Over the last few years, decentralization has become a buzzword and a staple of any discussion. Decentralized finance or DeFi is a salient part of this trend that aims to create financial products and markets that don’t rely on traditional financial institutions.

The goal is to use new technologies like blockchain and cryptocurrency to make it easier for people to borrow, lend, and trade without middlemen. DeFi has already spawned a number of popular products, including decentralized exchanges, peer-to-peer loans, and tokenized assets. As the sector grows, it could eventually challenge the hegemony of companies like Visa and Mastercard.

Today, we’ll have a look at this phenomenon and see what it takes to invest in DeFi development.

The basics of decentralized finance

Decentralized finance (DeFi), also known as open finance, is an umbrella term that encompasses different financial protocols and applications that operate on the blockchain. DeFi has gained a lot of traction in the past year and is often touted as one of the most promising use cases of blockchain technology. The key benefits of DeFi include security, transparency, liquidity, and interoperability.

DeFi vs traditional finance

While decentralization appears to be an innovative concept in the tech world, it also topples traditional financial systems. Essentially, DeFi was meant to challenge legacy financial institutions that rely on centralized processes.

Traditional financial systems always include any kind of intermediary such as banks that validate the transactions. It means that users have to pay fees to send their money to another user.

DeFi applications allow users to borrow and lend money, invest in assets, and trade securities with no centralized authority. By removing the need for intermediaries, DeFi applications can reduce costs and increase transparency.

A blockchain serves as the trusted body in DeFi, controlling all financial transactions. In traditional finance, however, public governance, which includes regulations and licensed financial organizations, serves as the source of trust, overseeing all operations.

DeFi is known for inclusiveness, thus allowing all users to perform DeFi transactions. Therefore, it’s easier to access for underbanked populations and offers faster settlements. Traditional finance, on the contrary, is more difficult to qualify for, thus leaving 1.7 billion adults unbanked, according to Global Findex.

As we can see, decentralized finance brings new benefits to the table. Compared with traditional financial institutions, it can make money management easier, less expensive, and faster.

Decentralized finance and blockchain

Blockchain and cryptocurrencies are the two pillars of decentralized finance. Unlike our traditional financial system, which is based on a centralized infrastructure administered by central authorities, decentralized finance is powered by code native for the Ethereum blockchain’s decentralized architecture. It is the Ethereum mainnet that powers DeFi with peer-to-peer transactions that allow users to send assets directly to each other.

Moreover, blockchain stores your transaction history in computer code that is not managed or owned by a centralized entity. Therefore, users have more control over their personal data, while making it immutable as well. When there’s no centralized server, it’s almost impossible to alter or delete a record.

Also, the backend of any DeFi application is a smart contract. The latter is a piece of code that automatically verifies and closes the deal once the predefined conditions are met. This way, no intermediary is needed to execute the agreement.

Top DeFi applications in 2022

Last year, DeFi applications reached a milestone with an all-time high value in the blockchain market. Thus, the total market value climbed to $7 billion. In 2022, it is slated to reach $12.7 billion. And as of March 2022, $79.1 billion of value is locked in decentralized finance.

No wonder this market uptake was followed by a growing number of DeFi solutions. Let’s have a look at the most popular ones.

Decentralized exchanges

Decentralized Exchanges or DEXs are DeFi platforms powered by the blockchain network. They do not have any management authority and have smart contracts as an authority.

Decentralized exchanges allow users to find a match for requests to buy, sell, or trade. Some DEXs also enable crypto staking. Curve, Uniswap, PancakeSwap, and SushiSwap, are often listed as the top decentralized exchanges.

Decentralized applications (dApps)

A dApp is built to host a variety of applications, including decentralized finance, gaming, and social media. In simple words, decentralized applications offer an interface for the users to access any DeFi service.

DApps also have the following differentiators that make them a standout among traditional applications:

They run on the blockchain.
Their code is open-source.
Users can access dApps in exchange for tokens.
Miners get a token reward if they make contributions to the ecosystem.

Lending platforms

Within a traditional financial system, borrowers just qualify for the loan to take it out. Defi lending platforms act as an alternative to traditional loans. They crypto loans in a trustless manner, with no paperwork or intermediaries. Users can enlist their crypto assets on the platform for lending purposes using cryptocurrency or fiat as collateral. A borrower can directly take a loan through peer-to-peer lending. Lenders, in turn, receive their money back with interest.

How to develop a DeFi application: Step by step

Blockchain and decentralization still remain the wild west of software development. However, the process of DeFi creation is no different than the usual solution. Below, we’ll go over the milestones of DeFi development services.

Create a holistic strategy

Any development lifecycle starts with planning and market research. A business analysis performs a thorough audit of the current market trends, essential functionality, and user needs. A result of this stage is a detailed project roadmap with functional and non-functional requirements that lay the ground for design and development.

Design

Design is a common weak point of DeFi solutions. Therefore, your UX/UI designs should have hands-on experience in blockchain and know the core visuals that power DeFi applications. The user interface should also be flexible enough to allow updates in the future.

Development and testing

Solidity, Python, Java, and other usual suspects are the core tech stack for DeFi development. Each technology is a bag of pros and cons, so your development team should match your solution architecture with relevant technologies.

Maintenance and support

Maintenance is the most challenging thing in DeFi development. While the front end can be easily updated, the smart contract cannot be altered once on the blockchain.

The Final Word

Decentralized finance (DeFi) is a term often used to describe financial applications that operate on a blockchain. These applications can include anything from lending and borrowing to insurance and derivatives. DeFi has experienced significant growth in popularity over the past year, with many new projects being launched. However, DeFi development is a challenging process that needs hands-on expertise and robust security measures to eliminate any vulnerabilities in smart contracts.