After the holidays, we can resume our path in decentralized finance (DeFi) and as we had seen in the previous article in which we presented the macro areas of this sector, in the next articles, we will analyze in detail the individual sectors to better understand what they offer and what can be done.
This sector takes as a reference that of traditional finance, in which we find 2 subjects, one who needs liquidity and another who has liquidity and wants to make it profitable, exploiting a parameter that can be recognized by both parties which is interest.
So once the parties establish the parameters of the loan, such as interest and collateral on the loan, then we see that the beneficiary obtains the liquidity necessary to do what he wants or for a specific purpose, for example, think of a mortgage for the purchase of a house, and in that case the money will go directly to the seller of the property.
All normal and natural would you say, but there is a small problem, and this is represented by the documentation and guarantees required by financial institutions that dispose funds only after approval of the same documents and information that it has managed to recover on our economic profile and not.
In fact, access to these financial instruments is subject to our conduct, our past, and the financial situation in which we find ourselves, therefore it is highly discriminated against and 2 subjects, for example a student and a employer, will have access to instruments and liquidity different, or no credit that it is not certain that the financial institution will approve the request for liquidity of the applicant.
Traditional finance and loans are not democratic tools.
Contrary to what one might think that blockchain and crypto are scarce, anarchic and unregulated tools, we see that they reveal the most democratic and non-discriminatory tools that we can find in the financial world.
In decentralized finance, platforms have been developed that allow everyone to interact with them, and to provide or take liquidity from these protocols, and here too we find an interest both for those who provide liquidity, therefore the creditor, and for those who take liquidity, i.e. the debtor, is borrowed.
These protocols are simple only on the visual side, but behind they hide complexities that make everything work automatically and without the use of a human intermediary who can control whoever carries out the operation or for what purpose the loan is requested.
Behind these protocols are hidden smart contracts that operate automatically and perform a simple function, that is to raise the capital of creditors, generate interest based on available liquidity and allow the debtor to borrow liquidity, paying interest which is determined by the liquidity of the smart contract that manages the "fund", in fact the interests are inversely proportional to the liquidity, the lower the liquidity and the greater the interest we will receive or have to pay.
As regards the interest, this is counted either as APR (Annual Percentage Rate) or as APY (Annual Percentage Yield), and based on what we are going to do we may receive one or the other, because they follow similar logic and the the basis is always the usual concept of interest, but which is calculated differently.
So in this case, we have a subject who will only have to deposit his own funds and crypto in one of the many protocols that exist and for the entire duration of the deposit, he will obtain an interest that will calculate the smart contract in a variable way, unless we are faced with platforms that offer periods of freezing of funds for a fixed interest, and on the other hand we will find another subject or the same, who will exploit the liquidity of the protocol to borrow the funds from it, without going through any procedure bureaucratic or share your financial situation or the purpose of using these funds with third parties.
How can I use these platforms?
Lawful question but which contains a very thorough and detailed explanation, and it is for this reason that this and other questions such as which are the best platforms for this kind of financial products, are answered in the book that explains the various topics in detail, which takes the name of "Mastering DeFi - A practical guide for beginners and the advanced", important because it not only explains the basics of this sector and the various steps of the various protocols, over 30, but it is also the only one that examines 3 different blockchains such as Ethereum (ETH), EOS and Tron (TRX).
A book that analyzes the macro-categories of decentralized finance which are:
Lending and BorrowingPaymentsDecentralized ExchangeAsset managementDerivatives
All organized into 8 chapters and also divided by blockchain so as to have a complete picture of what we find on the various blockchains and also make the relative comparisons to leave maximum freedom for anyone to use the blockchain they prefer without closing the door to others.
Over 30 protocols analyzed in detail and details, with relative fundamental steps, an indication of the various costs incurred to carry out the various transactions, so as to make the reader aware before he can interact with him.