What Is DeFi? The Basics of Decentralized Finance

DeFi or decentralized finance is a way to receive, use, distribute and store money by eliminating intermediaries using the blockchain method. DeFi is a global, peer-to-peer (i.e., directly between two people, not through a centralized system), anonymous, financial ecosystem open to all.


What Exactly is DeFi?

DeFi is based on blockchain technology, which allows you to store a copy of a transaction in several places at once, while no organization can control or change it. DeFi is different in that it expands the use of blockchain from simple transfer of value to more complex financial use cases. Formally, you become a bank for yourself because you can freely duplicate its services in lending, borrowing funds, insurance, trading in assets and derivatives, only without completing countless pieces of paper.


DeFi vs. Traditional Finance

Imagine the banalest situation in your routine. For example, every day you go out for lunch at the same cafe because they cook really delicious food. You pay for this meal with your credit card. But have you ever thought that you are not paying to the business but are using an intermediary, the bank? If the latter does not like something or seems suspicious, your payment will be rejected or considered in a particular order – and along with your entire banking history (just went out for lunch, right?)

But what if it’s not a trivial dinner but a “serious” money transfer that you sent to another continent? If the speed, in this case, is a decisive factor for you – the last thing you would like to hear is “the transfer will take several banking days.” 

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But not only direct purchases are in the field of view of centralized financial institutions. It’s the same for:

  • Loans
  • Insurance
  • Crowdfunding
  • NFTs
  • Rates
  • Securities and so on


In the case of DeFi, this inconvenience disappears. You pay directly from your wallet to the counterparty’s wallet for any product or service. Moreover, even some progressive companies began to issue salaries in cryptocurrency.

The blockchain technology market is expected to grow to nearly $70 billion by 2026, according to MarketsandMarkets.

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What is DeFi, and How does It Work?

DeFi takes the core premise of Bitcoin – digital money – and expands on it to create an entirely digital alternative to stock exchanges. But huge offices of several floors in elite business centers are not needed here. A gadget with which you can access the Internet is enough. So DeFi fans are talking no more, no less about open, free, and fair financial markets accessible to all.

DeFi uses cryptocurrencies and smart contracts to provide financial services to eliminate intermediaries. Users typically interact with DeFi through software called dApps (“decentralized applications”), most currently run on the Ethereum blockchain.

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In DeFi, a smart contract replaces a financial institution in a transaction. The smart contract is a type of Ethereum account that can hold funds and send/refund them under certain conditions. No one can change this smart contract while it is running – it will always work as programmed. Contracts are also publicly available for review and audit. This means that bad contracts often quickly become the focus of community scrutiny.

Because DeFi is open source, the protocols and applications are theoretically available for users to test and innovate. As a result, people can mix and match protocols to unlock unique combinations of possibilities by developing their own dApps.

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Pros and Cons of DeFi

Any innovative technology is designed to make life easier for ordinary people and improve the quality of life. From this perspective, DeFi is a very attractive concept that is still gaining potential. At the same time, everything new, one way or another, has its drawbacks, both in terms of flaws and the human factor. Let’s take a closer look at the pros and cons of DeFi.

Among the advantages are:

  • Lack of intermediaries in transactions (a plus both in terms of security and the financial side)
  • Ability to take out a loan without “baggage” in the form of a credit history
  • Higher interest rates due to market dynamics

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Interestingly, the disadvantages of DeFi are the flip side of the advantages.

  • Yes, you keep your data secure, but if you forget the password, you may lose your assets as there is no governing body to call and ask for a password reset after answering the mother’s maiden name question.
  • Yes, you can take out a loan without fear that your credit history will catch up with you. However, as a consumer, you are deprived of the guarantee of your rights protection.
  • Yes, you can make good money on high-interest rates, but high volatility always comes with risks.

Types of DeFi

The most popular (but far from the only) types of DeFi include:

  • Decentralized Exchanges (DEX)
  • Stablecoins
  • Lending platforms
  • Prediction markets


Roughly speaking, it is like a currency exchange point in a bank, only cryptocurrencies and not in a bank, without intermediaries. If, in real life, with real money, such an exchange with a high degree of probability could end in fraud on someone’s part, then in an online exchange where the transaction is stored on more than one medium, a scam is almost impossible.


