Flash Loans Mexc
Table of Contents
The world of decentralized finance (DeFi) took the cryptocurrency market by storm in 2020, and despite a decrease in popularity, billions of dollars continue to flow into various DeFi products. So, what is DeFi lending exactly?
What is DeFi Lending?
In the traditional financial system, accessing financial services and loans requires a lengthy process of identity verification and providing personal and collateral information. However, in DeFi decentralized financial services, anyone can complete a loan without disclosing information to a third party. Borrowers pledge their crypto assets as collateral, and lenders earn interest by depositing assets on the platform.
Decentralized lending eliminates the barriers of traditional finance, allowing for increased utilization of crypto assets and enabling users to generate passive income by holding cryptocurrencies. This is the driving force behind the explosive growth of DeFi in recent years.
The DeFi Lending Model
There are three main types of lending available in DeFi:
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Peer-to-peer mode: Borrowers and lenders list themselves on a platform, with the platform acting as an aggregator. When borrowers are unable to repay the loan, the platform automatically executes the liquidation process. Platforms like dYdX and dharma offer this service, although it can be relatively inefficient.
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Stablecoin Model: MakerDAO is a well-known platform that allows users to deposit ETH and borrow a stablecoin called DAI, which is pegged to the US dollar. The platform requires a minimum collateralization ratio of 150% or more.
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Liquidity pool trading model: This is the most mainstream DeFi lending model in the market, used by platforms like Compound and Aave. Users can deposit and withdraw funds as they like, and the system sets the interest rate through an algorithm to balance supply and demand.
Compound
Compound allows users to deposit assets into liquidity pools and receive cTokens, which are proof of interest. These cTokens increase in value over time, allowing users to earn interest simply by holding them.
Aave
Aave is a pool-based lending agreement platform that allows users to deposit assets at any time to earn interest or lend other assets. Aave also introduced an innovative unsecured lending product called “flash loans.”
Flash loans allow borrowers to obtain loans without providing any collateral. The loan and interest repayment must be completed within one block of ETH (15 seconds). If the transaction is not completed, the smart contract automatically undoes all previous operations to ensure overall agreement and asset security.
Security Issues with DeFi Lending
Despite the uncensored and efficient nature of DeFi lending, ensuring the safety of lenders and platform assets remains a concern. Unlike traditional finance, DeFi lacks credit metrics. To mitigate risk, all mainstream platforms rely on over-collateralization and smart contracts that enforce a strict clearing process.
However, the volatility of cryptocurrencies poses a challenge. Although the probability of a rapid flash crash is small, it can still impact the security and trust of the DeFi platform. Additionally, contract vulnerabilities have resulted in asset theft on DeFi platforms. Users must carefully manage their capital and be cautious even while enjoying the flexibility and convenience of DeFi.
Closing Thoughts
Decentralized finance has revolutionized lending relationships through smart contracts, reducing barriers to entry. The industry continues to evolve, with innovative lending models such as leveraged lending on the horizon. The future holds great potential for further innovation in the DeFi lending market.
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