Co-founder and CEO at Priority Token (ptoken.io) and Industry 4.0 Investment Bank (industry4ib.com).
In the last couple of years, the DeFI landscape has worked tirelessly to improve the way we interact and engage with financial processes and systems. Needless to say, all that hard work has begun to pay off.
In 2020 alone, the sector has slowly emerged as the heart of crypto growth with over $8 billion worth of assets tied in DeFi protocols. This growth index is more remarkable when you consider that the value of assets flowing into this emerging market was hovering around the $1 billion mark at the beginning of this year.
The explosiveness of this concept and the technology powering it shows that DeFI is poised to take a more commanding role in the ongoing crypto mainstream adoption movement. In other words, the future of the crypto industry hinges on DeFi.
That said, it is imperative to understand the fundamentals of DeFI before you can truly appreciate the unfolding saga in the crypto landscape. DeFI, stylized from “Decentralized Finance,” is looking to reinvent financial processes so much so that it becomes possible to enjoy improved services without relying on intermediaries.
Hence, the goal is to utilize blockchain technology to decouple financial services from the cumbersome, restrictive, and expensive centralized models powering conventional financial technology.
Apart from a few hiccups here and there, there are a lot of positives to take away from the performance of the crypto economy in 2020. However, this is largely due to the surprisingly successful stints of new and established DeFI projects in the last few months.
The crypto narrative currently revolves around the myriad of opportunities available in the DeFI landscape and how it has altered the way stakeholders approach everything crypto.
Now more than ever, entrepreneurs and developers are motivated to explore the concept of decentralization and infuse it into existing or new products.
In light of this, it has become necessary to create a checklist to ascertain that financial products intended to carry the DeFI moniker comply with unwritten market standards. Here, I will show how non-DeFI projects can successfully transition to the DeFI terrain.
Why You Should Consider Transitioning to DeFi
For the better part of 2020, the DeFI ecosystem has expanded at a blistering pace. The market, which only managed to attract $1 billion worth of assets at the beginning of the year, is undoubtedly the toast of the crypto world.
At the time of writing, the total value of assets locked in the DeFI landscape has crossed the $8 billion mark and is exponentially rising. Unsurprisingly, several centralized financial service providers have begun to incorporate elements of decentralization.
Owing to the growing demand for DeFI, more crypto-preneurs are tinkering with decentralized finance. While this is a given, the main source of concern is that there are lots of intricacies involved. And, more often than not, project teams always seem to cut corners or create less than appropriate projects labeled as DeFI-enabled. This begs the question: what are the core factors to guide the transition from CeFI to DeFI?
How to Reinvent A Centralized Application into A DeFi Masterpiece?
Make Sure That It Fits into The Defi Narrative
It is irresponsible to believe that just about any idea or project will pass the DeFI test so far it enables decentralization. As its name implies, DeFI ultimately tackles the fintech market. In other words, it is paramount that the application you are looking to reinvent has one or more features designed to provide financial services to users.
For now, the DeFI narrative is more potent in some sectors. You should consider pivoting to DeFI if you are creating or have a startup targeting any of the following financial applications:
Lending and Borrowing: Open lending protocols are perhaps the most potent use case of DeFI at the moment. These protocols enable lending and borrowing features with the options to collateralize digital assets, minimize counterparty risks, and earn higher interest rates when compared to the conventional alternatives.
Decentralized Exchanges: Decentralized exchanges eliminate some of the security and privacy worries associated with custodial-based trading platforms. Users do not need to subject their personal information and assets to third parties before having access to the crypto market.
Derivatives: DeFI derivatives protocols expose users to a myriad of financial instruments by providing trading systems based on the performance of underlying entities. With this, users can navigate restrictions and capitalize on the performances of traditional markets.
Payments: Decentralized payment solutions focus on providing financial services to the banked and the unbanked. The goal is to establish censorship-resistant and cheap payment infrastructures.
Insurance: Like traditional insurance platforms, DeFI insurance protocols look to provide guaranteed compensations for losses based on predefined terms. However, the difference is that these protocols utilize fully-automated processes.
Decentralized Autonomous Organizations (DAO): DAO creates a unique way of running companies or foundations by distributing the governance responsibilities to shareholders while eliminating any form of hierarchical management. All operations of the DAO are governed by digital rules.
Prediction Markets: This unique solution allows users to predict the outcome of events. Users can earn when they make the right forecast.
Asset Management: These are sets of tools that let crypto holders monitor and store digital assets autonomously. These tools include wallets, dashboards, and apps to maintain full custody of crypto assets.
Stablecoins: Stablecoins are non-volatile digital assets. This concept requires developers to peg the value of a stablecoin to a stable asset or a basket of assets.
Tokenization: Tokenization is a vital aspect of the DeFi landscape. This is because it exposes investors to cheaper and faster investment instruments. With tokenization, it is possible to break real-world assets into small chumps and represent their value and ownership with tokens.
Data and analytics: Due to the explosive nature of the DeFI market, it has become necessary to introduce metrics and charting systems suitable to analyze and interpret the fast-paced ecosystem. These tools directly interact with DeFI protocols and mine the appropriate data to create accurate representations of their performances.
Nonetheless, note that the scope of DeFI as a concept is evolving, and more applications are going to emerge as we continue to unravel blockchain and crypto technology.
Create or Opt for A Smart Contract-Based Blockchain
There is nothing like DeFI without the functionalities and features found on blockchains. Hence, the transition from Cefi to DeFI also entails that the project operates from a blockchain infrastructure. This is because you and your team will give up control over maintenance, security, and daily operations to your community of users.
Hence, smart contracts will come in handy. The possibility of autonomy on the part of users is perhaps the most potent advantage of DeFI protocols. Other than autonomy, another vital aspect of blockchain’s innovative capabilities is its security system.
Armed with cryptographic functionalities and consensus mechanisms, blockchains offer some of the most secure environments for applications.
As such, you should opt for one of the readily available networks that let developers utilize SDKs to integrate and run applications on public blockchains with ready-made smart contract protocols and other infrastructures.
On the other hand, you can decide to create your blockchain from scratch. However, this may require more time, resources, and blockchain expertise.
Embrace Web 3.0
One of the benefits of running applications on blockchains is that it provides the level of flexibility absent in web 2.0 systems. For one, implementing the InterPlanetary File System (IPFS) as a decentralized file and web hosting protocol allows your project to defy the security and scalability issues prevalent in conventional approaches.
With the help of this protocol, your application can fetch data faster and securely. Another point that is worth noting is the possibility of interoperable blockchains. Solutions like PolkaDot are pushing the limits of blockchain by creating bridges that allow blockchain networks to share and transfer assets, data, and security.
When it comes to decentralized finance, participation is everything. Users must be involved in all the processes that define the viability of your protocol. Hence, you ought to get users involved in governance, validations, and liquidity generation.
From what we have learned so far, incentives and rewards are crucial to the success of a DeFI platform. Hence, you must include a unique rewards system compelling enough to spur users to lock their assets in liquidity pools, engage with the services, or contribute to security.
Audit All Protocols
Unlike centralized applications, it is difficult to fix bugs and eliminate errors once your DeFI protocol goes live. Hence, it is advisable to carry out audits and identify security loopholes before launch. A majority of the security mishaps linked to the DeFI ecosystem are a result of negligence or incompetence on the part of developers.
I have discovered over time that one of the factors that deter entrepreneurs from embracing DeFI is the perception that decentralization overrides business logic. Seeing that DeFI creates more effective ways to codify and maintain business rules, it is safe to say that it does not destroy business logic but establishes it.