Understanding DeFi

Chapter 4. How to Build a DeFi Application or Protocol

DeFi apps are blooming all over, and it seems every chain has a collection of return-generating and yield-farming apps ready to circulate funds. You should take a look at “Anti-Money Laundering and Know Your Customer” before you start your build, because it’s important to see what you need to avoid when building your application.¹

Now, let’s talk about the order of operations in developing your DApp. Remember, they all deal with the same basic principles of finance.

Basic Principles of Financial Tools

Let’s review the basic principles of financial tools. First, you have to put your money to work. Sitting in a box or piggy bank isn’t going to do it (I’ve tried). You have to make your money go do something to come back with more; everyone needs a job to get money, and money is no exception. Generally, you’ll be loaning out your money, and this amount of money that comes from your wallet to theirs is the principal.

Next, you have to loan that money to another person or entity—someone who isn’t related to you or your company. Make sure it’s a genuine third party, not one you control or in common control with you. Otherwise, you’re just shuffling money around or, worse, pretending to have revenue you don’t really have. This is called cooking the books, or fraud. It’s not great. Don’t do that.

Now, how does this money generate more money? Because you’ve rented out your cash (you need to get that back), now you also get a rental ...