This is a currency whose stability outside the Internet is confirmed by the currencies we are used to (for example, dollars or euros). Such a measure is needed to stabilize the price of crypto since their stability is not as strong as fiat funds.


Credit Platforms

These are intermediaries in the digital world of decentralized finance. If you can get a loan from a bank, why can’t you borrow cryptocurrency? With a high degree of probability, you will want to use an intermediary platform that will direct you to the right source of crypto finance.

Similarly, an intermediary platform allows you to offer your services as a crypto lender. Interest rates for services depend on demand. To take out a loan, the user needs to deposit collateral – often ether, the token that powers Ethereum. This means that users do not reveal their identity or associated credit score in order to take out a loan the way conventional non-DeFi loans work.


Prediction Markets

The same betting shops, but again without intermediaries. As you know, betting offices do not operate legally in all countries of the world. Here you can bet on any event – from the next presidential election to corgi races this summer – and not be afraid that you will not receive your finances if you succeed.


What is a DeFi in Crypto?

While DeFi is usually a significant player in the cryptocurrency conversation, it goes beyond creating an alternative digital currency or value. Instead, DeFi is working to replace the role of traditional financial systems with its smart contracts.

As of December 2021, there are 9,822 different cryptocurrencies available for trade, investing.com tells us. For comparison, as recent as 2019, there were 3,000 of them.

DeFi is designed to use cryptocurrencies for transactions. However, the technology is still evolving, so it’s hard to pinpoint precisely how existing cryptocurrencies will be implemented, if at all. According to Coin Metrics, five different cryptocurrencies process over 100,000 transactions each day.


While Bitcoin is a decentralized digital currency that runs on its blockchain and is used primarily as a store of value, DeFi is a concept that describes financial services built on public blockchains such as Bitcoin and Ethereum. They allow users to earn interest or borrow against their crypto assets.

DeFi consists of many applications related to financial services such as trading, borrowing, lending, and derivatives.



Here we are talking about Ethereum not as a cryptocurrency, but as a platform where applications for DeFi are developed. Since Ethereum is considered the most manageable base for developing dApps, most applications are written on this platform. Accordingly, you can borrow tokens on one site and exchange interest tokens on another market in a completely different application. They are universal. This process is similar to how you cash out your money in a “foreign bank” when yours is not in the immediate vicinity.

DeFi on Ethereum is not only a blockchain but also assets, protocols (smart contacts), and finally, full-fledged product applications that power the protocols.


What Can You Do with DeFi?

In addition to the absolute freedom of transactions in peer-to-peer trading, you can also create ideal conditions for passive income if you lend to others and earn interest on loans, as we mentioned above. Moreover, you can trade tokenized versions of investments such as stocks, funds, NFTs.

DeFi can also be seen as a long-term benefit – put some of your cryptocurrency in alternative savings accounts and earn better interest rates than you would typically get from a bank.


Why is DeFi Important?

However, do not forget that investing in DeFi is a risky undertaking at the moment. About $2.2 billion was outright stolen from DeFi protocols in 2021. Moreover, many scammers used plausible pretexts for theft, imitating the “security” of the site where reckless crypto investors trusted their money. And if you or your financial advisor don’t understand the subject well enough, it’s better to invest in something more stable.

Decentralized finance is still in its early stages of development. First, it is unregulated, which means that the ecosystem is still full of infrastructure failures, hacks, and scams. Other issues are system stability, energy requirements, carbon footprint, system upgrades and maintenance, and hardware failures.

However, you can get a good profit and, if you’re lucky, worldwide recognition, only if you are on the wave of the business avant-garde, understand all the trends, and successfully apply them in practice. Right now, when the dApps market is not yet oversaturated with offers, it’s time to start developing an application for DeFi. Then, you can put it in the hands of The APP Solutions. Like no one else, we understand the importance of such technology and are ready to face any challenges!

