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Dear Bankless Nation đ´,
Welcome to the second edition of the DeFi Download! For our first issue, we focused on stablecoins, the foundational money lego. For this issue, weâre still sticking to the basics but we begin to explore a bit of what makes DeFi so revolutionary â in this case, lending markets.
In traditional finance, lending markets are largely controlled by banks and other legacy financial players. These institutions determine who is eligible to borrow money (and in many cases who can lend money)â itâs a gated, permissioned system. As with all things DeFi, blockchain-based lending markets are not gated, allowing anyone to borrow assets against their deposited collateral. There is no loan officer determining your financial worth, your ability to get a loan. In DeFi, if you have the collateral, you have the ability to get a loan. And if you have assets to lend but arenât interested in the sub 1% interest rates paid at your local credit union, DeFi also has a place for you too. This is the democratization of finance.
Lending protocols vary widely in their operation. OG lending protocols like Aave and Compound essentially allow users to provide liquidity to earn yield (interest) or borrow against collateral they deposit, paying a stability fee (again, interest) for the pleasure of borrowing digital assets, most often stablecoins. While these legacy lending protocols tend to be more conservative in the assets that can be used as collateral, other lending protocols allow users to essentially use any digital asset as collateral for a loan. Weâll explore the benefits and risks of both types of protocols.
Also in this issue, youâll get a great basic overview of the how, what, and why of lending protocols, but youâll also learn about liquidity pools and automated loan coverage, the difference between APR and APY, and advanced tactics to leverage lending protocols to go short or long on assets. As youâll understand after reading this issue, DeFi lending is about more than just earning a bit of yield on a deposit, itâs about becoming more self-sovereign. Money canât buy you freedom, but the freedom of DeFi allows you to do more with your money.
Contributors: BanklessDAO Writers Guild (Bl0ckb0y.eth, d0wnlore, Elemental, EthHunter, teeLEROO, siddhearta, hirokennelly.eth, Jake and Stake)
From âCastle Ethereum,â by Perchy
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