A Detailed Guide To Understand & Develop DeFi App
Published December 8, 2022
The rising acceptance of cryptocurrencies and blockchain technology among customers have shown great potential in transitioning the finance industry.
In a very short span, the cryptocurrency community has witnessed the circulation of trillions of dollars in the DeFi space.
Thus, in no time the companies get into the competitive environment to enter into the field of Decentralized Finance (DeFi) sector and build the DeFi app to join this booming crypto world.
Further, in this blog, we’ll be discussing multiple intricacies of how to build a DeFi app that can help developers and business owners to make your app a winner.
What is Decentralized Finance – DeFi Apps?
DeFi stands for “Decentralized Finance” or self-custody finance. The system was introduced in 2018 by a group of entrepreneurs and Ethereum developers who aimed to build a finance app from a traditional system.
In the traditional banking system, the respected organization used to be responsible for your money, whereas in the DeFi system only you have access. With this, the concept of the DeFi system is expanding and providing more services and opportunities to take care of your money.
In simple words, the DeFi system eliminates the fees or service charges imposed by banks or any other financial institution to take care of your money and avail of their services. Through the DeFi app, any individual can put their money in a secure digital wallet and transfer funds digitally within minutes by using the DeFi app or system.
Types of DeFi Apps
1. DeFi Banking
DeFi banking apps allow users to manage money in a decentralized manner.
Here, the user can easily save, invest, and make payments without going through the banks’ central system or any other authorized institution. It helps to minimize the transactional fees and other expenses associated with the traditional banking system.
2. NFT (Non-Fungible Tokens)
The NFTs are the unique and scarce digital assets, that are used for trading on DEXs. NFTs can also be used for the collateralizing load on assigned platforms, such as Compound.
3. Borrowing and Lending
This cryptocurrency-supported application allows the user to borrow or lend money and earn interest from the borrower. The borrowers can even give loans to other users on the app.
Compound Finance is a popular example of carryout borrowing and lending operations, which allows users to earn interest on their crypto by lending it to other users on the platform.
4. Decentralized Crypto Exchanges (DEX)
The decentralized exchanges are quite similar to the traditional exchanges but operate through smart contracts instead of following the central servers. This enhances the security system of carrying out all the operations against the traditional banking system.
Popular DEXs are ForkDelta, AirSwap and IDEX.
In the blockchain, there are a variety of wallets that exist for handling different assets.
For example, Trust Wallet stores all ERC20 tokens and other 20,000 plus Ethereum-based tokens; whereas the Coinbase wallets allow users to store ERC20 tokens along with bitcoin, Ethereum and other assets.
6. DeFi Crowdfunding Platforms
The DeFi crowdfunding platforms are usually managed by a team or community that owns all tokens and handles all the key decisions about their usage. These platforms have their own tokens, which can be used to pay for various services on different platforms or can even serve as an investment opportunity for other users.
What are the Main Elements of DeFi Apps?
There are six main elements of the DeFi app, which are lending and borrowing, stable coins, decentralized exchanges, derivatives, margin trading and insurance.
1. Lending and Borrowing
The DeFi app allows the investor to deposit fiat money (inconvertible paper money made legal tender by a government decree) through a decentralized app and allows to earn interest.
Through this decentralized bank, any individual or business can borrow money and return it with the interest amount before a predetermined timeline. These transactions are carried out under a contractual system where no middleman is involved and also eliminates the scope of any loan sanction commission.
Stablecoins are a form of cryptocurrency or any additional charges.
In this lending and borrowing process, the long paperwork trail is not required, whereas it promotes a peer-to-peer loan system where the user can get loans at lower rates as compared to bank rates.
Some of the familiar DeFi apps that allow users to lend and borrow money are AAVE, Compound and MakerDAO.
Stablecoins are a form of cryptocurrency that has a value equivalent to another asset, such as an exchange-traded commodity, fiat money, or any other cryptocurrency. However, cryptocurrencies are highly volatile and for that, stablecoins are the suitable options to deal with this price fluctuation.
Stablecoins can also be used in trading goods and services, promoting cheaper and quick international transactions, derivatives contracts, lending and borrowing loans, and many more.
Even many economically failing countries adopted stable coins, exchanging their fiat money for coins equivalent to another country’s currency and saving their economy and security.
Some examples of Stablecoins are USDT, DAI, and USDC.
3. Decentralized Exchanges (DEX)
With Decentralized Exchanges, the user can trade digital assets by reaching out to buyers and sellers through the peer-to-peer network. DEXs are built on blockchain and serve as a secure and transparent platform without any medium.
It comprises all the major features of a Centralized Exchange (CEX) and enables one to trade multiple coins virtually. DEX provides faster and cheaper transactions as compared to CEX.
There are two types of DEXs;
- Order Book-based DEXs present all the buy and sell orders of assets in one place by using an order book and enable quicker trades. Some examples of Order book-based DEXs are Idex, PolaDEX, and Loopring.
- Liquidity Pool-based DEXs serve as a pool of crypto funds that are presented in the form of smart contracts and allows users to trade assets in a decentralized and efficient manner to earn interest on their holdings. Some of its examples are Uniswap, Balancer, Bancor, and Kyber.
