Diving into DeFi: What is DeFi in your mind?
Cryptocurrencies have been around for over a decade now. Every now and then we get to hear people say that the whole cryptocurrency market is a bubble. However, every time such a statement is floated around, cryptocurrency knocks it out of the park.
The main reason behind the success of cryptocurrency as a whole is its potential to replace all the flawed centralized structure that exists. Take for example the 2008 recession. All of us had to pay a huge price for the bad decisions made by the centralized financial organizations.
Cryptocurrency essentially puts an end to all these wrongdoings. Have you ever wondered what happens to the money that you deposit in your bank account? Did you know that you are actually being robbed even though you receive a small interest rate for the money that you deposit in your bank account?
Luckily, the crypto world has a solution to this problem. In this article, we will have a closer look at one of my favorite DeFi tokens that gives you complete power over the money that you own. But before we get into it, let us first understand what DeFi is.
What is DeFi?
DeFi stands for decentralized finance. In simpler terms, this is your virtual bank on the blockchain. Financial tasks such as lending and borrowing can all be done on the decentralized ecosystem with the power of DeFi.
Without the involvement of any centralized organization, how is this even possible? Well, smart contracts such as those built on top of the Ethereum blockchain makes it possible to create a completely secure decentralized ecosystem for your financial transactions.
In the centralized ecosystem, whatever money that you deposited in your bank account would then be used to lend money to others at a higher rate of interest. In India, most of the banks offer a standard rate of interest of 4% per annum. This is lower than the APR of Steem power actually.
While they give you 4% interest, they lend your money to other borrowers at a higher rate of interest. So, they use your money to generate more funds and return only a very small portion to you as income. This is a robbery that not many voices out.
DeFi gives you complete power over the funds that you own. You can then lend this money to other users and take full advantage of the interest that you get. This is the benefit that you get as a lender.
As a borrower of funds, you would probably benefit by paying a lower interest rate than your traditional banks. As there are no middlemen involved in this entire process, The total rate of interest that you would need to cough up is low. Thus, saving yourself the extra interest that you would need to cough up at a bank.
Now that we have a basic idea of what DeFi is, let us have a look at AAVE (Lend), which is my first DeFi token and a project that I believe in greatly.
So, Lend protocol was previously known as EthLend. This is a lending platform on the blockchain that helps you get instant loans for certain collateral. Basically, it's a platform where lenders and borrowers come together to negotiate interests for borrowing money.
In a nutshell, the lenders deposit the crypto asset that they want to lend into the pool for a certain interest rate. Borrowers then have access to these funds. Whenever your interest rate is accepted by a borrower, your funds in the pool get transferred to the borrower and you receive your interest rate.
In order to be able to borrow money, the borrower should deposit collateral which is larger than the money that is borrowed. This collateral not only prevents any frauds on this platform but is also used to liquidate and stabilize the price of the token in case of extreme volatility.
The best part about the Lend platform is that it does not require any KYC or anti-AML documents. The collateral that you deposit on this platform is enough to gain the trust of people.
Since the whole platform is free from any middlemen, it means that the end-users benefit the most. The lender gets a higher rate of interest than what a bank pays and the borrower gets to pay a lower rate than what a bank would have charged.
AAVE is the token that powers this entire ecosystem. AAVE was also one of my first DeFi investments. I had bought just INR 7,000 worth of AAVE back in February of 2020. The ROI on this investment has been great so far. At its peak, my single investment was up by 30X at a point. However, that has since come down to about 18X. I still have my complete position in this project as I believe in the potential teh DeFI has in our future.
With the development of platforms such as Lend, we are getting very close to decentralizing everything. With transparent and secure protocols governing all financial transactions, DeFi is the future of the financial world.
Benefits of DeFi:
1- Quick Loans: If you have ever taken a loan from a bank, you would know the time-consuming procedures involved. The worst part is that your loan application might also get rejected at times. With DeFi, you can get instant loans that are extremely secure. Thus, giving them an edge over centralized loans.
2- Avoids loan defaulters: Public sector banks have seen several loan defaulters over the years. There are criminals who have stolen Billions of dollars from the banks and never returned. This are your money that was stolen. With DeFi, this would not be the case as the collateral deposited would be liquidated if the borrower defaults on his repayment.
3- Advantage for both lenders as well as borrowers: DeFi is a smart contract on a particular blockchain. This completely eliminates the need for a middleman. With the absence of the middleman, the lender would be able to get a higher rate of interest than what a bank would pay and the borrower would also have to pay a lower interest rate than what a bank would have charged him. So, it’s advantageous for both parties involved.
Cryptocurrencies as a whole are changing the way we lead our everyday lives. Initially, these assets were used to make payments. Then the ICO era made it clear that the crypto world is capable of helping entrepreneurs during the early stages of a company. Now, with DeFi, the crypto and the blockchain world has completely eliminated the need for centralized financial organization.
Once more people are made aware of the technology, DeFi would be able to go mainstream and help the world embrace the crypto culture.
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