Steemit Crypto Academy Week 7// Introduction to Defi and Yield Farming // Homework submitted to @gbenga
Thank for the Lectures breakdown @gbenga.
It is no longer news that DeFi (Decentralized Finance) is gradually taking over the world of finance and it solves the problems of the centralized applications, the third party syndrome.
For a decentralized Finance ecosystem I will specialize on Lending DeFi ecosystem.
Introduction to DeFi Lending Ecosystem
Our fiat banking system makes provisions for lending in order to pay within a specified time frame. DeFi ecosystem being a decentralized financial system also make provision for lending and borrowing. DeFi ecosystem just like banks provide loans for business and a certain amount is added to the loan as interest. The services are based on smart contract and uses Dapps.
In DeFi systems, there is transperncy of transaction, flexible software and opens among other benefits.
Compound Project in DeFi ecosystem
Compound is a decentralized lending and borrowing platform built on the Ethereum blockchain, it does not require a third party to manage it, it is open and frictionless. Borrowed funds are based on certain interest rate protocol. Most exchanges keep idle fund in their wallets, now compound seeks to uses these funds for lending purposes and in turn receive interest for the allocated loans which are paid back on retrieval of borrowed funds.
How it works
Compound protocol makes provision available to lenders and borrowers to either give or take loan by locking their funds in the system. The interest rates charged on the lender and the borrower are strictly based on supply and demand of the said crypto assest whilst the block mined determines the rates of interest.
In compound protocol, when ever a user request for a loan, the protocol makes sure that there are available the available funds locked up in the system is more than what he has requested. By this his request is granted and fund disbursed to the borrower. The user is then allowed to do what so ever he want with his funds, as soon as he redeems his loan the lock asset which can be called a collateral can then be withdrawn.
Compound can also be described as a liquidity pool in that the lenders provide liquidity to the pool, with which users are then allowed to borrow from this pool. When a user suppliers asset to the compound protocol, he is given a ctoken which can be traded and even transfered, assuming you deposit Etherum, you recieve cetherum in return.
Compound interest rate
This is a very important part of lending the and borrowing assest that must be taken seriously, Compound's interest is based on the available liquidity within the protocol at any given time and the rates depends on demand and supply of cryptocurrency asset.
How safe is Compound
In one of our lessons some weeks ago we discussed extensively on security
Compound is built on the Ethereum blockchain, by this build up characteristics, it is very safe platform, they can be audited. Contract codes also go the on verification. With all this checks, I believe it is very safe.
Governance on Compound Project
COMP is the goverance token of the compound project and can be used for proposing and voting for upgrades. The token holders and delegates are the one I charge of the management of Compound.
Underlying risk with Compound Protocol
One risk I can consider is wallet security, we know that compound stores cryptocurrency in wallets which can be hacked, this can pose a serious risk on the compound.
Conclusion
Unlike our banking system where the borrower has to wait for weeks and sometimes months to access a loan, the compound protocol is instant, thanks to smart contracts.
Thank you.