In an era of rapid technological development, blockchain technology and cryptocurrency are gradually changing our lifestyles, among which decentralized finance (DeFi) is a highlight. If you have ever heard about DeFi but felt at a loss, or are confused about cryptocurrency lending, then this article is for you. I will take you into an in-depth understanding of the core concepts of DeFi lending, from its basic principles to practical operations, as well as possible risks and response strategies. Are you ready to enter this emerging world of finance? Let’s get started!
What is DeFi? Deep understanding of decentralized finance
DeFi, the full name of Decentralized Finance, is an emerging financial system that relies on blockchain technology. Its goal is to break the monopoly of traditional financial institutions and integrate all financial operations (including lending, insurance, payment, etc.) Disintermediation, directly through the blockchain. In this system, smart contracts (Smart Contracts) play a vital role, automatically executing transactions and ensuring transparency and security at every step.
To understand the charm of DeFi, we first need to understand how it is different from traditional finance.
First of all, in DeFi, lending does not require third-party institutions such as banks as intermediaries, but relies entirely on smart contracts for execution, which makes the entire process more efficient and transparent. In addition, DeFi has no geographical restrictions and anyone can participate as long as they have an Internet connection and a cryptocurrency wallet. By cutting out the middleman, DeFi platforms can often offer lending services at lower fees and allow for more flexible interest rates.
At present, DeFi has covered multiple financial fields such as lending, trading, and savings, and well-known platforms such as Aave, Compound, and MakerDAO have emerged. With the development of blockchain technology, DeFi is expected to become part of mainstream finance in the future, providing decentralized financial services.
The appeal of DeFi lending: Why is it worth trying?
So, why do more and more people choose DeFi lending instead of traditional bank loans? In fact, the appeal of DeFi lending mainly comes from the following points:
First of all, DeFi lending does not require cumbersome identity authentication or credit assessment. As long as sufficient collateral is provided, you can quickly obtain a loan, and the funds arrive almost instantly. Secondly, DeFi transactions are based on blockchain records, which are transparent and cannot be tampered with, ensuring the interests of participants. In addition, DeFi platforms have high flexibility in interest rates and terms, allowing users to flexibly allocate funds according to their needs.
The application scenarios are also very diverse, such as liquidity mining, where users can earn additional income by providing liquidity to the DeFi platform; or use leverage to increase funds for cryptocurrency investment, of course, this is also accompanied by higher risks. In addition, DeFi lending can also help users convert cryptocurrencies into stablecoins to hedge against market fluctuations.
The basic operating model of DeFi lending
As a Lender: How to Become a Supplier of Funds?
In DeFi lending, lenders, or fund providers, play an important role. You can choose DeFi platforms such as Aave and Compound to deposit cryptocurrencies into the liquidity pool. These funds will be provided to borrowers and you can earn interest on them. The entire process is automatically managed by smart contracts, and the lender’s financial security relies on the security of these smart contracts, so it is important to choose a platform that has been security audited.
As a Borrower: How to Borrow Cryptocurrency?
If you want to borrow cryptocurrency, you need to provide collateral, usually worth more than the borrowed amount, to protect the lender. When the collateral is in place, you can borrow a certain amount of cryptocurrency or stablecoin. Once the loan is repaid, the collateral will be returned to you. The process is straightforward and eliminates the need for a cumbersome credit evaluation.
How to choose a DeFi lending platform
There are many DeFi lending platforms on the market, each with its own unique features. Aave offers flexible lending options and supports collateral-free flash loans, perfect for arbitrage and emergency needs. Compound allows users to deposit assets into a pool to earn interest, and is a platform with a mature lending market. MakerDAO’s DAI is one of the most well-known stablecoins, suitable for hedging the risk of market fluctuations.
When choosing a platform, security is of paramount importance. You should consider whether the platform has undergone security audits and how stable the smart contracts are. In addition, the interest rates of different platforms are dynamically adjusted according to the supply and demand of funds. You should choose the interest rate that best meets your goals. The user experience of the platform is also important. Some are more suitable for novices, while others offer more diverse choices.
Risks and Challenges: How to protect yourself in DeFi lending?
The high volatility of the cryptocurrency market is a double-edged sword for DeFi lending. Severe market fluctuations may cause the value of your collateral to plummet. If the value of the collateral is insufficient to support the borrowing, “liquidation” may be triggered. The core of DeFi is smart contracts, and smart contracts inevitably have loopholes. Choosing a security-audited platform can effectively reduce these risks.
In addition, liquidity risk is also a major challenge. DeFi platforms rely on the supply of funds in liquidity pools. If participants withdraw funds on a large scale, it may cause liquidity to dry up and affect normal operations.
With the advancement of blockchain technology, the application scenarios of DeFi will become more and more extensive. In the future, we can expect the emergence of more DeFi lending products linked to real assets, such as real estate mortgages, equity tokenization, etc., which will further lower the lending threshold and benefit more people. However, the decentralized nature of DeFi also faces compliance challenges. How to balance supervision and decentralization will be an important issue that the platform needs to solve in the future.
From theory to practice, master the power of DeFi lending
DeFi lending provides us with a brand new financial tool that requires no intermediaries, is open and transparent, and can meet diverse financial needs. Whether you want to earn interest or are looking for flexible lending options, DeFi is a new option. But at the same time, we also need to recognize the risks and do a good job in risk management. As long as you deeply understand how it works, choose the right platform, and adhere to risk control measures, you can reap huge rewards in this emerging field. I hope this article can help you open the door to the world of DeFi lending, and let’s explore more possibilities together!
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About LayerPixel：
LayerPixel is an all-in-one DeFi protocol designed specifically for the TON blockchain and seamlessly integrated with Telegram Mini Apps. Leveraging a modular architecture, LayerPixel overcomes the asynchronous limitations of TON while harnessing its sharding benefits.
At the core of the LayerPixel ecosystem are several innovative components:
- PixelWallet - An SMC wallet with Account Abstraction (AA) features, enabling users to interact with dApps and the LayerPixel ecosystem with ease.
- PixelSwap - The first modular DEX on TON, supporting advanced trading models like weighted pools and LBP.
- Pixacle - A decentralized oracle solution delivering fast and accurate price data to dApps and smart contracts.
LayerPixel’s future plans include becoming a cross-chain solution to power DeFi experiences across all Telegram Mini Apps. By providing an all-in-one platform, LayerPixel aims to make blockchain-powered finance accessible to everyone within the TON ecosystem.
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