Feb 20, 2023
Zaineb Matiullah
1. Introduction
Decentralized Finance (DeFi) is a rapidly emerging sector of finance and technology. It refers to a new financial system based on Blockchain technology that facilitates the development of open, transparent, and widely available financial apps and services. The DeFi ecosystem has gained enormous popularity in recent years, and the overall value of the protocols has reached billions of dollars. Many experts believe that DeFi has the potential to disrupt traditional finance and bring financial services to a wider range of people. The market experienced an explosive growth in the beginning of 2020. According to the latest stats by Banklesstimes, the DeFi’s TVL was estimated at $60 Billion as of November, 2022. The market cap of DEXs increased by 36.8% as compared to the previous year. It is predicted that the TVL is expected to reach $231.19 billion in 2030.
After reading this blog, you will have a clear understanding of how you can turn your DeFi idea into a minimum viable product (MVP). The process of creating an MVP involves defining the problem, target users, and value proposition of the DeFi concept, prioritizing essential features, building a basic version of the product and continuously gathering feedback from users to improve and develop the MVP into a full-fledged DeFi solution. By following this very guide and keeping a focus on delivering value to users, you will be well on your way to successfully turning your DeFi concept into a MVP.
A deep understanding of the DeFi ecosystem is essential for starting a successful DeFi platform. DeFi is a complex and rapidly evolving field, and it is crucial to have a clear understanding of the various protocols, technologies, and market trends. In order to get started, here are some key concepts that you should familiarize yourself with:
Blockchain Technology: Blockchain technology is a decentralized digital ledger that eliminates the need for middlemen and enables safe and transparent transactions. It is made up of a chain of blocks, each of which contains a list of transactions that are confirmed by a network of users and added to the chain. The integrity of the data kept on the chain is ensured by the decentralized structure of Blockchain, which makes it difficult to hack or alter.
Smart Contract: Smart contracts automate the negotiation and execution of contracts through self-executing clauses. These are Blockchain-based computer programs that are programmed to automatically carry out a contract's terms if a set of prerequisites have been satisfied. Smart contracts are a helpful tool for a range of applications, including supply chain management, real estate, and financial services. They are safe, transparent, and irreversible.
Token Economics: Token economics is the study of the economic and business principles that underpin the creation, distribution, and use of tokens. It involves analyzing the value proposition of a token, understanding the incentives for different stakeholders, and designing mechanisms to align those incentives with the desired outcomes. Token economics can help to create sustainable and effective token ecosystems that provide value to users and stakeholders alike.
Market Trends: Closely studying market trends is an essential step in building a successful DeFi startup. By analyzing the growth and adoption of different DeFi protocols, as well as identifying gaps in the market, entrepreneurs can create innovative solutions that meet the needs of users and stakeholders.
Security: Security breaches can result in significant financial losses for users and can undermine confidence in DeFi as a viable alternative to traditional finance. By prioritizing security, DeFi developers can promote the long-term sustainability and adoption of the ecosystem, and ensure that users can engage with DeFi protocols with confidence.
In the next step, we will see the DeFi Product Development framework and its steps.
2. DeFi Product Development Framework
2.1 Product Planning Session
2.1.1 Product Concept
To start a successful DeFi platform, it's crucial to evaluate your idea and identify a real market need. This involves identifying the problem your platform will solve, such as a lack of access to conventional financial services or high fees. It's also essential to consider the best Blockchain networks, technologies for front and back-end services and whether a mobile app or website is needed for the platform.
2.1.2 Establishing KPIs
Establishing KPIs are important to identify the specific metrics that will be used to measure the success and progress of the business. KPIs help to track performance, evaluate success, and make informed decisions about the business.
Define business goals: Identify the specific objectives and goals of the DeFi startup. This could be related to user acquisition, revenue, platform adoption, or other relevant metrics.
Identify key metrics: Determine the metrics that are most relevant to measure progress towards the business goals. For a DeFi startup, this could include metrics related to transaction volume, user acquisition, user engagement, platform adoption, or revenue.
Set targets: Establish specific targets or benchmarks for each KPI. This helps to track progress and evaluate success over time.
Monitor progress: Regularly track and monitor progress towards the established KPIs. This helps to identify areas of success and areas that need improvement.
Adjust targets as needed: If progress is not meeting established targets, adjust the targets or KPIs as needed. This ensures that the business is focused on the most important metrics for success.
2.1.3 Plan Release Cycle
To get our DeFi startup product out into the hands of customers as quickly as possible, we will plan a phased release cycle. The release cycle will be divided into the following phases:
Alpha Testing: We will conduct alpha testing of our platform with a select group of users to identify and fix any bugs or issues.
