Decentralized Finance (DeFi) is a financial service based on ledgers, just like the ones used by cryptocurrencies. In the U.S., DeFi technology challenges the current centralized finance system by empowering individuals to manage their own financial exchanges via a crypto wallet. Because decentralized finance eliminates fees from banks or other financial institutions, anyone with an internet connection can use DeFi.
As a developer, building APIs that can push and pull DeFi data is a vital way to impart value to your customers. When building a DeFi API, there are a few key considerations that you should pay special attention to.
Because a DeFi application deals with financial and other sensitive user data, it’s critical to build a secure API. This means protecting user data and preventing unauthorized access is incredibly important. A huge privacy concern in the world of DeFi and cryptocurrency is the privacy limitations of current public blockchain technologies; a public blockchain allows for any user to view transaction amounts and addresses involved. This is a lack of “financial privacy” that is inherent when dealing with crypto such as Ethereum or Bitcoin.
It’s essential to follow best practices for securing your API, such as using HTTPS and implementing proper authentication and access controls to ensure that only authorized users can see data on a financial transaction or in a wallet. Services like Provable can encrypt your API calls and feed data from off the blockchain (off-chain) data sources and to your blockchain (on-chain) for smart contracts to use. Building a long lasting, risk-based framework based on user analytics will allow your API product to evolve with the DeFi market.
Given the sensitive nature of financial transactions, it matters that the tools you use to analyze incoming data are built with security in mind. Because Moesif has always handled customer data, we built our solution with security in mind. Our HIPAA and SOC 2 compliant analytics platform has multiple processes for handling data securely, including: encrypting stored data at rest, internal controls for accessing production data, and strictly controlling changes to platform software.
Beyond server-side encryption and SOC 2 compliance, projects with sensitive data can stay private to your organization via client-side encryption. The privacy benefits of proprietary software are gained, without the complexity of building and scaling your own data infrastructure. Moesif’s SOC 2 compliance allows our platform to enable growth in privacy-conscious markets with confidence.
Interoperability is when a product or system works with other products or systems. Ensuring your DeFi API is interoperable with other DeFi protocols and blockchains can increase their usefulness and chances of adoption. As an example, users of the Ethereum blockchain cannot easily interact with other blockchain technology, like Avalanche or Polkadot. This requires careful consideration of data format, APIs, and integration methods. Cross-chain interoperability gives your crypto holders the freedom to decide how to conduct DeFi transactions, without being held back by a specific blockchain network.
Cross-chain interoperability can enable wider adoption of your DeFi solution. By allowing users to access DeFi services across blockchain networks, it can create incentive for them to interact with your DeFi API. This open access can allow for more users in the Web3 space, leading to greater liquidity flowing into the DeFi ecosystem. Over time this allows for larger lending, staking, and borrowing operations. In short, more users that are able to access your DeFi app means more crypto being mined.
Your DeFi API must be able to provide reliable and fast access to ensure a seamless user experience. A digital asset is only as valuable as the story its metadata holds. When gauging efficacy of your DeFi solution, there are a few possible performance metrics to consider:
- Total Value Locked (TVL): A standard metric used to measure overall health of a DeFi protocol. The total number of DeFi tokens is referred to as the “total value locked.”
- Price-to-sales ratio (P/S ratio): This ratio compares market cap of an asset with its revenue. A P/S ratio is calculated by dividing a protocol’s capitalization by the total generated revenue.
- Non-speculative usage: Reviewing digital transaction data to understand the real value of a decentralized finance solution. Transactions in a protocol that are performed for speculative use should be avoided.
To analyze and iterate your DeFi solution, using an external analytics platform can save time and money, two invaluable resources in the ever changing Web3 landscape. Using an analytics platform to identify inconsistent latency can allow for optimization of connections and endpoints. Inconsistent response times, due to connections with varying latency, undermines the user experience and can lead to poor retention. Additionally, identifying the transaction parameters that matter to your DeFi products versus ones that are just “vanity” metrics can allow for accelerated growth and business transparency. Measuring and acting on key metrics is vital to maintaining a smooth user experience.
Because the world of DeFi crypto exchanges is rapidly growing, your API must be able to handle increasing levels of usage. Considering how to make your infrastructure scalable early on can help to ensure your API can handle high levels of traffic. Using an analytics tool like Moesif can allow you to collect and analyze data on high volume APIs with no performance impact. Whether you are looking at token activation or endpoint usage, Moesif can handle your Web3 queries.
DeFi APIs must comply with relevant regulations and laws, including Anti-Money Laundering (AML) and Know Your Customer (KYC) regulations. Ensuring that you have a clear understanding of these requirements and designing your API accordingly to avoid any legal issues is paramount to the longevity and scalability of your DeFi project. It is unclear in the U.S. if DeFi projects are regulated for the purpose of AML compliance. The U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN) requires that any Money Service Business (MSB) implement and maintain a risk-based AML protocol.
As of 2019, FinCEN considers crypto businesses as MSBs. The question of if a DeFi project is an MSB is slightly more unclear, as there is little regulation yet on the DeFi space. As it stands, a smart contract or DeFi application is not likely subject to these regulations. However, DeFi projects that consider themselves “decentralized” but are actually centralized in practice likely fall under the regulations set by FinCEN. Ensure that users of the traditional financial system are open to using your product by enacting a modern, risk-based DeFi framework.
While the world of traditional finance continues to remain unchanged, the world of crypto tokens and decentralized finance evolves at a rapid pace. Individuals with a crypto wallet want to know that their data is secure with your DeFi app. A decentralized financial product that is built to last starts with understanding how potential and current users interact with smart contracts and relevant blockchain technology, and ends with implementing changes based on your users’ data.
Moesif provides user-centric analytics right down to the individual customer level, as well as deep insights into how your API is being used. Build highly-scalable, secure and performant DeFi APIs with help from Moesif today.