001 | DeFi- Decentralized Finance | Weekly Blockchain Thinking — Programmer Explains
A smart contract enables the decentralized finance?
You keep hearing about Ethereum and DeFi from a co-worker, family member, or friend and want to learn more… because you have heard users have historically earned 5–20% interest in DeFi lending platforms…
You also keep hearing about smart contract and don’t know what is it, let’s see!
What is DeFi?
Decentralized finance, or DeFi for short, is what the Ethereum community calls financial smart contracts, decentralized applications (DApps), and protocols built on Ethereum.
DeFi products includes
- Decentralized Exchanges
- P2P Lending and Borrowing market
All of those products are developed by using smart contract, let’s see how each of those using smart contract!
1. What is a decentralized exchange?
A decentralized exchange, or DEX for short, is like a stock exchange run by a smart contract on the Ethereum blockchain. Although both allow you to trade assets, a decentralized exchange trades cryptocurrency only and so does not require a centralized authority to operate.
DEXes are perfect for trading ETH or tokens on the blockchain without having to rely on a centralized authority like a traditional cryptocurrency exchange. Trading on a DEX reduces some risk because you keep your ETH and tokens in your wallet instead of placing them in someone else’s control. Trades are made by transacting with the DEX’s underlying smart contract and the only time your funds leave your account is to execute a trade.
2. The fundamental of peer to peer lending platform?
A project called Maker has developed DAI and MakerDAO as the fundamental of P2P Lending Platform along with another project called Compound.
In short, DAI, MakerDAO and Compound make peer to peer lending platform possible.
MakerDAO — (1/3)
MakerDAO is sort of like a central bank in the sense.It issues DAI in charge of keeping DAI stable at ~$1. If the DAI supply increases too much and DAI’s value falls below $1, the stability fee is increased to encourage CDP holders to pay back their debts.
{{ Smart Contract }} — MakerDAO
MakerDAO Smart Contract letting users open Collateralized Debt Positions, or CDPs for short. Users deposit ETH as collateral and are able to mint/borrow a token called DAI. DAI is a stablecoin pegged to the US dollar.
DAI — (2/3)
DAI is like a smart version of the US Dollar. While the price of ETH may fluctuate, you can count on DAI to hover around $1. (If you want to know how DAI work under the hook, please leave a comment below)
{{ Smart Contract }} — DAI
DAI is developed and base on ERC20 Token Standard, and can be easily used by developers on ethereum network while developing DApps.
Compound Finance — (3/3)
Compound is a peer to peer lending platform, loans are secured through over-collateralization. Borrowers deposit tokens into Compound to increase their borrowing power. If the borrower’s borrowing power falls below 0, their collateral is sold to cover the debt. The interest rates on loans is different for each asset and vary based on the demand for that asset.
{{ Smart Contract }} — Compound Finance
Compound using multiple smart contracts that allows users to borrow and lend tokens. Similar to your bank, Compound lends out your money to borrowers and earn interest over time. But unlike your bank, the interest begins compounding the minute you deposit into Compound’s smart contract. And because it’s a smart contract, the rate you earn is higher than traditional banks because there’s no middleman.
Who am I？
I am Wayne. I am the person who understand what business needs and understand the core value of what blockchain could provide to different business. I am also a tech contributor for open source blockchain project (DEXON and NEO). Let’s bring blockchain technology to real world adoption together.
Find Wayne elsewhere
Instagram / Line@ / Facebook / Email / CBA Blockchain College
