DeFi or “Decentralized Finance”, is currently massively reshaping the traditional financial system around the world including markets such as funding, lending, borrowing, derivative products, equity and the securities market. Instead of centralized equity entities, funding can now be done quite easily through decentralized open-source protocols, “smart contracts”. More than 8 billion USD has been locked into different DeFi projects since April 2020 and the majority of these applications are currently created on Ethereum blockchain. DeFi also limits the risk and the legal aspect of ‘Custody” since assets are locked in'' programmable smart contracts” and not held in custody by a single entity.
DeFi funding allows a new project or start-up to take out a “loan” in BTC or ETH and put their native token or coin as collateral. “Lender” is the smart contract itself and interest rates are calculated algorithmically based on supply and demand of the token or a fixed interest rate in exchange for lending your token or coins to the contract. DeFi allows borrowers to stake their digital assets as collateral, which is then locked within a smart contract until the “loan” or funding is repaid. Examples of DeFi lending platforms include Aave, Compound, and Maker. To be accepted by a community on a DeFi protocol and to get funding, similar funding criteria as exchanges, e.g. quality of team, technical protocol, tokenomics, tokenmetrics etc. The community of a DeFi protocol is rewarded with tokens by participating in the token economy and providing liquidity to the protocol so called “Yield Farming”.