Smart contracts are at the heart of the cryptocurrency system, and Decentralized Finance (DEFi) does not operate without them. DeFi is meant to be permissionless, trustless, and automated. There are no financial settings behind the scenes to manage transactions. Thus, all aspects of the financial transactions are carried out through smart contracts — a set of rules written by programmers.

As both the FinTech industry and crypto industry continue to evolve together. Businesses must acquire the tech infrastructure required to support this booming growth. That’s where DeFi smart contract development becomes critical, and enterprises & large-scale businesses are adopting this trend to gain the competitive edge in the market.

This blog covers what a founder needs to know about DeFi smart contracts, their real-world applications, steps to develop DeFi smart contracts, the cost to build this, and crucial security practices to consider in the process of DeFi smart contract development.

Let’s move ahead…

How DeFi Smart Contracts Power Modern Financial Applications

DeFi utilizes smart contracts to automate the transaction process on decentralized environment tied to blockchain. This setting circumvents traditional banking, brokerage houses, and the need for a trusted party to facilitate trades.

DeFi Smart contracts handle various DeFi applications, some of which are,

Storing assets via non-custodial wallets
Automating swaps and liquidity management
Lending, borrowing, and interest calculation
Distributing rewards, yield farming, and staking
Minting, transferring, and enforcing NFT royalties

Through executing a set of rules defined by each contract, smart contracts eliminate the potential for human error, decrease operational costs, and enable businesses to offer 24/7 accessibility to the global market.

Real World Use Cases of DeFi Smart Contracts

Using smart contracts has never been more popular than it is now. And there have never been more uses than now.

Crypto Wallets
Crypto Exchanges
DeFi Protocols
Peer-to-Peer Exchanges
Decentralized Apps
NFT Marketplaces
Crypto Payment Gateways

Crypto Wallets

DeFi wallets are one of the most used tools by crypto holders. DeFi wallet service extensively makes use of smart contracts. Wallets come in-built with smart contracts for different crypto networks.

Crypto Exchanges

Both CeFi and DeFi exchanges make use of smart contracts. Users can trade, deposit, withdraw, transfer, and swap crypto, and smart contracts run in the background. Exchanges have customized pre-written smart-contracts for every scenario.

DeFi Protocols

Smart contracts make DeFi protocols functional. Every feature in a DeFi ecosystem has pre-tested smart-contracts to ease it. From staking, swapping, and lending, every function uses smart contracts.

P2P Exchange

Smart contract development first began with peer-to-peer transactions in mind. To enable crypto transfer from user to user without oversight.

dApps

Decentralized apps have a connection to blockchain networks. For every feature, the app uses the smart contract from the blockchain. And every transaction is data stored on the blockchain.

NFT Marketplaces

NFTs are artistic visions of people. Artworks have always been difficult to value. NFTs are artistic creations converted for the crypto space. Smart contracts monetize artwork by placing a value on it with cryptocurrency. That is why NFT marketplaces use smart contracts for everything.

Crypto Payment Gateways

A crypto payment gateway is a portal that allows users to convert fiat to crypto. The portal lets users on-ramp their fiat currency by providing many payment options.

In the crypto space, smart contracts are often in use. If crypto moves hands from one place to another, chances are that smart contracts run in the background. As such, the importance of smart-contract technology is growing.

DeFi smart contract development across blockchains

Beyond a single blockchain, a DeFi smart contract can be built on multiple blockchains. Different blockchains provide unique benefits in terms of scalability, transaction costs, and ecosystem maturity. Choosing the ideal blockchain is crucial as it affects performance, user base, and security of your business.

The blockchains that are popularly used to build DeFi smart contracts are addressed below,

Ethereum

The Ethereum blockchain is the safest option for protocols that are built with high-security to have mass adoption. It is the established network using Solidity and ERC standards (ERC-20, ERC-721, ERC1155).

BNB Chain

Has lower transaction costs and faster confirmation times than Ethereum. Developing a DeFi Smart contract is cost-effective in BNB chain, which is most preferable and ideal for startups.

Solana

High-performance blockchain that executes smart contracts written in Rust. If you are planning to create a high-throughput DeFi platform based on performance metrics, the Solana blockchain is the best choice.

Cardano

Cardano creates Smart Contracts with Haskell and Plutus, with an emphasis on academic rigor and formal verification.

Polygon

Polygon is often preferred for scalability and enterprise DeFi solutions. Modern DeFi platforms are increasingly embracing the notion of developing on a multi-chain. This allows businesses to create greater liquidity options and rely less on any single network. The next section covers exactly what you need to know as a founder and a business owner — simple steps to develop a smart contract.

Step-by-Step process to develop a DeFi Smart Contract

There are six main steps to building a DeFi smart contract.

Contract Design
Contract Format
Configuration
Testnet Deployment
Optimization
Launch

Contract Design

Here, you should determine what the contract should do. After all, you cannot use a smart contract designed to swap crypto for an IFO or an IDO. The usage of the smart contract will determine its type.

Contract Format

The parameters set for a smart contract depend on its use. Smart contracts built for a crypto swap can have an auto slippage tolerance feature, but not for a liquidity pool. Smart contracts designed for liquidity pools can have a pool migration feature, but not for a blockchain bridge. Each smart contract varies by its features and hence has different formats.

Configuration

Configuring smart contracts is vital before both testing and deployment. The formatting is dependent on the environment. It is necessary to deploy the correct testing data. Otherwise, interacting with the smart contract becomes a problem.

