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DeFi & Lending

DeFi generally refers to Decentralised Financing, a network of financial applications and software built upon blockchain technology. DeFi has no third party or centralised authority, unlike the traditional finance system. Instead, DeFi uses a peer-to-peer network to create decentralised applications that enable users to interact and manage their financial assets regardless of their status. As a result, DeFi strives to ensure that people worldwide have access to open-source and transparent financial services.

The three major functions of DeFi include; developing financial banking services, providing a peer-to-peer network for lending and borrowing protocols, and enhancing advanced financial tools such as decentralised exchange, tokenisation, and prediction markets.

DeFi lending takes place on lending platforms or protocols that provide cryptocurrency loans by permitting holders to stake their coins in DeFi lending platforms for lending purposes. A borrower can take out a loan via the DeFi platform, with the lender earning interest once the loan is paid back. The lending procedure is completed from beginning to the end without intermediaries.

Risks associated with DeFi Lending

  1. Impermanent loss: When you put your assets in a liquidity pool, you run the danger of "impermanent loss." When the price of assets locked up in a liquidity pool changes after they've been deposited, it results in an unrealised loss (in dollar terms) compared to if the liquidity owner had kept the assets in a crypto wallet. This price change mostly occurs because DeFi pools keep track of the assets in their liquidity pool. DeFi pools depend heavily on arbitrage traders to match the prices of assets in the liquidity pool with the current market price.
  2. Flash Loan attacks: Flash loans are a sort of collateral-free lending specific to the DeFi environment. Flash loans are unsecured loans that employ smart contracts to eliminate all of the risks of regular banking. The idea is straightforward: A borrower can receive hundreds of thousands of dollars in crypto assets without putting up any security, but the twist is that they must repay the entire amount in the same transaction in which it was received (usually a few seconds). Flash loan attack occurs when corrupt individuals utilise these platforms to borrow large quantities of money and use them to control the market or target vulnerable DeFi protocol for their advantage.
  3. DeFi rug pulls: Rug pulls are a unique form of an exit scam in which DeFi developers create a new token, pair it with a popular cryptocurrency like Bitcoin or Ethereum, and establish a liquidity pool, urging people to stake into the pool by convincing them of incredibly high yields, and then drain the popular cryptocurrency from the pool, leaving millions of tokens without value in the pool after raising a large amount of collateral in the popular cryptocurrencies.

Benefits of Decentralised Finance

  • Absence of middle man
  • Absolute transparency
  • Personal ownership
  • Fast transactions
  • Open source technology
  • Higher returns (average of 12% compound yearly interest on your USD)

faq

How Secure is the Data on DeFi platforms?

User data across DeFi platforms are highly secured since they leverage blockchain technology and are built with smart contracts.

What do we mean by Total Value Locked?

Total Value Locked in DeFi refers to the total of all cryptocurrencies deposited, loaned, or staked in a pool across a DeFi system. In simpler terms, the total amount of cryptocurrencies used to carry out financial activities in a DeFi.

Is Bitcoin a DeFi?

No, Bitcoin is a cryptocurrency itself (a digital currency), while DeFi is a financial system developed to use bitcoin and other cryptocurrencies in its network.

What is the purpose of DeFi?

DeFi aims to provide a financial system without third-party intermediaries involved in financial transactions.

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