Crypto Academy Homework Task For Week 7 For Professor @gbenga: DeFi Ecosystem.

Hello Steemians, its with great pleasure that i present week 7 homework task by @gbenga on DeFi Ecosystem and its products/protocols. I must commend @gbenga for an interesting lecture, i learnt alot.

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What Is Decentralized Finance Ecosystem.

Decentralized finance, DeFi for short is referred to the shift from a traditional, centralized financial systems to a peer-to-peer finance which is enabled by decentralized technologies thats built on the Ethereum blockchain. It is also referred to the movement From lending and borrowing platforms to stablecoins and tokenized BTC. The DeFi ecosystem has launched a large network of integrated protocols and financial tools that is worth over $13 billion of Ethereum smart contracts. However, decentralized finance has emerged because it is the most active sector within the blockchain space with a good range of users, developers, and institutions. Decentralized finance is encrypted with codes that are running on the decentralized infrastructure of the Ethereum ledger system unlike the local traditional financial system which runs on a centralized infrastructure, it is managed by third parties like central authorities and institutions.

The breakthrough of DeFi is that crypto assets can now be put to use in ways unacceptable with fiat or “real world” assets. Decentralized exchanges, synthetic assets, and flash loans are completely novel applications that may only exist on blockchains. This paradigm shift in financial infrastructure presents variety of benefits with relevancy risk, trust, and opportunity.

Benefits of Decentralized Finance?

Decenttalized finance make use of the key principles of Ethereum blockchain to influence financial safety and transparency, open liquidity and allow growth opportunities, also support an integrated and standardized economic system.

• Programmability.
  DeFi is a highly programmable smart contract that automatically executes and allows the creation of new financial tools and digital assets.
• Immutability.
  Decentralized blockchain structure increased security and auditability by the use of Tamper-proof data coordination across the blockchain.
• Interoperability.
  Ethereum’s composable software stack ensures that DeFi protocols and applications are built to integrate and complement each other. With DeFi, developers and merchandise teams have the flexibleness to make on top of existing protocols, customize interfaces, and integrate third-party applications. For this reason, people often call DeFi protocols “money legos.”
• Transparency.
  Every transaction on the public Ethereum blockchain is usually broadcasted and verified by other users on the network. This has shown a high level of transparency around transactions in a way that data are not only allowed to be richly analyzed but also helps the network's activities available to any user. Ethereum and the DeFi protocols that are running on the blockchain are also built with open source code that make it available for any user that wants to view, audit, and build upon.
• Permissionless.
  DeFi is known for its open and permissionless access that is anyone access the DeFi app built in the blockchain regardless of where the person is in the world with less amounts of funds as long as you have a crypto wallet and an Internet connection.
• Self-Custody.
  DeFi market allows users to keep custody of their assets and also have control over their personal data by just using a Web3 wallet like MetaMask to transact with permissionless financial protocols.

DeFi Project/Protocol.

Compound.

Compound (COMP) is a decentralized finance protocol (DeFi) that allows users to deposit and borrow cryptocurrencies, Its purpose is also for users earn interest while carrying out these activities. Compound was first launched in September 2018, it wasn't really used until June 2020 that alot of traders and user noticed it, this protocol has gained more attention and has also its ascent has touch $ 912 million in locked value. However, Compound offers something no other alternative can do and this has made it a revolutionary protocol.

Compound has the ability to generate liquid money markets for cryptocurrencies through the creation of interest rates and the use of algorithms that balance these values ​​in real time and in a decentralized way. As a result of this, Compound is able to create pools with a very large liquidity, and offers it to users with quite an attractive interest rates. Compound recently became one of the most exceptional DeFi protocols and this is possible because of the operating model of liquidity, rewards and governance pools. This decentralized finance protocol has helped to generate a financing and loan ecosystem by enabling credits to its users and adding interest on assets those users have within the system.

How does Compound work?

The operation of Compound is just like the normal banking system, albeit with its nuances from the crypto industry. Firstly, you have to deposit cryptocurrency in one of the pool, by doing this, it allows you earn some interest. Just as i said before, its amost same with the bank savings account, just that in the case of Compound, much more higher interest is been offered for saving money. Also you don't need to go through any form of identification or KYC process and there is no exorbitant commision charged. Compound is known as a non-custodial protocol, so activities here is virtually handled by smart contracts on the Ethereum blockchain.

Compound creates liquidity pools and money markets based on your crypto assets, leaving your money in them. That is, it takes your money that you have deposited and that of many other users and put them in a smart contract. Now, that money is loaned to anyone that wants to get credit with the interest that is available at the time, so that interest will then be distributed to the liquidity providers. The interest that is been paid on the loan is what is ultimately converted into the payment of interest for each user that has provided liquidity to the pool.

cTokens

cTokens, which are known as the Compound tokens are one of the fundamental tools in the operation of Compound. These Tokens are usually generated by Compound to observe and direct the loans and interest generated within the platform. In summary, cTokens are a unit of account within Compound.

For example, when a user injects funds into a gaggle of loans, they're issued a corresponding balance in cTokens. This balance of cTokens is directly proportional to their participation within the loan group.

Thus, each asset accepted by the platform has its pair in cToken.

as an example, DAI has its cDAI, and Ether has its cEther. Additionally, these tokens work under the quality ERC-20 Therefore, they're tokens that we will store in our wallets and even exchange them cleanly.

Compound Opportunities

• The union of opportunities for yield farming, liquidity mining and Compound's loan and investment proposals creates a multiple potentialities on the DeFi platform.

• Another important opportunity is that users can join and get cTokens, create a staking of them and receive profits for it. this makes the platform to be the simplest and most carefree platform to use.

• We can conjointly use it to request loans, which permits users to invest in alternative platforms, get profits on them and therefore leverage our position. A lightweight yield farming, that is typically the strategy that a lot of users pursue inside Compound. it's conjointly doable to advance any during this strategy, as long as your capital permits it and you've got nerves of steel to hold it on in the face of the likelihood of big losses.

• In addition, you'll conjointly invest within the platform, earn COMP tokens and use them to extend your participation within the platform, thereby generating a lot of financial gain, combining staking with liquidity mining to enhance your position.

With all this, it's clear that Compound presents distinctive opportunities on a platform with an easy-to-use interface, with a community governance that's gaining strength, and a protocol that doesn't stop evolving.

Compound risks

• On the opposite hand, Compound's main risk is in a very sharp decline within the cryptocurrency markets. For example, if a user takes his/her purse and borrows cash from Compound and enters his/her guarantee with a 1: 1.5 magnitude relation and then they approve his loan. Definitely, the loan has been safeguarded and one amongst those safeguarded could be a settlement clause that kicks in if the worth of the collateral starts to fall and exceeds the suitable threshold. This threshold is that the minimum worth that his/her guarantee doesn't cowl the loan granted and fees and commissions of the platform. Therefore, at that time, Compound can liquidate the user's position and looking on the autumn within the worth of the user's collateral tokens, the user's loss are partial or total. This example not solely affects people who borrow, however conjointly, people who have cTokens and expect them to form a profit.

• As always, in DeFi ecosystems there are several variables that can affect how they work. For example, a vulnerability in a protocol can detorate the world's most valuable token to nothing in minutes. Or even a hacker that attacks the stability of the same because the reserves do not support the damage caused.

So always bear in mind that while DeFi and its projects are a land of opportunity, we are in current and virgin territory, and the interpid might not always do well, it is better to trade with cautious and have plans when the situations is not favorable.

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Special thanks to @steemcurator01 and @steemcurator02 for their support.