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How does #defi work? Today, lending and borrowing money all revolves around the individuals involved. Banks need to know whether you're likely to repay a loan before lending. Decentralized lending works without either party having to identify themselves. Instead the borrower must put up collateral that the lender will automatically receive if their loan is not repaid. Some lenders even accept NFTs as collateral. Borrowing Borrowing money from decentralized providers comes in two main varieties. Peer-to-peer A borrower will borrow directly from a specific lender. *ex. Exodus supports Peer-to-peer (p2p) trading Pool-base where lenders provide funds (liquidity) to a pool that borrowers can borrow from. *ex. Aave, Compound Access to global funds When you use a decentralized lender you have access to funds deposited from all over the globe, not just the funds in the custody of your chosen bank or institution. This make loans more accessible and improves the interest rates. Tax-efficiencies Borrowing can give you access to the funds you need without needing to sell your ETH (a taxable event). Instead you can use ETH as collateral for a stablecoin loan. This gives you the cash-flow you need and lets you keep your ETH. Stablecoins are tokens that are much better for when you need cash as they don't fluctuate in value like ETH. Flash loans Flash loans are a more experimental form of decentralized lending that let you borrow without collateral or providing any personal information. They're not widely accessible to non-technical folks right now but they hint at what might be possible to everyone in the future. It works on the basis that the loan is taken out and paid back within the same transaction. If it can't be paid back, the transaction reverts as if nothing ever happened. The funds that are often used are held in liquidity pools (big pools of funds used for borrowing). If they are not being used at a given moment, this creates an opportunity for someone to borrow these funds, conduct business with them, and repay them in-full quite literally at the same time they're borrowed. This means a lot of logic must be included in a very bespoke transaction. A simple example might be someone using a flash loan to borrow as much of an asset at one price so they can sell it on a different exchange where the price is higher. So in a single transaction the following happens: You borrow X amount of $asset at $1.00 from exchange A You sell X $asset on exchange B for $1.10 You pay back loan to exchange A You keep the profit minus the transaction fee If exchange B's supply dropped suddenly and the user wasn't able to buy enough to cover the original loan, the transaction would simply fail. To be able to do the above example in the traditional finance world, you'd need an enormous amount of money. These money-making strategies are only accessible to those with existing wealth. Flash loans are an example of a future where having money is not necessarily a prerequisite for making money. Lending You can earn interest on your crypto by lending it and see your funds grow in real time. Right now interest rates are much higher than what you're likely to get at your local bank. *ex. You lend your 100 Dai, a stablecoin, to a product like Aave. You receive 100 Aave Dai (aDai) which is a token that represents your loaned Dai. Your aDai will increase based on the interest rates and you can see your balance growing in your wallet. Dependant on the APR, your wallet balance will read something like 100.1234 after a few days or even hours! You can withdraw an amount of regular Dai that's equal to your aDai balance at any time. Sources - https://ethereum.org/en/#unbankyourself Not financial advice. DYOR. DCA. BTD. HODL. #crypto #cryptocurrency #cryptocurrencies #cryptoaddict #cryptoalert #cryptobeliever #bitcoin #ethereum #cardano #public #publiccommunity #dyor #longterm #growth #learningtoinvest #feedyourbrain #learningaboutcrypto #possibilities #newinvestor #tech #technology . . .
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