Crypto Academy Week 7 - Homework Post for [@gbenga]. Introduction to Defi and Yield Farming.

Hi @gbenga, greetings again. Thanks for another week of classes in which we can learn new concepts while reinforcing old ones. Let's get started.

As mentioned in class, the term DeFi encompasses a movement or ecosystem of financial applications built on blockchain. Modern financial services allow you with the use of cryptocurrencies, smart contracts, and the decentralization of processes to access all the power of a bank directly from your wallet and without the need for a central entity to manage everything.

The traditional financial system is constructed in such a way that only a registered bank or financial institution can afford to participate and profit from the tools currently available.

However, thanks to the irruption of the cryptocurrency market and all the development in the blockchain industry, it is now possible to have access to loans, liquidity, interest, leverage, and many other modern financial instruments freely and directly on the blockchain.

Based on this premise, my selected project is Aave which is within the ETHEREUM Ecosystem.

_{Aave offers loans, under certain conditions. On this platform you can be the lender and generate interest. Source: https://criptointercambio.com/blog/es/mercados/analisis-de-precio-aave/}

But first let's talk about Ethereum.

Launched in 2015, its main feature lies in the proposal of smart contracts under the distributed consensus environment, which are executed automatically and encrypted.

Compared to Bitcoin, the operating principle of Ethereum differs a lot; as Bitcoin is a payment network protocol and a unit of value transfer within that system, while Ethereum can be considered as a complete ecosystem.

_{The potential of Ethereum is tremendous and many people say It is the biggest technological innovation of the decade. Source: https://www.reddit.com/r/ethtrader/comments/l65yst/the_ethereum_ecosystem/}

As we learned earlier Ethereum is a decentralized platform with its own blockchain and a complete ecosystem where everyone can build various distributed applications (Dapp), smart contracts, and even their own cryptocurrencies.

All of them aim to be safe to use and reliable, without the need for intermediaries such as banks or agencies. Everything is accessible to everyone.

Ethereum is by far the biggest and most well-known project in the platform category and smart contracts are one of the most revolutionary things about the platform.

Smart contracts can be used in anything, which requires some automated actions based on certain events. Smart contracts also give unprecedented trust, as all your data is stored in a blockchain. Once the data is on the blockchain, it is impossible to tamper with it later.

Making smart contracts is also much faster and cheaper than traditional contracts. Smart contracts may revolutionize the way we make contracts in the future.

All this development of Ethereum has laid the groundwork for the creation of Aave, and these are the reasons that motivate me to talk about this project.

Aave

Formerly known as ETHLend, Aave was founded on the simple premise of creating a decentralized finance protocol that allows people to lend and borrow cryptoassets.

Aave is kind of an online bank, not in its full expression of the word. But rather in the realm of being able to access cryptocurrency loans under a decentralized protocol, with the possibility of you being the lender and generating interest. All this on a platform that works through the smart contracts of the Ethereum network.

Aave was initially launched in 2017 and has survived despite numerous challenges. Since its launch, the project has gone through several protocol changes and a token exchange to emerge as one of the main contenders within the DeFi ecosystem.

By September 2018, ETHLend evolves to Aave. This brought with it a change in the way lending operates. For example, liquidity pools were implemented, which are smart contracts in which lenders could deposit their cryptocurrencies and other users apply for credit.

Imagine you go to the bank and say you want to apply for a credit for $100,000. To grant it to you, the bank will place, among other things, the condition of giving something in guarantee, which covers the risk in case you can't or don't want to pay back those $100,000. But how is this possible in the digital world?

Well, for that there are collateral deposits or collateral value. To apply for a loan within Aave you need to give another cryptoasset as collateral. That is, if you need DAI you can give ETH (or any other available) as collateral and receive, for a fraction of the value given, the equivalent DAI.

Another advantage, in this case for lenders, is that it allows you to generate interest at low-risk rates on your savings by depositing them in Aave's liquidity pools.

_{Aave process, Source: https://blog.synthetix.io/susd-and-snx-are-now-available-in-aave-protocol-for-lending-and-borrowing/}

Interest rates in Aave are set depending on the supply and demand that a well has. The lower the availability, the higher the interest rate. This in turn implies that the lower the liquidity, the more abrupt the interest rate variations can be.

Changing the Rules.

One of the biggest innovations that Aave brought to the DeFi market was the Flash Loan, which you can apply for without giving any collateral. But the loan repayment must be made within the same blockchain (or transaction). This allows you to have immediate liquidity in any cryptocurrency available on Aave.

Gaining Ground.

Last year, Aave was approved for a license to operate as an electronic money institution within the territory of the United Kingdom. The significance behind the news is that we are talking about Aave now being able to conduct cross-currency exchanges (cryptocurrencies and national currencies) legally. This allows it to create e-money accounts for companies and individuals, expanding its operations to more users and improving the adoption of its products.

Conclusions

In conclusion, platforms such as Aave allow cryptocurrency users to use services that for years were reserved for the traditional banking system, such as loans. Moreover, they have taken it further by allowing both secured and unsecured loans. This, together with the new license to operate as an e-money institution, makes Aave a very promising platform for finance.

On the other hand, although Ethereum is by far the largest and most popular cryptocurrency ecosystem, it has recently gained several competitors alongside it. However, compared to other ecosystems that have emerged in recent years, Ethereum has a clear advantage in its favor. Like Bitcoin, Ethereum also has a first-mover advantage.

Ethereum has the most skilled developers and the most promising projects. Currently, almost all DeFi applications are embedded in the Ethereum blockchain.