Testnet Deployment

Testnets and simulators are valuable tools for smart-contract development. Like any program, bugs and errors are part of the process. But it presents a unique problem with blockchain technology. Blockchains are inherently immutable, and this complicates certain things. Once you launch a smart contract on a blockchain, they become unchangeable.

If the smart contract has bugs or errors, rectifying them becomes a problem. And that is why it is necessary to test the smart contract on a testnet. Stress-testing smart contracts can reveal their bugs and vulnerabilities. And the next iteration of the contract is optimized.

Optimization

When the smart contract gets uploaded on a testnet, make it a habit to test it. Take a considerable amount of time to optimize it. There are many smart-contract testing frameworks. Truffle framework is a well-known Ethereum-based testing system. Then we have Mocha for JavaScript, Hardhat for Solidity, Populus for Python, etc.

Launch

Never be in a hurry to deploy the smart contract. Deploying a smart contract on a blockchain is a permanent step. Even if you update it, the older version of it will always be in the blockchain. Make sure to follow the community guidelines and the blockchain integration steps properly.

Innovation is a constant process. Always keep innovating or updating your smart contract. The better we develop, the more decentralized and safe our crypto financial system will become. The future of DeFi is in the development of smart contracts.

DeFi Smart Contract Security Best Practices

Every successful DeFi Smart Contract is built on robust security. Once it has been deployed, it is immutable, meaning the occurrence of any errors leads to irreversible losses. For both startups and enterprises, implementing strong smart contract security practices is essential for the effective functioning of the platform.

An insecure DeFi smart contract ecosystem leads to direct loss of user funds, reputation damage, legal & compliance risks, and loss of liquidity & users’ trust.

To build secure and reliable DeFi applications, a security-first development strategy must be implemented. Here are some best practices for secure DeFi smart contract development.

Follow secure coding standards whenever possible, and do not develop custom logic if there is an audited library that can be used.
Use modular and upgrade-friendly architecture to separate risk.
Conduct rigorous unit testing and integration testing on every function of each contract
Use role-based access control and multi-sig approval
Conduct an internal security review of a smart contract before requesting a therid parity to audit.

Additionally, using tried and tested security practices lets businesses minimise the risk of exploitation, safeguard investor funds, and build long-term confidence in their DeFi applications.

Benefits of Creating a DeFi Smart Contract for Businesses

There is a reason why DeFi smart-contract technology is growing unchecked. The benefits far outweigh the risks. That’s why.

Security
Speed
Transparency
Efficient
Developer Toolkit

Security

Smart contracts work in tandem with the blockchain network. The safety of blockchain technology extends to smart contracts. For example, once a smart contract gets stored on a blockchain, it’s immutable. For hackers to tamper with it, they must compromise all the blocks in the blockchain. And this is on-chain security.

Speed

Smart contracts are virtual and automated, so there is no paperwork to complete. And this also eliminates the time needed to fix mistakes or changes when documents are drafted manually. Furthermore, the lack of third-party mediators removes the time delays and fees that usually come with it.

Transparency

Blockchains are online virtual ledgers. Anyone can access these blockchains. Furthermore, all data on the blockchain is open at all times. Due to the openness of on-chain data, smart-contract transparency is innate.

Efficiency

The main reason smart-contract used is due to their efficiency. The contract executes itself if the underlying conditions are satisfied. And this contributes to the time it saves.

Developer Toolkit

DeFi smart contracts run the DeFi protocols. As they function on blockchains, it is ideal for developers to build dApps. For example, Rotki and DeBank are dApps built around the Uniswap protocol.

We have seen enough of the smart-contract benefits; let us see how much investment is required to develop them.

How much does it cost to develop a DeFi Smart Contract?

When it comes to DeFi Smart Contract development, the cost is dependent on time. Unlike CeFi, DeFi is a rapidly growing space. The lack of regulations makes innovation a factor in its uniqueness. As you may know, we already have standards and smart contracts for nearly everything. And since all data is open-source, finding smart-contract code is easy. GitHub is the go-to destination for reference.

But this is where it also becomes a problem. Translating new ideas into computer code takes work. And it takes a lot of time. The more complex the concept, the longer it will take to write and develop it.

If a single person is working on development, it can take months. The solution is to have a team of developers with diverse skill sets. The average salary of a blockchain developer is around $75K. Let’s say a crew of four, so that’s $300K per year before expenditure. And that’s $25K a month till you develop it.

For a business, I understand this can be a commitment to make. You can outsource the process to a reputed DeFi Smart Contract development company in the blockchain space; it will significantly cut your cost. But the choice is up to you.

Upshots

DeFi is a niche in the crypto space. And niche markets are always the best place to get a business started because that is where ideas flourish. DeFi, NFTs, Web3, Metaverse, etc. I believe that, now, you know completely about DeFi smart contract development. If you are interested in knowing more or wish to build a DeFi smart contract. This DeFi smart contract development company can help you with your development journey.

They have innovated more in the crypto space than FinTech has in fifty years. And that’s no coincidence. The decentralization, immutability, and openness have transformed the world. Cryptocurrencies are here to stay, and the businesses built around them have the opportunity to create an empire.

Five percent of all crypto transactions happen in DeFi. And it has a TVL of $40 Billion. Competing with centralized entities backed by institutional money is not easy. And that is why DeFi is where ideas can thrive.

DeFi Smart Contract Development: A Critical Guide For Business Owners in DeFi was originally published in Coinmonks on Medium, where people are continuing the conversation by highlighting and responding to this story.

Feed: Web3 in Coinmonks on Medium

View: Original article

Tags: blockchain finance management money new tech technology testing