Intro To Decentralized Finance | Blockchain Lending & Borrowing | Advantage Blockchain
Welcome to Advantage Blockchain, the easy, affordable way to learn about blockchain and cryptocurrencies online. This lesson is about Decentralized Finance to help you answer the question: How can I borrow or lend using blockchain technology?
Today’s lesson is about Decentralized Finance (DeFi) which includes activities such as lending and borrowing using blockchain technology. This new movement is particularly popular within the Ethereum Ecosystem and is sometimes referred to as Open Finance. We will focus on the Ethereum Blockchain, which is where most of DeFi takes place as it is permission-less, programmable money.
What is Decentralized Finance?
DeFi is a financial system built on top of Ethereum enabling a wide variety of activities including lending, borrowing, investing, betting, collateralizing, and saving. You can engage in DeFi through an Ethereum application called MakerDAO, which is a technology that provides a transparent, open, and decentralized financing on top of the Ethereum Blockchain.
MakerDAO designed a protocol that allows ETH holders to lock their Ether and in return generate a decentralized stablecoin called Dai. Once Ether is locked, the generated Dai allows you to lend/borrow against your Ether, or other ERC-20 tokens. After that you move to the application layer where dApps such as TokenSets, PoolTogether, and Uniswap coexist. From bottom to top the whole process is permission-less if using Ether.
How does DeFi compare to traditional banking tools?
DeFi gives every person regardless of age, sex, race, financial status the ability to access financial tools otherwise only provided to accredited investors with the proper credit rating in a first world country. DeFi protocols are permission-less, accessible, and timely. DeFi allows you to be your own bank because you are entirely in control of your money. In a DeFi system, there is no third party bank required to secure funds. Decentralized Finance is a promising technology, but comes with it’s own set of risks. Some of these risks include smart contract risk, digital asset volatility risk, lack of historical information and long term historical trends.
How to access DeFi tools on the Ethereum blockchain?
The only barriers to entry in DeFi are internet access and knowledge of how to use the Ethereum blockchain. You can acquire Ethereum from one of many trusted exchanges. Next, you can learn online how to create an Ethereum wallet. It is vital to save your private keys by writing them down as losing these private keys would be losing access to your Ethereum. Transfer purchased Ether into a wallet with web access and now you can explore the decentralized web.
Visit MakerDAO CDP Portal or Compound Finance where you can explore borrow and lending rates for your digital assets.Lending and borrowing is most commonly done on MakerDAO and Compound Finance. Both have advantages to one another but both are well trusted in the space.
What are some other use cases of DeFi?
DeFi enables decentralized exchanges which are an important feature in the crypto ecosystem. Decentralized exchanges allow for permission-less swapping of tokens. Some of the most common are Kyber network, Uniswap, and IDEX.
Another dApp called TokenSets is a great product for a user who doesn’t want to actively trade but would like to accumulate their holdings through certain market conditions. They offer trend sets, range bound sets, and buy/hold sets.
Last but not least is an innovative application built on top of Ethereum and the open finance stack. “Pool Together” is the world’s first lossless lottery. A player purchases x amount of tickets each for 1 Dai and has x % chance of winning the lottery. The Dai used to purchase tickets are pooled together in a compound savings account accruing interest for a 7 day period. After 7 days a winner is selected at random and given the interest received from the pooled dai. Everyone else has the option of receiving their initial ticket deposits back in full.