Derivative DEXs are contracts whose values are extracted from the performance of the existing financial assets. These assets could be in the form of stocks, interest rates, bonds, commodities, currencies, market indexes, and many more.
The DeFi derivative market supports anyone to define a contract for an asset and doesn’t demand any proof of identity or eligibility of the user.
One of the primary DeFi applications in this space is ‘Synthetix’ – which offers on-chain exposure to varied assets.
5. Margin Trading
DeFi crypto margin trading supports the usage of borrowed funds to raise the position of a specific asset. Trading of financial assets becomes the security for the loan.
Margin Trading has two aspects i.e., leveraging and shorting.
In Leveraging the traders used to borrow assets to raise the trading assets amount. Whereas, with Shorting the trader borrows assets to sell and tries to decrease their value.
Major examples of crypto margin trading platforms are Fulcrum and dy/dx.
The insurance in the crypto ensures the security or compensation against the payment of a premium. Centralized finance insurance can be replicated in the decentralized ecosystem.
However, in the DeFi world, insurance is exercised to protect deposits and offers protection against any smart-contract failure.
Popular examples of insurance in the crypto industry are Opyn and Nexus Mutual.
How Do DeFi Apps Work?
DeFi apps are usually accessed through dApps software application that runs on the Ethereum blockchain. DeFi is quite safe and maintains transparency in its working, which is quite similar to the current banking system. In contrast to that, the user doesn’t have to fill out the application form to open an account or perform any activity, like in the traditional banking system.
With the DeFi app, the borrower can select the time period in which they can repay the amount with interest. To do so, all the legalities are followed in the form of smart contracts. The borrowed amount gets deposited in the liquidity pool that loans out to the borrowers via. crypto-backed loans.
As a result, the lender earns interest and the funds support the network running. It works on a peer-to-peer model, where any person can easily get a loan amount for a stipulated period at definite interest rates.
Usually, all the DeFi apps follow the same set of procedures, rules, and protocols. The only difference that can be witnessed is in the form of fee collection for every issued loan on the protocol.
How to Build A DeFi App?
The cryptocurrency-based app development requires additional expertise in terms of tools and technologies. Likewise, the DeFi apps use three significant tools, namely Ethereum Blockchain, Smart Contracts, and Cryptography.
The following steps will help to understand how to build a DeFi app where a user can deposit a token (ERC20) into the smart contract. Let’s learn about the steps and processes required to build a DeFi app effortlessly.
Step 1- Install Truffle and Ganache
Truffle framework is integrated into the developer’s device to facilitate testing and development and enables to build of smart contracts for Ethereum. It provides quite a convenient way to develop and deploy smart contracts to the blockchain.
On the other hand, the Ganache tool allows the local Ethereum blockchain to test smart contracts. It builds basic network features and generates funding for the top ten accounts with 100 test Ether. Ultimately, making smart contracts deployment easy and free.
Step 2- Create ERC20 Token
Once you build the environment, let’s move toward creating the ERC20 token. Basically, ERC20 tokens are the pre-configured smart contracts that are used to issue tokens for investors in exchange for Ethereum.
To build this token, the OpenZeppelin library should be installed. This library stores all the implementation standards that are required for ERC20 and ERC721 creation.
Step 3- Deploy ERC20 Token
Before the deployment of a token, it is necessary to verify the smart contract compilation that is carried out under the correct solidity compiler version. If so, then it is time to deploy your ERC20 token to the Ethereum network.
After the successful deployment process of the token, your app will get access to Ethereum, Bitcoin, and other cryptocurrencies for the token.
Step 4- Test the Developed DeFi App
Testing is the crucial phase before the final deployment of any application. Hence, ensure all your smart contract methods i.e. transfer, balance, and supply are accurate and working properly.
All these contracts and methods can easily be found on the right-hand side of the remix window. To follow good practices, it is suggested to test and try to transfer some tokens to the Ethereum wallet address. Thus, make sure to check and call the balance method to find the Ethereum address balance.
Cost to Build a Decentralized Finance Application (DeFi App)
The requirements, features, functionality, and many other factors, are not the same for every app. Likewise, the development time and cost will also vary. Considering the varied aspects, we have classified the DeFi app development cost estimation based on the project’s requirements.
- A basic app with generalized and most common functionalities demands about 3-6 months with 450 to 750 development hours.
- A medium complex app with basic and some advanced features requires 5-9 months with approx. 800-1300 development hours.
- A highly complex app with most of the advanced functionalities will demand more than 9 months with 1200+ development hours.
Based on the defined minimum to the maximum timeline, the development will vary in a wide range, and it will take $45,000 to $300,000.
Develop Your DeFi App with Experts at Codiant
The Decentralized Finance concept is making transactions effortless and efficient while maintaining high security and accuracy. With the DeFi app, the user can easily save time, money, and resources that can be spent on different methods.
Thus, after learning all these details, including cost and process, if you are planning to invest in the DeFi space, then it is the right time to do so. However, being a DeFi app development company, we suggest you not take any decision without taking the proper time and have detailed research to develop the DeFi app that can generate huge revenue.
After finalizing the concept of your DeFi app, another major concern arises to find the right and expert decentralized app development company. In this reference, Codiant – A Yash Technologies Company is one of the most recommended destinations as the DeFi app development company. We have a team of developers having expertise in DeFi, NFT and various other blockchain development services.
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