Beta Testing: We will invite a larger group of users to participate in beta testing to further refine our product and gather feedback.
Public Release: We will launch our platform to the public and promote it through targeted marketing campaigns.
Continuous Improvement: We will continuously monitor our KPIs and gather feedback from users to make improvements to our platform and enhance the user experience.
2.1.4 Community Building
Building a solid user and development community is essential for the success of your DeFi platform. A helpful community can offer insightful criticism and aid in maintaining the platform ensuring its longevity and continued growth. It is important to regularly engage with your community through events, social media and other channels to stay in touch with their needs and preferences. Meeting customer needs and staying ahead in the competition require your DeFi platform to be updated and improved on a regular basis. This can involve adding new features, enhancing existing ones and addressing any flaws or potential problems that may arise.
2.2 Product Meeting
During the product meeting module of a DeFi startup, it is important to focus on key areas defined below:
Define the theme: Begin by defining the theme for the development cycle based on the KPI. This will help to align the team's efforts towards achieving the desired outcome.
Brainstorming: Encourage everyone to participate in a brainstorming session to generate ideas for features, bugs, and tests. This will help to ensure that all relevant perspectives are considered, and ideas can be prioritized based on KPI.
Feature grading: The technical lead should grade the features based on their level of complexity: easy, medium, or hard. This will help to identify the features that are most critical for achieving the desired KPIs.
Prioritize features: Mostly hard features should be prioritized over easy and medium ones to ensure that the team is focused on the most impactful features that will help achieve the KPIs.
Specification and task assignment: Once the features have been prioritized, everyone in the meeting should work on specifying the features and assigning tasks. This will help to ensure that everyone is clear on their responsibilities and timelines to deliver the features.
Stick to Plan release cycle: The team should stick to the release cycle based on the prioritized features and KPIs. This will help to ensure that the most impactful features are released first, and the team can measure their success against the KPIs.
2.3 Product Development
The product development phase is one of the most important module of creating a DeFi startup. Some of the important points to keep in mind includes:
Start working: After the planning phase, the team should start working on their assigned tasks. It's important to have a clear understanding of the tasks and deadlines to ensure that everything is completed on time.
Stick to the plan: It's crucial to stick to the plan and avoid changing the specifications or adding new features. Any changes should be evaluated carefully to ensure that they align with the product goals and KPIs.
Release the product: Once the product is ready, it should be released to customers as soon as possible. This will provide valuable insights into the product's usability, functionality, and overall value.
Gather feedback: It's important to gather feedback from customers and other stakeholders to understand their experience with the product. This feedback should be used to identify areas for improvement and make necessary adjustments to the product.
Iterate and improve: Based on the feedback and data gathered, the team should iterate and improve the product to better meet the needs of customers and achieve the desired KPIs. This process should be continuous to ensure that the product remains relevant and competitive.
Collaboration and communication: Effective collaboration and communication are key to a successful product development process. The team should have regular check-ins to ensure that everyone is on the same page and to address any issues that arise.
Quality assurance: Quality assurance is crucial to ensure that the product meets the desired standards and functions as intended. Testing should be performed regularly throughout the development process to identify any bugs or issues and fix them promptly.
2.4 Testing & Release
Developing and testing a DeFi prototype is a crucial step in bringing a platform to life. Followingsteps should be followed to ensure that the product functions as intended and delivers the desired user experience.
Allocate testing time: The testing time should be allocated based on the release platform, whether it's mobile or web. This will ensure that the product is thoroughly tested on the specific platform to identify any issues or bugs.
Test together: The testing should be done collaboratively, with the entire team participating to ensure that all aspects of the product are tested. This will help identify any bugs or issues that may have been missed by individual testers.
Make fixes: Any issues or bugs found during testing should be addressed promptly. The team should work together to make fixes possible before the product is released to customers. This will ensure that the product functions as intended and delivers the desired user experience.
Down bugs: If any bugs or issues are not addressed before release, they should be noted and discussed in the next product meeting. This will help the team identify patterns in bugs and develop strategies to prevent them in future releases.
Ensure compatibility: The product should be tested on different platforms and devices to ensure that it is compatible with a variety of systems. This will help ensure that the product reaches the widest possible audience and functions seamlessly across different platforms.
Provide documentation: The product should come with documentation that outlines its features, functionality, and any known issues. This will help users understand how to use the product and troubleshoot any issues they encounter.