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What is ERC20 token

The universal Ethereum platform has dramatically simplified the life of developers, making it possible to quickly and easily create more and more new tokens. However, at some point, there were so many of them that it was already possible to get lost in them. This created great inconvenience. Imagine that you have to learn a new language each time to understand the technology and apply it on your platform. Moreover, all these languages ​​are not similar to each other. And there are already hundreds of them, and there are more and more every day. This happened due to the lack of general instructions, so everyone did what they could in their own way.

In 2015, Ethereum introduced a standardization system for tokens to prevent further chaos, which helped to bring them into a more consistent form. This greatly popularized the platform. It is still the most popular platform for creating tokens here, and it does not have to be done from scratch. Figuratively speaking, Ethereum gives you the backbone that you build muscle on.


What is ERC20?

ERC or “Ethereum request for comment” is a standard used to create and issue smart contracts on the Ethereum blockchain. And 20 is the identification number of the offer. There are other numbers, but the number 20 is the most popular. These are how the main technical notes and requirements are communicated to the development and user groups. In fact, the Ethereum platform thus significantly helped developers; they do not need to learn a hundred “foreign languages” to work.

This simplifies the task for developers; they can continue their work knowing that each new project will not need to be redone every time a new token is issued.

What Is DeFi? The Basics Of Decentralized Finance

What is ERC20 Used for?

Historically, ERC20 has become the technical standard for writing smart contracts on the Ethereum network used to implement tokens. It contains a kind of set of rules by which tokens should be created on the Ethereum platform. We will talk about them a little lower.

As of August 2021, around 442,647 ERC-20-compatible tokens exist on Ethereum’s leading network. This is about half of the Entire ETH Blockchain.

Pros and Cons of ERC20 Tokens

Standardization always leads to order, and order is always good. If everyone were to create their own tokens with their own functionality, it would be a compatibility nightmare. Also, keeping these tokens in wallets and listing them on exchanges would be a hassle. The transmission could have broken contracts and make them vulnerable to hackers.

In addition to convenience, the scalability of the whole direction can be noted among the advantages. If the projects on top of Ethereum are active and interact with each other, this will invariably lead to an increase in the number of projects and users. Although, at the moment, some experts are talking about problems with scalability.

But this system also has certain disadvantages. For example, despite the apparent convenience of creating tokens in the ERC20 format, some other tokens and wallets do not support our format. Thus, you need to use the transfer() function to make a transaction (we’ll talk about it in more detail below). And in such cases, it is not work with flying colors. If the user makes a mistake and selects the wrong function, the token will be stuck inside the contract (the contract does not recognize the transaction). There will be no way to retrieve stuck tokens. Accordingly, even in such an established system, the human factor can lead to the loss of millions.



How To Create Your Own Ethereum Token

The Internet is literally full of hype articles where authors compete for how much they can create an ERC 20 token? It may take an hour for someone, and someone promises that it can be done in just a couple of minutes. As a result, junk tokens often appear that are not needed by anyone except the egos of their creators. Or even worse, fraudulent tokens.

So is it really that simple? After all, a token is not only a digital certificate but also a whole marketing strategy behind its development.

You can start from these positions:

  • The Token’s Name
  • The Token’s Symbol (usually, it is recommended to use no more than 4 symbols)
  • The Token’s Decimal Places
  • The Number of Tokens in Circulation

Most tokens have 18 decimal places, which means you can have up to 0.00000000000000000001 tokens. When creating an Ethereum token, you need to know what decimal places you need and how they fit into the big picture of your project. However, you can use any other division.

It is very important to come up with a catchy name for your token. So, the ERC20 Shiba Inu token, which was created as a parody of the already legendary Doge, has not only a funny name, but also a powerful marketing strategy. For example, instead of white paper, they have woof paper. The original name, as well as the original token symbol (logo), will immediately attract attention. But under the title, there must also be some far-reaching rational basis.

EOS, for example, remains a popular token based on ERC20, which raised over $185 million in a five-day ICO launch.

