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Integrating Decentralized Finance (DeFi) Protocols in Web3

Simply put, Web3 is an Internet where user data is stored not on the side of large corporations such as Google, Amazon, Facebook, and Apple but in decentralized databases.

Web3 will enable the creation of platforms that no one controls, but everyone can trust because of the algorithms and protocols underpinning them. This is proposed to be achieved through advanced technologies such as:

• Blockchain;
• Machine learning (ML);
• Big Data;
• Artificial intelligence (AI).

Tokens and cryptocurrencies, independent of traditional financial systems, should be the fuel for the third-generation Internet economy.
 

DeFi is an ecosystem of decentralized financial services and applications based on public blockchains.

DeFi tools extend the use of distributed ledgers from standard transactions to more complex and sophisticated financial transactions. For example, lending and borrowing.

At the time of writing, the total value of locked (TVL) assets in smart contracts of the entire DeFi sector exceeds $87 billion, according to DeFiLlama.

What is DeFi in Web3?

DeFi in Web 3.0 refers to decentralized finance built over the structure of a decentralized web. Integrating DeFi in Web 3.0 applications makes it easier for one to interact directly with the blockchain with smooth financial services of borrowing, lending, or exchanging assets without using any bank or middleman.

Integrating DeFi Protocols in Web 3.0 will allow users of Web 3.0 to experience direct interaction with financial services securely, with full control over their assets and identities. DeFi and Web 3.0, taken together, are all about democratizing not just finance but even digital autonomy.

DeFi and Web 3.0 are already having an impact on how finance works around the world. Traditional banks do not decide who gets access to finance. Decentralized protocols create open financial networks that anybody can use: microloans, yield farming, and cross-border transactions at low cost with high security.

Web 3.0's decentralized infrastructures create a secure environment whereby DeFi applications enable users to invest, trade, and manage assets at scale. This combination opens routes toward a more equitable financial system that is faster and with the objective of directly serving human beings rather than central entities.

While DeFi and Web 3.0 seek to decentralize traditional systems, the goals are utterly different. DeFi definitely covers the envelope of financial services and processes, building alternative systems to banking, trading, lending, and more. Web 3.0 is more general in nature, targeting the decentralization of the internet. It entails much more than finance, from data privacy to governance, social media, etc.

In other words, Web 3.0 provides the infrastructure, and DeFi is an applications layer built on the former to build out a range of decentralized financial applications. Here's a sheet highlighting the key differences between DeFi and Web 3.0.

There are significant core benefits in integrating DeFi for Web 3.0 apps. For instance, in the enterprise:

• Access to decentralized finance would be easier;
• Security would significantly increase but with meager transaction costs without intermediaries.

Developers will also have better functionality in an app that can be more appealing to users focused on financial autonomy, transparency, and safety. Hence, there would be higher adoption rates and greater user retention.

How to Choose the Right DeFi Protocol for Integration

The choice of the best DeFi protocol for your Web 3.0 application depends on the financial services required by users. DeFi protocols for Web3.0 apps are built for specific functions, such as lending, borrowing, or trading, each coming with its different advantages and technical requirements:

• Lending and borrowing. 
  • Aave and Compound are both very actively used protocols for borrowing and lending. 
  • For example, Aave provides a way to deposit crypto assets and earn interest or borrow collateralized loans. With the incorporation of Aave, DeFi developers can connect to the Aave API or SDK and directly enable the lending and borrowing of assets in the app, allowing users to take ownership of their funds without conventional banking systems interfering.
• Decentralized exchanges. 
  • Uniswap and SushiSwap provide popular protocols for DEXs that let users trade tokens in a decentralized manner. 
  • Integrating, for example, Uniswap into a Web 3.0 dApp enables the latter to empower users to swap tokens within the UI of an app. This comes in handy in such scenarios as Web 3.0 gaming, NFT marketplaces, and other places where users need fast, in-application exchanges of tokens.
• Yield farming and staking. 
  • Protocols such as Yearn Finance provide yield farming automation by searching for the best yields over various DeFi protocols. This functionality can be abstracted into Web 3.0 applications focusing on asset growth, such as savings apps. 
  • Another approach is with staking protocols like Lido that allow users to stake their tokens and get rewards while staying within the comfort of the Web 3.0 space.

Learn how SapientPro created a decentralized domain naming system using ENS-based smart contracts and creating a Web3 website. 

Read the full case study here.

Connecting to Blockchain Networks

The choice of the blockchain network is significant. Standard options are as follows:

• Ethereum. 
  • As the most utilized DeFi network, Ethereum boasts the greatest liquidity and hosts the broadest set of DeFi protocols. Many DeFi projects are native to Ethereum and are, therefore, ideal for integrations that demand great interoperability with proven security. 
  • For example, we developed a Steam items marketplace using Solidity (Ethereum).
• Binance Smart Chain (BSC). 
  • Compared to Ethereum, the transaction fees are cheaper, and the processing is faster on BSC. For this reason, plenty of DeFi applications are built on the chain, such as PancakeSwap. Thus, choosing BSC will be practical for those DeFi developers who target a more cost-sensitive audience.
• Solana. 
  • With its speeds and low transaction fees, it will be well suited for DeFi protocols that require high throughput of transactions. Integrating with Solana’s DeFi ecosystem, like Serum, can enhance performance, especially for high-frequency transactions.

