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what is Defi development company?

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kishore senthil

a year ago | 6 min read

What is DeFi?

Decentralized finance (or DeFi) is a technological movement that aims to replace traditional financial systems by moving the flow of money from centralized entities (i.e. banks) to decentralized finance development company P2P networks, and using smart contracts to execute code based on conditions. defaults.

DeFi technology offers services such as cryptocurrency trading, lending, borrowing, tokenized stock trading, yield farming , liquidity mining, prediction markets, etc. Many of the services and features that exist in traditional financial markets are replicated in DeFi in an unreliable way.

The DeFi industry is still in its early stages, but the market passed the $100 billion milestone in 2021. The DeFi market skyrocketed 400% in one year, and DeFi tools like MetaMask have amassed over 10 million downloads.

When did DeFi start?

Following the ICO mania of 2017, the cryptocurrency market in general may have entered a protracted bear market, but the 2017 headline garnered mainstream attention. Investors, developers, traders and other professionals poured into the sector as leftover capital from the ICO bubble was used to fuel technological innovation alongside increased venture capital investment. Much of that effort and capital has manifested itself in decentralized finance (DeFi).

How did DeFi start?

DeFi started on Ethereum when its founder, Vitalik Buterin, realized that Bitcoin ( BTC ) lacked smart contract functionality that could make blockchain useful for building financial services and decentralized applications ( DApps ) on top of existing blockchain infrastructure. .

These applications have the potential to replace traditional banking by giving each user full control of their money and allowing totally trust-free trading. DeFi removes the need for an intermediary like a bank and users can trade with each other using P2P technology.

Ethereum was the first cryptocurrency that allowed other users to build coins on the blockchain under the ERC-20 standard. Any developer with basic coding skills could deploy an ERC-20 token and build their own crypto. More than 300,000 cryptocurrencies have been deployed on the Ethereum blockchain alone.

Bitcoin is fully decentralized as a currency, but it lacks the Defi smart contract development functionality that allows developers to build features like their own crypto, loans, and decentralized trading services – cutting-edge technology that can take crypto to the next level.

The rise of cryptocurrencies being deployed on Ethereum led to the creation of many decentralized trading platforms. UniSwap was the first DeFi trading platform to become popular, allowing people to trade ERC-20 coins for Ethereum.

With the rise of decentralized trading platforms , developers started creating a new ecosystem of financial services, such as lending and borrowing services, tokenized stocks/precious metals, farming services, gaming/prediction markets, and much more. The technology later spread to other competing platforms beyond the Ethereum ecosystem.

How to use DeFi:

What can DeFi do for you? DeFi development company platforms include everything from decentralized exchanges (DEXs like Uniswap ) to synthetic assets (eg Synthetix), liquidity pools, insurance products (eg Opyn), payments, lending protocols (eg Compound), stablecoins , and more. These platforms work in a similar way to existing financial services, but in most cases they replace the institution (like an exchange) with a series of smart contracts that operate on a network like Ethereum.

Let's look at some practical use cases on a day-to-day basis:

Decentralized Exchange (DEX): Users can trade ERC-20 and other Layer 2 tokens for profit. Decentralized exchanges ( DEX ) work similarly to centralized exchanges in that users can buy and sell crypto, sometimes even with limit orders. These exchanges work on the principle of “exchanging” one currency for another, for example exchanging Vlaunch (VPAD) > Ethereum and vice versa.

Lending: DeFi is comparable to traditional finance in that it offers similar features as loan/lender. Lenders can make money by charging interest on your crypto assets.

Stable coins: Traders can convert their tokens into fiat-pegged stablecoins like USDT , USDC, DAI, and more. Similar to how traders can cash out in volatile cryptocurrencies like ETH, they can use stablecoins in decentralized wallets.

Yield Farming: An investor can charge fees for trading on decentralized exchanges by making their cryptocurrencies available for trading. If a person has ETH and Shiba Inu ( SHIB ), he can deposit them as a SHIB/ETH LP token and earn a % commission for every trade on the platform.

Wrapped cryptocurrencies: Users can “wrap” other cryptocurrencies that do not run on the Ethereum blockchain, such as Bitcoin – WBTC is the most popular. This allows them to have a wrapped version of their favorite coin in a DeFi wallet.

