INTRODUCTION

Prior to yesterday, I have been in the crypto space for long and never really took the time to know why some coins were known as Defi. Yesterday, while going through professor @gbenga's post, I learnt all what I needed to have known about Decentralised Finance, or DeFi as it is called.

This post is an attempt at completing the assignment task;

Task
Write on a Decentralized Finance Ecosystem as well as a Project/Protocol in the Ecosystem.

The DeFi Lending

The DeFi lending platforms are trying to fix the bugs in loan systems in traditional banking. This implies it serves as the financial service provider while fulfilling the mass adoption needs of Blockchain and cryptocurrency. Known as open finance, it launches open banking movement where individuals don’t need a central party for loans or lending.

DeFi lending and borrowing

In DeFi lending, Investors providefunds for interest through a distributed system and a decentralized application. On the other hand, Borrowers borrow money for interest, all going through a decentralized network. Both lending and borrowing make use of DApps, Smart contracts and so many other DeFi protocols.

How does DeFi lending work?

The decentralized lending is in simple terms, lending a borrower. However, the Decentralized application and Smart contract replace the negotiators, banking system, etc. Assuming you have $1,000,000 to loan through a DApp, all it takes is going to trusted lending dapps, clicking the required buttons, and you are done, with just your phone, the smart contract makes lending and borrowing agreement automatic.

Advantages of DeFi Lending Ecosystem

Hedge funding

Violatility in crypto market has always been its greatest turn off. Investors who want to hold for long but get scared pull out easily. DeFi lending creates a solution traders or investors to hedge Crypto for fiat to solve other needs without having to sell. Imagine, acompany that holds BTC and don’t want to sell to fund a project could easily use a DeFi lending project to hedge Crypto for fiat to execute the project.

Earn interest in holding crypto assets

Panic has made thousands of crypto holders miss out on huge profits. DeFi Lending will save you from yourself here because rather than panic selling, you lend it out with specified interest rates defined in the smart contract, at the stipulated time, you earn your money with interest.

Ease

The work behind DeFi doesn’t demand excessive meaningless documentation, as seen in the orthodox lending system. Rather, it runs through a Decentralized Application. This makes it easy for lenders to earn interests without the stress found in a distributed and centralized network.

Machine accuracy

The mistakes madewhile documentaing, processing and giving loan that the orthodox system puts you through is more or less inexistent, as the smart contract is on autopilot, and is 99.9% efficient.

For the Project under this ecosystem, let's talk about AAVE

A A V E

Aave is a decentralized lending system that allows you lend, borrow and earn interest on crypto assets, without going through middlemen. It runs on the Ethereum blockchain, Aave instead is a system of smart contracts that manages theses assets by using a distributed network of computers running its software. Aave users don't need a particular institution or person to manage their funds. They need only trust that its code will execute as written, which of course relies on very high efficiency of machines. Aave software enables the creation of lending pools that enable users to lend or borrow 17 different cryptocurrencies including ETH, BAT and MANA and like other decentralized lending systems on ERC-20, Aave borrowers must deposit collateral, equal in value to required loan before they can borrow. Borrowers receive funds in the form of a special token known as an aToken, which is pegged to the value of another asset. This token is designed in a way that lenders receive interest on deposits. A borrower may post collateral in ENJ, for example, and borrow some ETH. This also by virtue allows a borrower to gain exposure to different cryptocurrencies without owning.

Innovation

Aave is a profit oriented company founded in 2017 by Stani Kulechov in Switzerland. Kulechov started Aave while still a law student, originally named ETHLend, the firm raised $16.2 million in an initial coin offering (ICO) in 2017,selling 1 billion units of its AAVE originally named LEND. 300 million units of AAVE cryptocurrency were held for the Aave team. ETHLendhad a different model from Aave in that, instead of pooling funds, it tried to match lenders and borrowers in a peer-to-peer fashion. In 2018 ETHLend was renamed Aave, which means “ghost” in Finnish, and ETHLend became a subsidiary of Aave.

How does Aave work?

Aave is simply put, a lending pool. Users deposit funds they wish to lend, which are then collected into a pool. Borrowers may then draw from those pools when they take out a loan. These tokens can be traded or transferred according to the lender's wishes. To make this easier, Aave issues two types of tokens: aTokens, issued to lenders so they can collect interest on deposits, and AAVE tokens, which are the native token of Aave. AAVE cryptocurrency offers holders some advantages, AAVE borrowers don’t get charged a fee if they take out loans in the token. Also using AAVE as collateral gets you discount on fees. AAVE owners canscrutinize loans before they are released to the general public . Borrowers who deposit AAVE as collateral can also borrow more.

Flash Loans

Aave allows a special type of loans, called “flash loans” to be instantly issued and settled. These loans require no upfront collateral and happens within seconds. Flash loans uses the block feature of all blockchains to run. Transactions process on blockchain when a block is accepted, adding each new block takes time. On Bitcoin, is roughly 10 minutes. On ERC-20, it’s about 13 seconds.

In the flash loan, A borrower borrow from Aave, but must pay back with 0.09% fee within the same block. If the borrower doesn’t do this, the entire transaction is cancelled, so no funds move at all. This means Aave doesn’t take a risk and neither does the borrower, on paper. It is however worthy to note that flash loans have been combined to execute attacks on lending systems built on Ethereum, sometimes successfully stealing hundreds of thousands of dollars worth of deposits.
Flash loans are majorly used to take advantage of trading opportunities or maximize profits from other systems built on ERC-20.

What Makes Aave Unique?

• Aave during the DeFi craze in the summer of 2020, was one of the biggest projects in terms of the total value of crypto locked in its protocol.
  The project allows people to borrow and lend in about 20 cryptos, implying that users have a greater amount of choice.

• Flash loans, which we talked about is one of their best products, which have been billed as the first uncollateralized loan option in the DeFi space.

• Borrowers of Aave can alternate between fixed and variable interest rates. While fixed rates can provide some certainty about costs during times of volatility in the crypto markets, variable rates are used by borrowers whe they believe there's a drop in price coming.

CONCLUSION

DeFi lending is awesome, in one word. The concept of loans, without having to go through all the paperwork is just mind boggling. Also, providing a way to hold, earn interest and still earn profits from the increase in the price of the coi you lend is an all round win for me. I staked my tron recently on justlend but now understanding the concept is sweeeet.
I thank @gbenga for making us do this. I have really learnt a lot, and luckily, I picked a very impressive protocol to talk about, maybe after my exams tomorrow, I will delve more into the topic.
#AlphaFx

cc:
@gbenga
@steemcurator01
@steemcurator02