DeFi developers can use blockchain-specific APIs, such as Infura for Ethereum or QuickNode for Solana, that provide a seamless connection between the dApp and blockchain. All of these APIs abstract the low-level details of the protocol so the developer can focus on the core functionality of an application.

Integrating Smart Contracts

Smart contracts are the backbone of DeFi. To implement the capabilities of DeFi, you will need to write or integrate existing smart contracts designed for your protocol use case. Examples:

• ERC-20 smart contracts. 
  • Most DeFi protocols are built atop the ERC-20 token standard. This standard explains how your tokens are transferred and interacted with on Ethereum. If your app involves some sort of trading or yield farming, you will most likely want to implement ERC-20 contracts.
• Smart contract integration frameworks. 
  • Tools like OpenZeppelin offer a set of tested and audited reusable smart contracts a developer can use to speed up development while minimizing security risks. One can integrate standard smart contracts, customize them to their needs, and create unique DeFi functions related to pooling, staking, or collateralizing assets.
• SDKs of DeFi protocols. 
  • Most of the protocols have SDKs that make life easy for DeFi developers. In such a case, the Aave SDK allows dApp developers to communicate with its lending pool and fetch blockchain data without manually handling every contract interaction. This can drastically reduce DeFi development and testing time.

Suppose you are building a DeFi wallet. Your wallet will enable users to lend assets. You can use the Aave SDK to implement the lend functionality, integrate their smart contracts, or pull in information about the lending pools. This will make it easy for your users to deposit assets, earn interest, or take out collateralized loans directly within your Web 3.0 wallet.

Integrating DeFi Features Into Your Web3 Application

Once your smart contracts are integrated, the next step is to make these DeFi functionalities user-accessible through a clean interface. Here is what DeFi Integration companies advise you to do:

• UI of lending/borrowing. 
  • If integrated with Aave/Compound, create a straightforward UI where users can select tokens to lend, see potential interest, and set borrowing parameters. For example, the user should be able to adjust LTV or choose collateral from assets that he owns.
• Token swap. 
  • It must be intuitive enough. Token selection must be done in just a few clicks, including viewing the token exchange rate. This proves useful in applications where users need easy access to multiple tokens, such as in NFT platforms or Web 3.0 games.
• Staking and yield farming. 
  • Clearly communicate the probable rewards and risks to the yield farmer. Design a dashboard with real-time APYs, user deposits, and accrued earnings. Similarly, the staking protocols must be designed so that a user can easily view the balance of their staked assets and accrued rewards.
• Portfolio tracking. 
  • Almost all the DeFi implementations in Web 3.0 require portfolio tracking tools. Different platforms, such as Zapper, make APIs available for the portfolio analytics to be embedded directly. This is useful in asset management applications where users need to track their positions and earnings.

Security Best Practices while Integrating DeFi

Security is perhaps the most important aspect of DeFi integration services. We have deeply made sure of that when developing an NFT mining platform for the metaverse. 

Here is how you can ensure your DeFi-based Web 3.0 app is secure:

• Smart contract auditing. 
  • In-depth audits of your smart contracts should be done before their deployment. Companies such as CertiK and Quantstamp offer auditing services that can bring to light potential vulnerabilities in your smart contracts that can be used for hacking. Regular auditing and usage of security frameworks such as OpenZeppelin can be used to protect users' funds.
• Testing and bug bounty. 
  • Code testing in heavy amounts should be performed using tools like Ganache or Remix for Ethereum. Creating a bug bounty program on Immunefi may incentivize white-hat hackers to find and report issues.
• Two-Factor Authentication. 
  • 2FA or multi-signature abilities are good to incorporate for user accounts. Such multisig wallets can enforce multisig for sensitive transactions, making it much harder for anyone to get unauthorized access.
• User education. 
  • Inform users about the best practices. For example, how not to get caught in a phishing attack or how to keep their private keys safe. Even the most secure application is vulnerable if users do not follow good secure practices.

DeFi fundamentally transforms how users interact with financial systems in a world where they are supposed to be decentralized. In lending, trading, staking, and yield farming, a business unlocks the power of control, security, and transparency in ways that centralized systems can only dream of.

DeFi integration requires artful and strategic planning. This starts with choosing the right protocols for the security of smart contracts, making an intuitive interface design, and ends by maintaining & growing a full-scale product. SapientPro's team knows how to cope with these challenges and can help you integrate DeFi protocols in Web 3.0 apps, bringing expertise in blockchain, smart contracts, and secure app development.

With a streamlined approach to DeFi protocols development services, SapientPro helps businesses implement DeFi features that are secure, user-friendly, and ready for the demands of the decentralized industry.

Team up with our experts today!