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The Defiprime Post #11: Your Weekly DeFi News in Bite-Sized Fashion As you can see, default is the worst possible outcome for a loan — creditors can lose their money and debtors can go bankrupt. Aave is an open source and non-custodial protocol for money market creation. Transactions and computations are fueled by “gas” which is denominated in Ether. There are several DeFi protocols commonly described as “lending” protocols, each of which has its own unique features and characteristics. Essentially, the interest rates move in line with the utilization ratio to encourage more deposits with high interest rates when more funds are needed. Oct 16, 2020 at 17:41 UTC Updated Oct 16, 2020 at 17:44 UTC. With APYs that might surpass 25%, Aave offers an alternative for investors who want to earn investment income on their long-term crypto holdings. What does this person and others who might do the same use the DAI for? Level up your open finance game five times a week. Your position is then overcollateralized by $250. Subscribe to Bankless. You can then borrow some fraction of that amount from the protocol in DAI, depending on the protocol’s borrowing limit . Borrowers always have to supply more value in collateral than they can borrow, and suppliers can always seize that collateral — or have it seized on their behalf — through a free and open market for liquidation. Binance is one of the world’s most popular and well-established cryptocurrency exchanges. However, that does not mean that interacting with the protocol is a risk-free affair. Aave has emerged as one of the most popular decentralized borrowing and lending platforms in the market. For most people, lending is a familiar and ordinary aspect of financial life. As you can see, these systems take opposite approaches to the issue of trust. Let’s not undersell what we’re doing here—this is the single biggest revolution to the financial system of our lifetimes. Instead of relying on their trust in borrowers, suppliers rely on overcollateralization and liquidation to ensure that they can withdraw their assets at any time. Because we’re rebuilding the financial system one lego block at a time! Lending stablecoins could be an alternative to high yield CDs, ETFs, and savings accounts, with relatively higher risk. Since users always have to supply more value in collateral than they can borrow, their positions are said to be overcollateralized. You start by supplying $1,000 in ETH to the protocol. In doing so, borrowers forfeit their collateral to eventual seizure through liquidation. So far, this system has proven effective, securing billions of dollars in assets through the economic incentives of free market liquidation rather than through reliance on a trusted third party. Time to start repping the Nation . A lender “extends credit” by giving money to a borrower, or provides a “line of credit” by allowing the borrower to request money in the future. How to Earn Crypto Investment Income on Compound, Sign in with email to receive news and updates, How to Earn Crypto Investment Income on Uniswap, How to Earn Crypto Investment Income on Compound. This means the creditor can sue the debtor in a court of law and obtain a judgment against the debtor for the outstanding amount of the loan. That word. So far, DeFi developers have launched protocols enabling a wide variety of intermediary-free economic activities, including digital asset exchange, payments, portfolio management, derivatives trading, prediction markets, private transactions, and more. Although the term “lending” is broadly used and easily understood in common parlance, it misrepresents the economic activity that these protocols enable. By acknowledging that interest rate protocols don’t compete with credit markets, we earn the right to celebrate their ability to generate yield without subjecting users to credit risk. For users who are able to leverage web 3 wallet like MetaMask and stablecoins like Dai, Uniswap serves as a reliable DEX for quickly swapping ETH at market rates. DeFi protocols don’t do lending, and that’s a good thing! Nonetheless, the DeFi transactions that we’ve discussed here are categorically different from collateralized loans. If you use your borrowed Dai to purchase more Ether, you can effectively take a leveraged long position – all without using a margin-trading exchange! As a result, the finance industry has spent decades and billions of dollars creating a complex system for analyzing and quantifying default risk. This makes it more liquid, accessible, and reliable for use in dApps and lending platforms. The bigger risk for Aave, however, is if depositors start to withdraw their funds in one go, creating a de facto bank run on the protocol. The debtor, on the other hand, receives the benefit of spending the creditor’s money on costs that the debtor might not otherwise be able to afford. Very good article. ___, Learn more: This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. In our new “DeFi Unlocked” series, we will introduce you to the different ways you can make money in the booming decentralized finance market. So far, we’ve discussed (1) how the core feature of lending is a creditor’s ability to trust a debtor to repay a loan, and (2) how the core purpose of DeFi is to remove trust as a requirement for financial activity. Finally, tokens locked up in Aave cannot be quickly traded to capitalize on new investment opportunities. The loan is still subject to default risk, which can have serious consequences on both sides of the transaction. This means it’s difficult or impossible for suppliers to tie a real-world identity to a particular borrower without using a blockchain analytics service. By locking up collateral such as Ether, users can borrow and trade with leverage. By borrowing more Ether, you are effectively taking a leveraged long position on Ether. LEND tokenholders can take part in the protocol’s governance process; for example, to vote on Aave Improvement Proposals (AIPs). So, if you deposit ETH, for example, you will receive aETH as interest. In short, because interest rate protocols don’t involve credit or debt — and because they do not depend on trust or expose users to default risk— the transactions they enable are not loans. Borrowers are then free to walk away and never repay the assets they borrowed without posing any additional risk to suppliers. All DeFi protocols have some degree of “code risk,” which means there could be vulnerabilities or bugs that could be exploited. P.S. You can achieve the same effect by borrowing a stablecoin against your Ether collateral, and using these stablecoins to purchase more Ether on an exchange. Here, a liquidator might repay $150 in DAI and receive $160 of your ETH, earning $10 in profit and making your new position $600 DAI borrowed against $800 ETH ; seventy-five percent. Have we warped its meaning in DeFi? Many of these platforms leverage Ether and other Ethereum-based tokens as collateral for securing DeFi loans. The core idea is to take the complex financial services traditionally offered by legacy institutions, distill them into their component rules and procedures, and convert them into self-executing code — autonomous protocols that share the permissionless, non-custodial properties of the decentralized networks on which they reside. There are at least two reasons for this: First, like the decentralized networks on which they reside, interest rate protocols are permissionless by default, meaning they can be used pseudonymously by anyone with access to the internet. Nearly all were failures, and a number were frauds. Your position is still overcollateralized by $210, but you’re now over the protocol’s borrowing limit — the $750 in DAI you borrowed is over seventy-eight percent of your ETH’s reduced value. Each token comes with its own floating rate for loans, which is updated continuously. There, you will find all available assets and their prevailing borrowing and lending rates. The government trusts you to pay your student loans; the credit card company trusts you to pay your monthly bills; you trust your friend or family member to pay back your money. For your security, we need to re-authenticate you. This is not to say that interest rate protocols are entirely free from all risks, but simply that they do not pose default risk, which characterizes lending. We should all care. That bubble was caused in part by developers who overpromised the potential of blockchain technology to solve all of the world’s problems while soliciting investments from the unsuspecting public. We have seen this many times before in the crypto markets. Follow us on Twitter or join our Telegram.

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