Communicate with customers: Once the product is released, the team should actively communicate with customers to gather feedback and address any issues that arise. This will help build a loyal user base and ensure that the product remains relevant and competitive.
2.5 Product Team Structure
A DeFi startup requires a team of both technical and managerial personnel. Here are some key roles that may be included in such a team:
Product Manager:
This role is responsible for overseeing the development cycle and ensuring that the team meets its goals. The Product manager does not decide what to build, but rather ensures that the product is delivered on time and to the satisfaction of the customer.Technical Lead:
This is an experienced technology person on the team who grades tasks based on their complexity and derives the overall solution design. The Technical Lead is responsible for ensuring that the technical aspects of the product are sound and align with the product goals.Product Designer:
This role is responsible for user research, participating in specs creation, and designing the user experience of the product. The Product Designer works closely with the Technical Lead and Software Developers to ensure that the product is both technically sound and user-friendly.Software Developers:
This team consists of two to three developers with a Quality Assurance (QA) specialist. The number of developers required depends on the selected Blockchain and product technology and platform (mobile or web). The Software Developers work closely with the Technical Lead and Product Designer to ensure that the product is developed according to the specifications and goals set forth by the Product manager.
3. Technology Stack
Creating a detailed technical design for a DeFi startup involves a careful examination of the platform's requirements and goals. The tech team must have a thorough understanding of the technology and tools available. Following are the technologies that will handle the required job of creating a DeFi:
Smart Contract Programming Languages: Rust, Solidity, JavaScript, Vyper are good choices.
Front-end frameworks: React, Angular, Vue.js and Flask(Python) can be considered.
Back-end development: Node.js, Python, Ruby, C# can be used for backend development.
Database technology: MySQL, SQL, PostgreSQL and MongoDBare good choices as they are known to be secure and scalable.
Security: Tools such as SSL certificates, encryption, and two-factor authentication can be used.
Testing and deployment: Tools such as Truffle, Ganache, and Hardhat can be used to test and deploy smart contracts to the Blockchain.
4. Launch Platforms Like Mobile or Web App
To present your DeFi platform, you must choose the appropriate web or mobile application. Choosing the right technologies to build your platform's front and back ends is essential to ensure a seamless user experience, scalability, and security. Popular front-end web technologies include React, Angular, and Vue.js, while popular back-end web technologies include Node.js, Python, and Ruby on Rails. For mobile applications, popular choices include React Native and Flutter. It's essential to consider factors such as developer experience, community support, and scalability when choosing a framework.
5. Deployment on a Blockchain Network
Now, the DeFi platform must be deployed on any Blockchain platform of your choosing. You need to select the appropriate Blockchain platform based on your specific needs such as scalability, transaction speed, and cost.
Top 10 Blockchain platforms
(Note:The costs mentioned are the minimum costs as of 28 Feb, 2022)
Once you have selected the Blockchain platform, you will have to create the necessary smart contracts and deploy them on the Blockchain. This involves writing the code for the smart contracts, testing them thoroughly for bugs and vulnerabilities and then deploying them on the selected Blockchain network. You will also need to set up the infrastructure for the centralized components of your platform such as the database and user interface. This involves setting up servers and databases and integrating them with the Blockchain network. Once the deployment is complete, it is important to monitor the platform and address any issues or bugs that arise. Regular updates and maintenance should also be performed to ensure the platform continues to function optimally and remains secure.
6. Best Clouds Available for DeFi Platforms
When choosing the best cloud for your DeFi startup, there are several factors to consider ensuring that your application is reliable, scalable and secure. With the increasing popularity of DeFi, many cloud providers are now offering specialized services for hosting and scaling DeFi applications, making it easier for developers to build and deploy innovative applications. Some of the most popular cloud platforms comparison are shown in the figure below:
7. DeFi Product Risk Factors
Key points of DeFi product risk factors for a startup include:
Smart contract risk: Smart contract risk in DeFi refers to the potential security vulnerabilities in the code that governs the rules of a DeFi protocol, which can lead to financial losses and reputational damage if exploited by attackers.
Liquidity risk: Liquidity risk in DeFi refers to the possibility of a project failing to attract enough liquidity providers, resulting in lower trading volumes and potential price manipulation, which can negatively impact the viability and sustainability of the project.
Market risk: Market risk in DeFi refers to the potential impact of the volatility of the crypto currency market on the value of a project's tokens and the viability of the project.
Regulatory risk: Regulatory risk in DeFi refers to the possibility of regulatory oversight, particularly in areas such as anti-money laundering and know-your-customer compliance, which can pose legal and compliance challenges for DeFi projects.