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The so-called mandatory standards include such basic functions:

A characteristic that determines how your token will be split. In such a case, you cannot act, for example, as with pizza, cutting it into as many pieces as you want, but only after cooking. Here, the fractions must be determined in advance because the value of your ERC20 token will directly depend on this.

You go to the banking application when you want to know how much money is left on your bank card. The same principle works here (although a different mechanism, taking into account decentralization). Function balanceOf is specifically designed to return the total number of tokens that any given address has. So it actually acts as information about the user. So, if you originally created some tokens and sent them to other addresses, you can use this to check how many tokens you have left.

Why do we need a token that cannot be exchanged with anyone? After verifying that the user has enough tokens to transfer, the owner can use this feature to send tokens to another address. Moreover, transfer tokens act like a typical crypto transaction on other blockchain platforms.

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The next function – transfer but with a nuance. The principle is the same, but it concerns, for example, regular monthly payments. To make it convenient for your token holder to make such payments, you need to take care of the transaction automation function.

The approve function helps to get rid of any fake tokens. Once the contract owner checks the balance, they can approve the contract to collect the money. This assertion function will also check if the number is correct compared to all the tokens. So, it is impossible to fake tokens. If this function finds any differences in the numbers, it will cancel the payment and the smart contract.

The boost function allowance is the most important. In fact, when a contract wants to execute a transaction, it needs to see the balance of the Ethereum smart contract to understand if the user has the minimum balance between doing so. The contract can fulfill the deal or even cancel it using the add-on function.

Steps to develop a token

  1. Code smart contracts
  2. Test The Token
  3. Verify the Source Code
  4. Deploy it on the MainNet
  5. Verify on Etherscan

Ethereum smart contracts are written in Solidity. Although there are alternative languages, hardly anyone uses them for this purpose. However, Solidity is similar to JavaScript, so if you know JavaScript, or even Java and other C-like languages, you should have no problem understanding what a piece of code in Solidity does, even before you actually master Solidity enough to use it.

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Challenges and Alternatives

While ERC20 has received widespread support in the form of new tokens conforming to its standards, many in the developer community feel that ERC20 is limited or deficient for one or more reasons.

ERC20 tokens have been important to the growth of the crypto ecosystem, but they may have been delayed. People are already experimenting with newer standards.

For this reason, several alternative token standards have also been proposed since the development of ERC 20 token. These include ERC223, which aims to address issues with the approval and transmission of ERC20.5 elements.

ERC621 is another alternative that offers the same basic features as ERC20 but also adds the ability to increase or decrease the total number of tokens. ERC827, on the other hand, allows the holder to approve the spending of tokens by a third party. Each of these new protocol proposals builds on ERC20 to some extent.

Change is always slow, and it looks like we need to wait a bit before we can move to other standards. However, let’s not mistake “criminalizing” the ERC20 standard. It certainly deserves respect for the profound impact it has had on the crypto space.

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Is it Free to Create an ERC20 Token?

Let’s start with the fact that even if you make your own token according to someone else’s template, without resorting to the services of developers, in any case, you will not avoid the network fee, which is constantly changing. Still, on average, it is several hundred dollars. Thus, even if your ERC20 token does not have any non-standard functionality, you still have to pay for the “luxury” of its creation and support.


How Much does it Cost to Create an ERC20 Token?

The first thing you will hear in response to your question is ‘it depends’. It depends on your goal – whether you want to make a full-fledged product or it will be just a kind of toy that will be abandoned as boring after a couple of months.

The cost of creating an ERC 20 token plays an essential role in developing a crypto token on the Ethereum blockchain. Some of the most critical factors determine the cost of developing an ERC20 token. Such as: 

  1. Type of business
  2. Token features
  3. Token design
  4. Number of ERC20 tokens to be developed
  5. Complexity of the token
  6. Size and location of the ERC20 token developer
  7. Development and testing of the ERC20 token
  8. Distribution
  9. Maintenance

These factors will determine the cost of developing ERC20 tokens. As a result, the range is too big for us to name a specific amount. Therefore, if you have specific, clear ideas about how you will use your token, you can write to us – The APP Solutions – and our sales managers will calculate the project’s cost for you.

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