Decentralized Finance or DeFi is a phrase that is often being used in the finance sector, specifically in the Cryptocurrency area for the past few years and has piqued the interests of several businesses and entrepreneurs looking for viable business opportunities. In layman’s terms, DeFi is a merger of traditional bank services with blockchain technology. It is an open finance system providing an alternative to the services of a bank.
What exactly is DeFi?
Decentralized Finance is a concept that was introduced around 2015. It is a form of finance that does not work under a central authority or intermediaries like banks and exchanges. Run-on the Ethereum platform, DeFi uses smart contracts on blockchains that initiate and execute functions like lending and borrowing cryptocurrency assets, trade, and earn interest from them. There is no third-party involved in these transactions, making them immutable and transparent.
There are several DeFi Protocols that allow eager users to carry out the aforementioned functions with ease. Examples of such robust lending and borrowing protocols include Compound and Aave. Because of the accessibility these platforms provide and the seamless peer-to-peer integration, these protocols are the go-to applications for those who cannot access traditional methods of lending, borrowing, and trading.
So you, as a business owner or an entrepreneur, can invest in a proficient lending and borrowing platform like Compound by trusting decentralized protocol developers. Explained below is how a DeFi platform like Compound works and how you can make users want to use your platform for their cryptocurrency trading needs over others.
How does the Compound protocol work?
Predominantly, two types of services are performed on these platforms – Lending and borrowing of assets.
- How lending works
Simply put, users can deposit their assets and cryptocurrencies on the protocols like Compound to take part in Crypto trading, lending, and yield farming. This is done using wallets like MetaMask (Web 3 wallet), Coinbase wallet, and Brave. It’s sort of like a bank where you deposit your money and earn the corresponding interest. Once the assets are deposited for lending, users will receive interest. The interest percentage fluctuates based on the demand and supply of crypto assets but more on that later. Since the compound platform works on smart contracts, the process of borrowing and lending is completely automated.
Users can directly link their wallet with the platform, select the asset they wish to lend to borrowers, specify the quantity, and then enable the process. The wallet at this point will ask for confirmation, which can be given by the user after which a small gas fee is paid. The assets are then transferred to the platform after which interest is earned.
- How borrowing works
A workflow similar to lending is observed for borrowing crypto assets. Borrowers will need to hand in collateral in lieu of the amount being borrowed. The DeFi Compound protocol does not allow the borrowers to exceed their capacity of borrowing.
A system called the ‘Borrowing power’ will determine the amount of assets that can be lent to the borrower. This protects the lender from the risks of failure of repayment by the borrower. In fact, protocols like Compound maintain excess collateral to avoid any risks that may occur.
Once the borrower receives the assets, the interest amount is paid, and once the entire amount is paid back, the collateral that the lender is holding is released.
How are interest rates governed in DeFi protocol solutions like Compound?
The interest rates that each market offers is directly related to the liquidity of that market. As mentioned earlier, as the supply and demand of the assets change over time, so does the interest rate. In other words, when the liquidity is high in the market, the interest rate drops. When liquidity is reduced, the interest rate automatically boosts.
Advantages users can experience using your DeFi platform like Compound:
Listed below are some of the benefits your users will enjoy from the DeFi protocol like Compound is sure to increase the visibility of your platform.
- Users will face no limits for lending and borrowing in Compound finance.
- ID verification and KYC are not required to make transactions.
- Users can lend and borrow in several markets. Popular markets include Dai, USD Coin, Ether, Wrapped, Tether.
- The protocol only retains 10% of the earned interest, the rest is taken up by the lender.
- They provide autonomy, ensuring that the user’s assets are theirs and now one can infiltrate the system.
- The lack of boundaries or rather the accessibility of the platform is an added advantage as it allows services to anyone despite their location.
- The data is available publicly which allows for service providers to be impartial.
- The smart contract implementation will allow for automatic processing without the reliance on third parties.
- DeFi platforms like Compound and Aave provide flash loans for those who are in immediate need of assets for other operations. This can then be paid back after a certain period of time.
Why trusting BAF’s Decentralised protocol development will boost your profits
Our white-label and feature-filled solutions are sure to give your brand the highest visibility. Our experience and skills in developing and delivering services with blockchain technology over the years give us an edge over our competitors. Our DeFi protocol solutions offer increased speed and flexibility to the processes, including innovative features, making our lending and borrowing platform superlative above others. Develop and launch your own DeFi protocol like Compound now by partnering with us at BAF!