Cyber security risk: Cyber security risk in DeFi refers to the potential for security breaches or hacks of DeFi protocols, which can result in the loss of user funds and damage the reputation of the project.
Operational risk: Operational risk in DeFi refers to the possibility of downtime or technical failures, which can negatively impact the user experience and credibility of the project.
Financial risk: Financial risk in DeFi refers to the potential impact of market fluctuations, liquidity constraints, and operational costs on the sustainability of the project.
8. DeFi Compliance by Design
DeFi compliance by design is a proactive approach to ensuring that decentralized finance (DeFi) applications meet regulatory requirements and industry best practices. The approach involves integrating compliance requirements into the design and architecture of DeFi applications rather than adding compliance features as an afterthought. The goal is to create a more secure and trustworthy environment for users and investors while maintaining the decentralization and transparency that are core features of the DeFi ecosystem. By adopting the DeFi compliance by design approach, DeFi developers can mitigate the compliance challenges and reputational risks that have affected some projects in the past. They can position themselves as responsible and trustworthy players in the ecosystem which can help to attract users and investors in the long term. Compliance by design can also help to balance the benefits of decentralization with the need for compliance with regulatory and industry standards ensuring the long-term viability and sustainability of the DeFi ecosystem.
Developing and launching a DeFi platform also requires compliance with laws and regulations such as AML, KYT and KYC to avoid legal difficulties and prevent financial crimes. It is important to work with legal counsel and compliance experts to understand specific requirements and implement robust KYC processes. Other laws and regulations such as data protection, tax, and securities regulations should also be considered to ensure the platform operates ethically and protects its users' interests. Being proactive in identifying and addressing compliance concerns is key to a successful DeFi platform.
9. DeFi Security
In order to conduct a professional security audit of your DeFi platform, the first step is to identify a reputable security audit firm that specializes in Blockchain and smart contracts security. This company ought to have a track record of successfully completing security audits for other DeFi projects. The security audit company should then carefully evaluate the smart contracts and the overall system architecture. This involves a deep dive into the code, identifying potential security vulnerabilities and testing the system for potential exploits. The security assessment company should also offer suggestions on how to fix any found vulnerabilities. Once the security audit is complete, it is important to implement the recommendations and make any necessary changes to the platform to improve its security. Regular security audits should be conducted to ensure the platform remains secure and free of vulnerabilities.
10. DeFi Quality Assurance
10.1 Performance Monitoring and Scaling
Now that everything is operational, monitoring the performance of your DeFi platform is crucial to ensure its smooth operation and scalability. Data should be gathered considering the usage of the platform and its components. This data can include metrics such as the number of users, the volume of transactions and the average time taken for transactions to be processed. Additionally, it's important to monitor the performance of smart contracts as any bugs or vulnerabilities can have significant impacts on the platform's performance and user experience. Once data is collected, it can be analyzed to identify areas where improvements can be made. For example, if transactions are taking too long to process, the platform's scalability can be improved by adding more nodes to its network or optimizing its algorithms. If smart contracts are vulnerable to attack, the platform's security can be improved by auditing the code and implementing better security measures.
10.2 Backup and Disaster Recovery
Implementing backup and disaster recovery measures are as important as security of your DeFi platform. Some of the measures for backup and disaster recovery includes:
Robust backup measures must be implemented, including testing backups regularly to ensure their reliability.
A failover mechanism, such as a secondary network or server, should be in place and tested regularly in the event of a disaster.
A well-trained response team is essential to ensure the rapid recovery of the platform in case of a disaster.
11. Integration with other DeFi Protocols
Last but not least, integrating your DeFi platform with other existing DeFi protocols and services is a way to increase its usability and reach. Identify other protocols that complement your platform and have a large user base. Build strong relationships with the teams behind these protocols and implement the integration, making sure it is secure and functional before launching it to the public. This could include popular decentralized exchanges (DEXs), lending and borrowing protocols and tokenization platforms.
Conclusion:
Inconclusion, DeFi development is a complex and rapidly evolving fieldbut with the right approach, it is possible to turn a DeFi conceptinto a successful minimum viable product. By following the stepsoutlined in this comprehensive guide, you can minimize the risksassociated with DeFi development and maximize your chances ofsuccess. From defining your concept and conducting market research tobuilding your platform and launching it to the market, this guideprovides a roadmap for complete DeFi development. However, it isimportant to remember that DeFi development is an ongoing process andit's essential to regularly monitor the performance of your platform,make adjustments as needed and plan for backup and disaster recoverymeasures.
