiat without a centralized intermediary and the need to store the deposit of money in the accounts of the exchange, which makes such exchanges more secure. Examples: Uniswap, 0x and Kyber. More about the features of such sites and their development is written in the article: «How to create a decentralized exchange
. These are various decentralized wallets that function as asset depositories that are not related to banking and / or government structures. Services like these provide users with applications that enable cryptocurrency holders to securely store and manage their assets. Popular examples: Melon, InstaDApp, Set Protocol.
. These are decentralized tools based on smart contracts that allow you to quickly and easily exchange one cryptocurrency for another outside of exchanges and exchangers. The user simply gives one token and immediately receives another, as in the bank's cash desk. The most popular exchange protocols are Uniswap and Bancor, as well as the layer 2 Lightning Network. You can read about the latter in the article: «What is Lightning Network
These are DeFi platforms on which people can make predictions about the coming of future events, ranging from sports or political betting to predictions of stock prices and exchange rates. DeFi makes these markets more accessible and more transparent as they operate on open source smart contracts as opposed to shadowy brokers and investment funds. The most popular examples are Syntetix and Augur services.
. This type of DeFi platform allows you to insure movable and immovable property by depositing your funds in smart contracts, which form a common pool of liquidity for payments in case of insurance events. This market is still very small, but it has good growth prospects in the future. Notable examples: Nexus Mutual and Opyn.
. In DeFi, these tools are very flexible, as their smart contracts allow the issuance of tokenized derivative contracts that are automatically executed. Examples: UMA, Synthetix.
DeFi Product Development Process
Developing DeFi platforms is a challenging task that requires deep knowledge of finance, blockchain, and cybersecurity. Therefore, it is best to entrust the creation of such software to a technical partner with the appropriate personnel and development experience, such as Merehead. Since 2015, our company has been developing various solutions in the field of blockchain, fintech and DeFi - from smart contracts to decentralized cryptocurrency exchanges.
You can study our portfolio and find out the terms of cooperation through email@example.com
or by phone number +1-206-785-16-88.
Step 1. Business Analysis
The development of a DeFi platform, like the launch of any other similar project, begins with a business analysis. At this stage, you, together with a technical partner, define the overall concept, tasks, technical requirements and functionality of the project, which in the future will help you choose the optimal technology stack and build the product architecture, as well as develop design requirements
Step 2. Opening / planning
At the next stage, you need to clearly define the design requirements and the technical component of the software being created. The development of requirements for the platform design implies the creation of a general UX strategy, multiple user personas, user flows, information architecture, low-fidelity wireframes and other things.
Here is an example of the information architecture of a DeFi crypto wallet:
And here is an example of a map of user threads for this wallet:
Next, you need to work out technical requirements, finding the middle ground between meeting the needs of end users and your business goals. The result of such changes should be: the structure of the general data flow, the architecture of the platform, quality assurance principles, the technology stack and the development plan with the estimated time and cost of the project.
An example of a cryptocurrency wallet architecture:
Step 3. Development of UX / UI-design
UX / UI-design
is an integral part of any application. In the case of the development of a DeFi platform, it should be as simple and straightforward as possible, since its end users are ordinary people unfamiliar with blockchain technologies and decentralized finance. Ideally, working with your service should not be different from working with traditional applications for asset management, lending
, insurance or investment.
Step 4. Development of smart contracts
In most cases, the correctness, reliability and security of your DeFi platform will depend on the quality of smart contracts. They are the basis of any DeFi product, since they contain all the logic of the system's operation. In addition, you should also understand that depending on the quality of the implementation, smart contracts can both increase the security of your DeFi platform and make it more vulnerable to hacker attacks (most, if not all, DeFi projects are hacked through holes in their smart contracts).
The very process of developing smart contracts for decentralized finance is an extremely difficult task, since they must describe all possible scenarios for user interaction with the platform and, at the same time, they must be transparent and secure at the same time. In addition, it is also advisable to make them customizable so that you can update some of the smart contract terms without additional deployments. All this means that smart contracts should be created on the basis of open source code, have clear logic and not contain excessive amount of code. Therefore, choosing an experienced development team is crucial here.
Step 5. Front-end and back-end development
At this stage, the development team brings to life the UX / UI design, functionality and backend of your platform. Front-end, back-end, blockchain and mobile developers are responsible for this. An approximate tech stack they can use:
- Blockchain: Ethereum, Binance Smart Chain.
- Smart contracts: Ethereum Virtual Machine, BSC Virtual Machine.
- Programming languages: PHP, JAVA, MEAN Stack, Laravel
- Databases: MySQL, MongoDB, Redis.
- LAMP^ Linux Server, Apache, Mysql DB, Php
- Website development:PHP - Laravel / Codeigniter
- MEAN: MongoDB, Express JS, Angular js, Node js
- For Android: Java, Kotlin, Node JS, ROR, Laravel.
- For IOS: Swift, Node JS, ROR, Laravel, IOS fabric.
- Cloud: AWS, Google Cloud Platform, MS Azure.
- Push notifications: Twilio, Amazon SNS, MAP.
Step 6. Integration of DeFi products
One way or another, your platform will be linked to other DeFi protocols, such as cryptocurrency networks, payment gateways and / or cryptocurrency exchanges, since this is the only way you can create a financial ecosystem that will be of interest to potential users. The difficulty is that usually such protocols have different functions and interfaces, so you need to conduct a preliminary analysis to ensure the compatibility and security of the integrations you need. This also means that your development team will need to examine the code and architecture of another DeFi before starting the integration.
Step 7. Testing
Once you've implemented all the basic functionality, it's time to test your platform. This implies checking the code for usability and functionality, as well as checking the system operation under all possible load scenarios. In addition, you should also make sure that all of your smart contracts are working properly and do not contain "holes" for stealing money and sensitive user data. Internal testing is not enough here. You also need to conduct an independent audit of smart contracts.
Remember, according to Block Research, there were 15 hacks on DeFi platforms in 2020 that caused users to lose $ 120 million. And almost all of this money was stolen through smart contract hacks. So take testing them seriously.
The cost of building a DeFi platform
The main factors that determine the cost of developing your own DeFi platform are the complexity of the project and the location of the developer company. Complexity usually means the number and depth of elaboration of functions, as well as the complexity of the design implementation. Location is important as developer salaries can vary widely from region to region. So, the average rate of a specialist from the USA is $ 100 per hour, Western Europe - $ 70 per hour, Eastern Europe - $ 35 per hour.