DeFi. Week 7 Assignment

Good evening everyone. This is actually my first time of doing Steem Crypto Academy post. This is really because I had so much interest on DeFi and I saw this as a perfect time to read up about it.

Image Source

Introduction
Decentralized Finance (DeFi) is most likely to have a unique impact on how our traditional banking system operates in nearest future and might even shift the structure of the whole financial system at a macroeconomic level.
DeFi is constructed in such a magnificent way that allows it to be different from the usual way of things in the banking industry and I would like us to first of all look at the core concepts of Decentralized Finance that makes it different from others.

“DeFi creates decentralized financial instruments and store up values that are accessible at any time separate from traditional centralized institutions while cryptocurrency coin focuses on creating a value separate from any government-backed fiat currency.”

What is DeFi?
During the process of me researching for this assignment, I came across many definition and explanations about DeFi and in all this different concepts and understanding, I will just make a simple explanation here.
DeFi ecosystem is a decentralized financial covering that creates an enabling place for financial transactions without intermediaries such as banks, insurances and other financial influences and is operated by just the strength of a smart contracts. DeFi primary focus is to fulfill the services of a bank (CeFi) without seeking permission from a third party and at the same time strives to be very transparent and open.
In its outmost simplicity, DeFi is a storage where financial products are available on a public decentralized blockchain network making them open to anyone to use rather than going through a mediator. Quite different with DeFi unlike in banks and brokerage, no government issued ID, social security number or proof of address is needed. Decentralized Finance also provides permissionless, open source and censorship resistant framework. DeFi is also a system where applications developed on the blockchains offers both buyers, sellers, lenders and even borrowers to interact peer-to-peer level.

Decentralized Finance aims to use technology to remove middlemen or third party influence between parties in a financial transaction.

Component of DeFi
Decentralized Finance components takes the form of stablecoins and services like crypto exchange and lending services. Smarts contracts are essential framework for the functioning of DeFi applications because they encode the terms and activities necessary for the functioning of these services. For example, a smart contract code have specific code that establishes the exact terms and conditions of a loan between individuals. Now if these terms and conditions are not met, collateral becomes liquidated. Now remember we said that DeFi seeks to do the same thing as our traditional banking system and since DeFi also loans, collateral also becomes a necessary factor in the deal. All these are beautifully done with a codes rather than a bank or other institution manually doing this process. Someone might be quite confused over my consistent mention of Smart Contracts without saying in clear words what it means well I am doing that now. Smarts contracts or automated codes manages any finance service we like to create in a decentralized manner and this means that we can determine a certain way these rule will work and once we deploy it to a network, we no longer have control over it anymore.

I also did mentioned stablecoin and let me just say something about that, stablecoin are cryptocurrencies that are pecked to the value of a real world assets usually in USD.

Majority of DeFi projects are built on Ethereum as it has the most developed ecosystem to write smart contracts and so we will be looking at some to the projects and protocol in a jiffy.

DeFi Pojects and Protocol
DeFi has grown into what I would call a might tree (complete ecosystem) with many birds making their houses on it branches (working applications and protocols) that deliver value to millions of users.

Over $30 billion worth of assets has been dumped into the DeFi ecosystem since 2018 and as such there is so much necessity to building protocols that allows a smooth and secure running.

Compound
Compound project is a lending protocol developed on the Ethereum blockchain that allows users to gain interest by lending out assets or to borrow against collateral. Compound lending was launched in 2018 by Rober Leshner. The Compound protocol makes this possible by creating liquidity for cryptocurrencies through interest rates set using computer algorithms.

"Compound is a decentralized, blockchain-based protocol that allows you to lend and borrow crypto — and have a say in its governance with its native COMP token."

Compound supports the borrowing and lending of a specific set of cryptocurrencies. As of this writing, they are: Dai (DAI), Ether (ETH), USD Coin (USDC), Ox (ZRX), Tether (USDT), Wrapped BTC (WBTC), Basic Attention Token (BAT), Augur (REP), and Sai (SAI).

COMP is the the native token of the Compound protocol and a predetermined amount is distributed to all lenders and borrowers on the Compound protocol every day.

When there is a large pool of crypto locked in Compound, interest rates are low because there’s plenty there to be borrowed so you’re not getting paid a lot to add to that large pool. If the pool is small, interest rates are higher and you earn more. Fluctuating (aka floating) interest rates incentivizes lending new crypto to small pools (to earn higher interest) and repaying borrowed crypto into small pools and borrowing from large pools (to pay less interest).

Conclusion
Bearing in mind that DeFi is a fast-growing sector of the cryptocurrency industry, it is likely going to suspend the traditional.