DeFi Development

What DeFi is

Decentralized finance started to attract attention after all markets crashed in March 2020, but few people understand its essence so far. At first, the term was used to refer to analogues of traditional financial instruments that are implemented in a decentralized architecture. Now they have grown into a widely accessible ecosystem consisting of decentralized applications (dApps) and services powered by public blockchains.

The goal of decentralized finance is to create a financial system that would be open to everyone and wouldn’t require user trust, as well as to promote the self-sustainability principle. Conservatives consider this principle a disadvantage, but it encourages people to take responsibility for their investments.

The difference between DeFi and FinTech

Decentralized finance seems similar to financial technology (FinTech) that is also aimed at modernising financial services. However, the difference is that while FinTech relies on a conventional financial infrastructure, DeFi offers completely new components.

Let’s recall, for example, TransferWise, a fintech service for international payments. Though its fees are several times lower than those of most banks, it still uses bank accounts and other infrastructure elements that may have become obsolete. With bank accounts in many countries, TransferWise makes it easy for customers to transfer money. When you send euros to someone living in another country, such fintech services capture your money, and to the recipient, they give the funds from the corporate account in the recipient’s country. This speeds up transaction processing and reduces fees.

Now let’s compare the above model with DeFi services, for example, Dai transfers. Instead of centralized intermediaries such as banks or fintech companies, Ethereum stakers verify Dai transactions. They will process your transaction for an amount equalling one US dollar, and this will only take 15 seconds — the period required to create one block in which verified transactions are recorded. As a cherry on top, you can send your Dais to anyone who has a wallet that supports ERC-20 tokens. Your recipient can receive them in 15 seconds, even in a country under sanctions or with an outdated financial system.

Where DeFi is used

Decentralized finance is an accessible alternative to most traditional financial services, allowing anyone who has an internet connection and some awareness of cryptocurrencies to interact with the DeFi ecosystem. For that, developers have created a hundred new blockchain projects with their own protocols, distributed networks, decentralized services, and dApps.

When we take on DeFi, we start with the terms of reference for the project development. Without detailed ToR, we won’t be able to evaluate and start creating your future DeFi project.

Stablecoins

Decentralized finance first started to be used in stablecoin projects. This is a cryptocurrency, the price of which is pegged to the price of a reference financial instrument, usually fiat currency or commodity. Thus, all the issued stablecoin units are backed by a reserve stored at a reliable custodian. The value of the USD-pegged stablecoins is ensured by the issuer, while their purchase and sale are subject to AML/KYC procedures.

Examples of DeFi projects with stablecoins: Liquity USD (LUSD), USDD, Wrapped Bitcoin (WBTC). The latter is pegged to the price of bitcoin, but is powered by the Ethereum blockchain.

Decentralized autonomous organizations

Another type of crypto projects often associated with stablecoins are decentralized autonomous organizations (DAO). Amongst them, MakerDAO, which operates on Ethereum, is considered the most popular. Although it has a native stablecoin DAI, any participant can issue their custom stablecoins. Their issue can be compared to the issue of fiat money backed by gold, only here ether is used instead. A participant sends a certain amount of ETH coins or approved ERC-20 tokens to a smart contract that creates a new stablecoin. This is called collateralized debt positions, meaning that the created DeFi tokens are basically a collateral-backed debt payable to MakerDAO.

A team of any crypto startup can establish its own DAO. It’s not much more difficult than developing and deploying a smart contract. There’s even such a platform, DAOHaus, which allows you to create a DAO on the open-source framework Moloch. It helps DAO members and founders to reduce coordination expenses to zero.

Decentralized exchanges

Thanks to DeFi, decentralized exchanges (DEX) regained their popularity. Unlike centralized ones, DEXs don’t store users’ crypto and data on their servers. Operating on blockchains, they only bring together buy and sell calls. Such a trade model helps avoid KYC procedure and doesn’t depend on the interests of major traders.

Here are a couple of interesting and not quite ordinary DEXs:

• Uniswap — both a DEX and an Ethereum-based decentralized protocol that provides liquidity and simplifies token exchange thanks to automated market making
• 1inch.exchange — an aggregator of various DEXs that divides an order between non-custodial exchanges to minimise slippage and find the most favourable price for order execution.

Prediction markets

P2P prediction markets have captured a separate niche. These are platforms that allow placing bets on various events, activities, prices, elections, etc. There are similarities here with usual bets, for example, in sports betting, so the principle doesn’t need much explanation.

Here are the most famous prediction markets:

• Augur — a platform for creating P2P prediction markets and an Ethereum-based decentralized oracle. Its collective intelligence (the wisdom of the crowd) predicts the outcomes of upcoming events on which the users can place bets.
• Gnosis — a platform with 4 products: Conditional Tokens (a framework for creating event-based tokens); Protocol (a DEX with round trips maximising liquidity); Safe (a wallet for digital assets); GnosisDAO (a DAO that manages the platform and prediction markets).

DeFi services

Apart from stablecoins, DAOs, DEXs, and prediction markets, there are 6 other fields of decentralized finance:

1. P2P lending.
2. Decentralized insurance.
3. Issuance of synthetic assets.
4. DeFi asset storage and management.
5. Liquidity pools.
6. Marketplaces.

As worthy examples of decentralized finance in the form of services successfully operating in these fields, we would like to highlight the following:

What the advantages of DeFi development are

Today, DeFi projects attract almost as much attention as IEO in 2019. So why is there such hype around them? What role does decentralized finance play for participants and organizers, what advantages does it provide?

Decentralization

The main advantage of DeFi is true decentralization. The rules of financial operations are prescribed in a smart contract, and once it is launched, the project can operate independently. Control over it is distributed amongst many independent participants, while the development team is deprived of the ability to manage it centrally.

Public accessibility

DeFi companies help people who previously couldn’t use financial services to join the global economy. Until now, 1.5 billion people don’t have access to basic banking services such as deposit accounts and loans. The main reason for this omission is that many unbanked people don’t have all the documents that financial institutions ask for. It’s also hard for them to get a decent credit score. Now residents of developing countries can enjoy financial benefits without intermediaries.

Transparency

In the DeFi sector, all information is open and available for familiarisation, allowing you to choose reliable projects and services from home. If you need a loan in real life, you have to go to banks, compare interest rates, and study confusing terms and conditions, so as not to face hidden fees or penalties later. In the case of decentralized finance, detailed information about lending protocols and terms is available in projects’ white papers.

Finance is under control

On DeFi platforms, only participants themselves manage their assets. They control their cryptocurrencies in decentralized services and organizations without outside help or interference. No regulator can freeze the accounts of dApp users or confiscate their funds.

What benefits DeFi developers offer to businesses

Any financial institutions, fintech companies, or crypto projects can connect to decentralized finance to benefit their business. For example, we suggest you get:

• A potential source of yield from unused fiat or cryptocurrency reserves
• Easy access to capital through lending protocols to fund business operations
• Reduction of costs and elimination of intermediaries due to the use of blockchain technology
• Automation of processes and reduction of errors due to the implementation of reliable smart contracts
• Attractiveness for potential investors due to the diversification of their investments through cryptocurrencies.

Cost of services

If you need a unique DeFi solution, we are ready to create it. Polygant develops DeFi apps of any complexity. Contact us to discuss all the details, and we will start working on your project right away.