6 things to consider when integrating decentralized finance as a core value in a startup
You don’t have to be a full-fledged decentralized finance (DeFi) startup like AshSwap or Curve Finance to reap the benefits of DeFi. Blockchain financial integration helps strengthen a company’s technology stack while raising capital. Integrating elements of DeFi as a financial layer opens up your business to more transparency, decentralization, and security. Startups looking to integrate DeFi and face the future of finance need to equip themselves with the best regulatory protocols and procedures now, while better understanding how to manage the risks and rewards to create something successful.
DeFi stands out as an alternative to traditional finance (TradFi) because it avoids the current financial bureaucracy, heavy restrictions and centralized regulators that control financial applications and slow down transactions. Unlike TradFi, where startups rely on intermediaries like banks or stock exchanges, all financial services run on a decentralized blockchain.
The real strength of DeFi is that users retain full control of their funds at all times. The absence of barriers to entry also means that the financial market is open to anyone with an internet-connected device and a crypto wallet. Since DeFi eliminates a range of costs for users – such as direct costs, privacy, censorship and networking – you are free to direct these funds elsewhere, such as optimizing your protocols and tools. risk management.
Blockchain solutions also make it much easier for investors to track and verify a company’s financial performance than with centralized financial institutions. But all that means very little if your project lacks utility. Respond to a current problem with a product or service that has a concrete goal and continually update the initial version. For your DeFi startup to have a working product, participants need to use it regularly.
Abandon traditional contracts
Digitized smart contracts are replacing traditional paper-based contracts that rely on expensive intermediaries. The terms of these contracts are written directly in computer code by different parties and stored on the blockchain. This code will automatically perform some actions when the specified parameters are met. Before signing a smart contract, you should verify its ownership and ensure that the contract is scalable. Check if the implementation matches the business requirements. Make sure each step is executed in the correct order and in a timely manner. Be sure to verify that the smart contract has been audited by a third party.
Smart contracts are particularly useful for making payments, transferring or exchanging funds between two or more parties. And you can customize and design them for different use cases, like building voting systems, crypto wallets, tokenized assets, or supply chain management. Contact specialized code auditing companies who can carefully anticipate and define the costs of interacting with each smart contract, also known as gas fees. These companies can ensure that the contract has clear limits that cannot be exceeded.
Find external support
It can be difficult for founders to embrace the benefits of DeFi and avoid product and business pitfalls like lackluster token utility or inequitable distribution. In addition to solid legal advice and an expert blockchain technical team, you need external consultation. Partner with DeFi launch platforms that provide the opportunity for incubation, help optimize your business plan, and grow your communities organically. Hire experts to audit your business and detect system vulnerabilities.
For economic security and general business management, a protocol should ensure that a startup has the right business model to support product business and avoid liquidity issues that can drain user funds. Speak to financial advisors who can attest to the soundness of business models and assumptions before putting them into operation. Organize test sessions with the community to prove that the model works in practice. In order to guard against exploits and technological threats, create bug bounties.
Understanding DeFi Protocols
DeFi protocols are essential for the inclusion of businesses in countries with limited access to the global banking apparatus, as they provide transparency to stakeholders and users on how funds are used. Unlike TradFi, DeFi protocols provide investors with additional security and transparency to check the status of their assets. While centralized institutions move investors’ money according to their needs, DeFi protocols allow users to monitor their investments on a public blockchain ledger.
An example of such protocols is Uniswap, a decentralized cryptocurrency exchange for merchants and liquidity providers. Uniswap facilitates automated transactions between cryptocurrency tokens on the Ethereum blockchain through the use of smart contracts. There are insurance platforms like Nexus Mutual for Ethereum users who want to share the risk of smart contracts, participate in the governance process, and earn rewards by doing so. Also on this list: peer-to-peer platform MakerDAO, which bridges crypto and fiat currency by pegging the DAI token to the US dollar. When linked to a more stable currency, users can transfer money more cheaply, trade or save assets, and earn interest. Until recently, they felt reassured that the value of their tokens would not collapse. However, the U.S. Treasury Department’s decision to sanction Tornado Cash, which allowed crypto users to transact anonymously, now threatens the decentralized nature of MakerDAO’s DAI stablecoin as the platform scrambles to reduce risk. centralized token exposure.
Measuring risk within DeFi
DeFi projects do not rely on intermediaries, so the same risk management strategies do not apply. Smart contracts introduce new forms of risk, such as attackers stealing funds by exploiting bugs in vulnerable code. The first step is to identify and assign different levels of risk at the deployed smart contract level.
Impermanent loss may be the biggest risk for liquidity providers and refers to the difference between holding crypto assets – the HODL strategy – and locking them in a pool of liquidity. This only happens when the performance of one token deviates from the other, and once you withdraw your liquidity from the pool, this loss becomes permanent. The greater the gap, the greater the loss. It can be profitable to provide liquidity when there are a lot of trades in the pool, even if the pool may suffer temporary losses. It depends on the protocol, specific pool, deposited assets and general market conditions.
There are always risks when it comes to gas fees, tokens, governance, and even regulatory and exogenous risks. But just as risk management models have built a solid foundation for modern financial markets, DeFi is forcing startups to reinvent these models and implement them in their protocols and as part of decentralized applications (dApps).
Choose multiple use cases
DeFi has the ability to outperform aging TradFi models and systems, especially as DeFi initiatives and application cases increase. Peer-to-peer borrowing and lending, decentralized exchanges, and insurance to Decentralized Autonomous Organizations (DAOs) are only growing in this context. For any crypto startup wishing to integrate DeFi, defining your use cases is essential – and one is not enough. If you want to focus on governance, trading, exchange, or derivatives, that’s great, but think bigger too. Find ways to build on the old DeFi system. Use your DeFi use cases to develop the risk management models and optimization the industry needs. This is the answer to creating stability during volatility. This is how you achieve unicorn status.