Steem Crypto Challenge: Diving Into DeFI (Loan Contract, Decentralized Echange (DEX) and Cross-Chain Exchange (XCX))

Welcome to today’s learning on DeFi.
DeFi blockchain is so packaged to accommodate investors, lenders and borrowers. Thus, everyone have a place they can choose to belong in the DeFi blockchain.

Join me as we explore some of the building blocks on DeFi that creates room for all.

Loan Contract
On DeFi blockchain, loans are designed to allow owners of the particular contract to loans that are collateralized and locked in the contract.

Every particular loan is unique to the owner or address in the DeFi blockchain.

For example, a contract owner sees an open loan contract, send DFI to fund the loan collateral, then he’s able to mint DATs to a certain collateral ratio.

At any point of transaction or borrowing, the minimum collateralization ratio of the contract can be adjusted by the DeFi blockchain DAO (Decentralized Autonomous Organization) and this starts with 150%.

This means $15,000 worth of collateral will allow a loan contract owner to take a loan up to $10,000.

Provided the collateralization ratio stays above 150%, the contract owner can take loans as long as he desires. Minted DATs are subject to floating borrowing rate.

At an event of a fall of the collateralization ratio below 150% at any time, the collateral is automatically liquidated through decentralized exchange (DEX) to pay off accrued interest.

There is additional 15% liquidation penalty to prevent loan contracts from having to be liquidated. Thus, the loan contract owners are responsible to monitor the collateralization ratio to avoid unwanted liquidation.

If the collateralization ratio is reducing and close to the minimum 150%, what should the loan contract owner do? This is a very sensitive question, because one can’t just sit back and watch it happen, then face liquidation.

If the above is happening, the loan contract owner can do the following to prevent the ratio reduction:

 Deposit more DFI into the loan contract, thereby increasing its collateral and collateralization ratio.

 Pay back some of the loan (or accrued interest), thereby decreasing the loan contract’s loan amount and increasing its collateralization ratio.

Decentralized Exchange (DEX)

A decentralized trading platform is provided by the DeFi DEX for all DeFi tokens and DFI itself. This means all tokens, comprising of DFI and DCT (DCT and DAT) can be listed in the DeFi blockchain DEX.

DEX does not need any intermediaries to operate in the DeFi blockchain. Thus, users can trade on their own in a trustless manner.

Comparing DeFi blockchain to other decentralized financial systems, it should be noted that DeFi is not just a consensus protocol to facilitate DeFi, it is open and users can interact in the blockchain without any intermediaries.

We can then conclude that DeFi blockchain is designed to operate in a simple to use client user interface (UI).

Cross-Chain Exchange (XCX)

A user that holds DETH might be willing to hold the actual ETH, which is different from a DeFi pegged ETH token (DETH).

The DeFi cross-chain exchange (XCX) makes it easy to swap from DeFi pegged token to the actual token. Example, users can swap from DBTC to BTC, DETH to ETH, DXLM to XLM, DXRP to XRP, among others.

This is to say that XCX allows the listing of DATs with it’s native tokens.

The actual transaction that facilitate the swapping of these tokens is called Atomic Swap. Atomic swap ensures that both parties receive their desired tokens and in the event of lack of successful transaction, no party receives, to avoid cheating.

The parties in the XCX are described as follows:
 Lender: a person owning BTC and receiving a DAT through the XCX, either temporarily for the duration of the XCX, or permanently, if the XCX expires.

 Borrower: a person owning a DAT and wanting to get a native coin, example, a person who has DBTC and wanting to obtain BTC through the XCX.

That is how much we can take today. It has been a long ride on DeFi and I have equally learned a lot during my research.

All thanks to @steemitblog, @steemcurator01 and @steemcurator02 for the initiative and support towards this challenge.

If you have questions about any area of DeFi you did not understand, please feel free to ask in the comment section.

N/B: All information here are for learning purpose and it’s in no way a financial advice for investment decision.

Thank you for reading.