Decentralized finance (DeFi) is a promising technology that could completely change how money is handled right now. It could speed up many services, like trading, lending, and exchanging money. But it’s hard to make a DeFi app that is safe and useful at the same time.
In this article, we talk about decentralized finance, how it can be used, and its benefits. We also look at the problems you might run into when making DeFi apps and suggest ways to get around them. Anyone who wants to make or use a decentralized financial product will find this article helpful.
What is DeFi, and what are its Top Technologies?
Decentralized finance, or DeFi, is a broad term for financial applications that don’t use intermediaries like banks, exchanges, or brokerages. Instead, DeFi uses smart contracts and tries to get people to use cryptocurrencies.
Users of DeFi don’t have to waste time on long phone calls and emails with managers, which is often the case with other financial apps. Instead, they use open software protocols to interact with digital wallets that are not hosted. These wallets are managed by users of the DeFi platform, not by a service provider. So, when people use DeFi, they have complete control over their money and can do business with each other directly.
People often mix DeFi with FinTech, which is a broader concept, because DeFi uses many different technologies.
Financial technology, or FinTech, is any technology that can be used to make traditional financial services better, more efficient, or more digital. This includes hardware as well as software, algorithms, and apps. FinTech has things like apps that people use to check their bank balances, figure out their taxes, and manage their investments.
FinTech and blockchain came together to make DeFi, so it’s more accurate to say that DeFi is the result of FinTech and blockchain than to say that it’s the same as FinTech.
How do things work that use DeFi?
DeFi solutions handle financial transactions by using a wide range of modern technologies. Here are four words that are often used to describe DeFi:
Smart contracts: Smart contracts are the heart of decentralized solutions and how DeFi works. They cut out intermediaries and ensure that financial transactions are fair and safe. The terms of an agreement are written into the code of a smart contract, which then carries out a trade when all the words are met. If the conditions aren’t satisfied, the person who paid for the smart contract gets their money back. Information about smart contracts stored in a blockchain is almost impossible to lose because it is encrypted and kept in a shared ledger. Also, smart contracts can’t be changed once on a blockchain.
Governance tokens: They are a type of cryptocurrency that can be used to build voting systems on the blockchain. They help DeFi projects stay decentralized by giving users rights and powers. Some dApps give governance tokens to users who use the system and make transactions as a reward. For example, users can vote on proposals to change a dApp’s protocol, incentives, and how it works. This helps to run and improve the dApp project.
Software protocols: DeFi protocols are groups of smart contracts that work together to solve problems and do specific tasks. A protocol like this has a set of standards, rules, and principles that can match real-world institutions in particular fields. Interoperability means that more than one thing can use the same DeFi protocols simultaneously. Smart contracts are used in DeFi protocols to help people keep track of their crypto assets. Most protocols for DeFi projects like Aave and Synthetix are built on Ethereum.
Decentralized apps, or dApps, are: A decentralized app (dApp) is a digital app that doesn’t run on a single computer but instead on a blockchain or a peer-to-peer (P2P) network of computers. It is not in the hands of just one person or group. A dApp is a website that lets people use a DeFi protocol. DApps can be run with the help of business automation software. Before an operation is run, the software ensures that all the parameters have been met. Chainlink and the Golem Network are two well-known dApps.
How to Use Decentralized Finance: How to Use DeFi in Different Ways
One strange thing about decentralized financial technologies is that they try to rebuild the financial ecosystem instead of just making software for different services. Most of the time, blockchain and crypto assets can power DeFi projects, which can then be used as consumer financial interfaces.
There are many different kinds of DeFi products, such as insurance services, platforms for lending money, and currency exchanges. Other use cases involve new types of cryptocurrency, like stablecoins, and new ways to mine, like liquidity mining.
Let’s take a closer look at some of the most common ways that DeFi is used:
Decentralized exchanges (DEXs)
DEXs differ from traditional centralized exchanges (CEXs) because they allow direct peer-to-peer cryptocurrency transactions and use defi smart contract development to make trading possible. This means that trades can happen immediately and are usually less expensive than CEXs.
Using smart contracts, these users of DeFi platforms can trade tokenized derivatives without a third party. Options, futures, or loans backed by collateral can all be considered derivatives.
Two well-known protocols for trading derivatives are Synthetix and BarnBridge.
People who have cryptocurrency to lend can do so right away with these platforms. The most important rule is that people who want to sign a smart contract must have enough collateral. One of the best things about DeFi is that it doesn’t censor anything, so nobody gets special treatment. Two of the best examples of DeFi lending platforms are C.R.E.A.M. and Notional.
A stablecoin is a type of cryptocurrency with a stable price, usually because it is tied to a non-crypto asset like the dollar or euro. This type of cryptocurrency was made because the crypto market is so unstable.
On crypto prediction markets, anyone can bet on the outcome of things like sports games and financial situations, no matter their status, where they live, or what country they are from. Decentralized prediction markets aim to offer the same services as traditional prediction markets but without any middlemen. TotemFi and Augur are two of the most well-known prediction markets.
DeFi Yield farming is staking or lending crypto assets to get more crypto as a return or reward. Liquidity providers put their assets at risk or in a smart contract-based liquidity pool. In exchange, they get “governance tokens,” which are a part of the transaction fees.
How DeFi helps Businesses in 6 Important Ways
- It is easier to get services related to money.
- Transparent person-to-person trades.
- It is possible to do business with cash across borders.
- It improved how the market worked.
- Users are in complete control of their money.
- Chance to use DeFi apps at the same time.
What could go wrong with a DeFi project?
- Smart contract limitations
- Not having clear rules and laws
- Low money coming in and high costs
- Attacks and hacking cause problems at work.
- Lack of skill
It’s hard to do a decentralized finance project that works well because the rules aren’t clear, and the technology is hard to understand. But you can make a good and competitive DeFi product if you know what could go wrong and have a team of skilled and experienced people working with you.
Professional defi development company Suffescom Solutions Inc. works with experts in quality assurance to make the best cryptocurrency, FinTech, and custom DeFi solutions possible. We are ready to share what we know and help you safely build your desired product. Contact us so we can talk about your dream project.