Dear and valued readers,
Last week we discussed the origins of decentralized finance and some of its application areas. We briefly examined the concept of blockchain oracle. This week, we want to take a closer look at lending operations in DeFi systems. As we briefly mentioned two weeks ago, DeFi lending platforms offer loans without intermediaries, just like in traditional banking systems.
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So how does it do that? Thanks to us.
Okay, we won't compromise our modesty. It's not really our thing. Here, we're talking more about individual lending and borrowing. If you recall, P2P, the end-to-end data transfer method introduced by Satoshi Nakamoto in his Bitcoin paper, which enables blockchain systems to function, has been quite helpful. To quickly recap, P2P essentially means that data is transferred directly from person to person without being stored on any server.
Someone involved in the blockchain obtains a full copy of the chain, and when a new block is created, it is sent to everyone on the network. People on the network test whether the new blocks have been tampered with and confirm their trustworthiness, and they all add that block to their own chains. When this creates a "consensus," it is decided which blocks will be valid. If you were to aim for a retroactive change, it would be almost impossible because you would need to make changes to that block and all subsequent blocks, and you would need to have more than 50% control over each block in the P2P system. This shows us why blockchains are resistant to changes and "tricks."
Here, P2P refers to end-to-end lending and borrowing. But how is this system controlled, and how can we trust it? First and foremost, being part of a trusted ecosystem and ensuring the decentralized finance application you discover isn't "shoddy" is extremely important. Because you'll complete this transaction thanks to the lending protocols written within that ecosystem, and consider how much you can trust your banker if they don't know basic arithmetic. Here, the protocols written are your bankers , and unlike banks, you might encounter some bankers whose expertise wasn't actually assessed during the hiring process. It's wise to be cautious!
Promising easy access for each money transfer, these systems offer transparency by not involving a third party in the transactions, and this is a notable feature. The borrower needs a crypto wallet and must open an account on the DeFi platform. They can then carry out the borrowing process using smart contracts. If you are the lender, you can also earn long-term profits. DeFi becomes a profitable system for both parties thanks to margin options. Just as in traditional banking systems, the interest rate you earn increases over time, the same generally applies in this system.
The lender deposits fiat currency into the platform and receives their money back with interest when the loan matures. The borrower, on the other hand, receives collateral in the cryptocurrency the platform operates with and receives their loan in cryptocurrency. They then repay the loan with interest and receive their collateral back. The lender profits from their investment through interest, while the borrower profits through margin trading.
Brief news from the day
• mistakenly sent $7.2 million to an Australian user due to an incorrect entry of the amount's digits . The error was only discovered months later, by which time it was too late.
• signaling that it could be banned if environmentally sound solutions are not implemented .
• The Central Bank of Saudi Arabia has taken a step beyond traditional banking and appointed Mohsen Al Zahrani as its Crypto Chief.
this week's Decentralized Bulletin 😇
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See you next week! Happy Sunday! ☀️
Originally published on Medium on September 20, 2022. English translation of “Merkezsiz Bülten: DeFi Dosyası 3”.