Staking – Users can stake their DeFi coins to earn a certain APY (Annual Percentage Yield). In most currencies, the annual APY% could exceed that of traditional financial institutions by a significant margin.

Aggregation: Users can take advantage of a DeFi app like 1Inch that aggregates the decentralized exchanges and get lower fees depending on the state of the network and the liquidity on the different exchanges.

7 Advantages of DeFi:

DeFi has numerous advantages over traditional financing. It covers the following features

Global: The reach of DeFi is truly limitless. Anyone can use DeFi services from anywhere in the world with no restrictions.

Private: DeFi wallets are private. To use a popular wallet like MetaMask , the user only needs to remember their recovery phrase. They don't need an email, ID, passport, proof of address or any sensitive information.

Keys: DeFi users are in full control of their crypto keys, and the only way to trade on most popular DeFi apps is to have a decentralized wallet. Users own 100% of their crypto in DeFi.

Decentralized: DeFi is the true definition of peer-to-peer electronic money in the original form that Satoshi Nakamoto envisioned in his Bitcoin white paper. Users can trade and move their crypto at any time without asking for permission.

Transparent: All DeFi transactions are public and transparent on the blockchain. Using block explorers , users can see their and other people's past trades. However, this data is not linked to the person's identity, only to their crypto address.

Fast: DeFi transactions are fast and the average trade on decentralized exchanges takes 5-10 seconds to confirm transactions. This is much faster compared to bank transfers which take 24 hours on average and are closed on weekends.

Open Source – DeFi is built on top of open source software protocols such as Ethereum ( ETH ), Uniswap ( UNI ), and MetaMask. Developers can instantly deploy crypto tokens and can trade them. Open source licenses generate thousands of different dApps.

DeFi Trading and Exchanges:

DeFi trading works similarly to centralized trading. The difference between cryptocurrency trading on DeFi exchanges and centralized exchanges is that the liquidity needed to make a trade is provided by peers in DeFi using so-called Liquidity Provider (LP) tokens, while on centralized exchanges it is provided by the exchange.

DeFi wallets like MetaMask offer people full ownership of Ethereum and any ERC-20 tokens they hold. The MetaMask wallet can be used to perform UniSwap operations exchanging Ethereum for any ERC-20 coin on the network. It can also be used for other Layer 1 networks.

On DeFi trading platforms, liquidity providers receive small fees in exchange for adding their crypto pairs and holding LP tokens. Users can add a liquidity pair like ETH/USDT and earn commissions for each trade. DeFi lending services work by merging crypto liquidity into large “pools” where lenders can add funds for a % return and borrowers can lend funds by posting collateral.

This technology was adapted from Ethereum to many other competing, smart contract-enabled platforms such as Solana ( SOL ), Cardano ( ADA ), Avalanche (AVAX), Fantom ( FTM ), among others. They offer similar features to Ethereum, but with much lower fees.

P2P trading technology does not mean that there are no fees in DeFi. Liquidity providers take an automatic commission of 0.3% for each operation. For most Ethereum-based swaps, gas blockchain fees can exceed fees from centralized exchanges or even traditional financial institutions.

DeFi and Centralized Cryptocurrency Exchanges

By contrast, centralized exchanges like Phemex can process trades using a central order book significantly faster than their DEX counterparts. Jack Tao, CEO of Phemex, explains:

“The technology we need to become a DEX is not ready yet. However, we are exploring whether a transition to a non-custodial exchange is possible while maintaining the many benefits and security features we offer our clients. We believe that the main purpose of an exchange is to help facilitate the exchange of value in an efficient manner. For such purposes, centralized exchanges still have their relative advantages at this point."

An immediate issue that comes up with many DeFi platforms (eg DEXs) is liquidity. DeFi protocols understood that financial instruments and trading would be the first major technological attraction of the cryptocurrency market, but attracting liquidity remains a challenge.

How are investors incentivized to deposit assets into a liquidity pool or DeFi platform?

In the case of Uniswap, the commissions generated by each operation in the liquidity pool are paid to investors who deposit or "stake" their assets in the protocol's liquidity pools. By providing liquidity to the protocol, they are rewarded with a passive income stream. However, for more complicated DeFi protocols, the answer to incentivize liquidity has morphed into another form known as liquidity mining, also known as yield farming.



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kishore senthil

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