In the early days of blockchain, the emphasis was disproportionately on the community and its related skills for creating blockchain networks. However, the introduction of Ethereum fundamentally altered the blockchain landscape by introducing a plethora of new opportunities for creating decentralized apps. Ethereum’s tokenization and smart contract capabilities sparked debate over the future of traditional finance.

Blockchain technology has emerged as a significant disruptor in the banking sector in recent years. The globe witnessed the emergence of DeFi, and top DeFi protocols gained prominence as a result of a completely distinct wave of financial innovation. Thus, what is DeFi and how are DeFi protocols defined? How did they become so popular? The discussion that follows will assist you in determining plausible responses to these issues. Most importantly, you’ll discover how to start your DeFi protocol.

What are DeFi protocols?

DeFi protocols are essentially self-contained programs designed to overcome certain shortcomings in the traditional banking sector. Over half of the world’s population lacks access to a bank account, a situation that DeFi protocols seek to solve.

Similarly, The advancement of DeFi protocols paves the way for the introduction of further financial products. Numerous DeFi protocols have evolved into important components of a complex ecosystem that includes numerous famous coins and projects. With DeFi protocol values skyrocketing, the potential for companies in the DeFi area becomes abundantly obvious.

Why should you have a DeFi Protocol?

DeFi Protocols may be thought of as the written rules or standards that govern certain tasks or activities. DeFi protocols may include a set of norms and principles aligned with real-world organizations applicable to participants in particular sectors.

Participants must see the protocols as necessary preconditions for working inside the DeFi ecosystem. Most significantly, DeFi protocols maintain the liquidity of the DeFi ecosystem while simultaneously ensuring interoperability. As a consequence, different organizations may create an app or service using the most common DeFi protocols.

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The Rise of DeFi

Since the summer of 2020, DeFi has expanded at a breakneck speed. DeFi took off in earnest in 2020, because of Compound.  Compound is an Ethereum-based autonomous lending system that enables users to earn interest by lending their digital assets or borrowing against collateral. In May 2020, Compound released its COMP governance token, allowing users to earn COMP in return for supplying liquidity to the network.

Compound enables other digital currencies and offers liquidity providers with a governance token. Due to Compound’s yield farming, the act of supplying liquidity to maximize governance token payouts became a catchphrase that inspired other DeFi applications.

By and large, the Total Value Locked (TVL) number is a critical indicator for determining the overall growth rate of DeFi. TVL shows the aggregate worth of monies users have committed to DeFi projects.

In June of last year, TVL reached a value of about $1 billion in cryptocurrencies put in DeFi apps. According to data from DeFi Pulse, the TVL number has surpassed the $60 billion barriers and peaked at more than $90 billion in October’21. 

DeFi TVL is off to another strong start in 2021, and has increased almost 300 percent year to year. Retail investors and institutions are increasingly recognizing the potential of DeFi as an investment opportunity in a decentralized financial services ecosystem.

How to get started with your DeFi protocol?

To begin the development process, an environment setup is required. Let us quickly review each step.

#1: Prepare the truffle and ganache

Truffle is a testing and development platform for Ethereum smart contracts. This tool enables the rapid development and deployment of smart contracts on the blockchain.

Additionally, DeFi dapps makes use of another tool, Ganache. It enables the creation of a local Ethereum blockchain to test smart contracts. This tool stimulates the blockchain network’s features by providing 100 test Ether to the first ten accounts. As a result, it enables the deployment of smart contracts simple and cost-effective.

#2: Create A Token Using The ERC20 Standard

ERC20 is a token standard for the Ethereum Blockchain. To create an ERC20 token, you must first download and install the OpenZeppelin library. This library contains ERC20 and ERC721 implementation standards.

#3: Create Your Own ERC20 Token

To begin compiling the smart contract, you must first verify the version of the solidity compiler. You may verify this by executing the following command: Truffle Version

The default truffle version is Solidity v0.5.16. If the token is written in Solidity version 0.6.2, you will receive a compiler error when using the command to build your contracts. To indicate the version of the solidity compiler to use, open the file truffle-config.js and change the value to the desired build version.

#4: Distribute ERC Tokens

After the compilation process is complete, you may deploy your token.

To accomplish this, launch Ganache and pick the “Quickstart” option to initiate a local Ethereum blockchain and then run: “truffle migrate” to deploy your contract.

To properly install the smart contract, utilize the first address shown on Ganache. To verify this, launch the Ganache desktop software and check the Ether balance for the first account; it has been lowered as a result of the cost of Ether used to deploy your smart contract.

#5: Get it Audited

This is the most important step of all. Every other day, there is news of a DeFi protocol bug or hack which leads to millions of dollars either getting lost or being stolen. To ensure that your DeFi protocol does not suffer the same fate, get your smart contracts audited from a well-known auditor such as QuillAudits. 

Conclusion

The huge ecosystem of optimal DeFi protocols will continue to grow. With DeFi protocols, you have decentralized exchanges (DEXs), liquidity aggregators, and margin trading platforms, asset management systems, and lending platforms. DeFi protocols are genuinely changing old financial sector standards, with such a diverse variety of use cases.

It is never too late to begin using your DeFi protocol. Using the principles mentioned above, anybody may create their own Dapp and provide answers to real-world financial problems that traditional finance will never be able to solve.