Decentralized finance, or DeFi, is one of the most important topics in cryptocurrency. DeFi’s aim is to create a completely new financial system that is completely independent of the traditional financial economy.


Lending and Borrowing in the DeFi ecosystem

Lending and borrowing platforms have become an important part of the DeFi ecosystem. Users can lock crypto positions into a smart contract and borrow against their positions. Other users can lock crypto positions into a smart contract and generate profits by allowing users to lend their coins.

One thing to note is that the yields generated by lenders in DeFi are substantially higher than in the traditional financial system. Running a smart contract is much more cost-effective than running a traditional bank. Therefore, nearly all profits generated from lending money are transferred directly back to the lender via smart contract. Many people put their trust in these transparent smart contracts and can generate substantial income from using them.

In a world of ultra-low interest rates, cost-effective smart contracts provide a technological solution to this problem. Many were annoyed with central bankers for allowing interest rates to be so low, and the solution was not found through political persuasion but through technology, which once again created an opportunity for both borrowers and savers. Perhaps it would be wise to bet against the traditional banking system by building a robust DeFi portfolio.


Another major application in DeFi’s lending and borrowing portfolio is Compound, an autonomous algorithmic protocol that allows users to offer various crypto assets and start generating interest. Compound also allows users to borrow crypto positions like ETH and borrow stablecoins (with interest) to be used for spending. This is very similar to the traditional financing concept of borrowing dollars against an appreciating security. Anyone can lock assets to the compound protocol and immediately start earning continuous compound interest on their positions.

Unlike traditional banks, compound interest rates automatically adjust depending on supply and demand. When users provide tokens for the Compound protocol, they will be credited with cTokens, which represent the underlying assets that are generating interest and acting as collateral. Combined users can borrow up to 50% of their cToken value. Just like in traditional financial systems, there are liquidation points on the borrowing position. Users have instant liquidity and can withdraw their assets at any time.

Aave and Flash loans

Another major lending and lending platform in the DeFi ecosystem is Aave. Similar to Compound, Aave is a decentralized, open-source, unattended protocol that runs on top of Ethereum. Aave allows users to lend or borrow crypto assets. Lenders can profit from their assets being made available to the protocol. Like a compound, earnings are adjusted depending on market supply and demand.

Aave also offers a unique service called “fast loans” Fast loans are “block borrowing transactions,” which are transactions in which users borrow and repay a loan within the same block. A smart contract allows a loan to occur only if borrowing and loan repayment occur in the same block (transaction). This technology is a new feature used in arbitrage and fast trading. This type of lending does not exist in traditional finance and is seen as a major improvement to the TRAFI system.

Fast loans allow cross-exchange arbitrage to exist within the crypto ecosystem. Fast loans increase price stability on crypto exchanges and ultimately strengthen the crypto economy.

Why is DeFi so important?

DeFi’s goal is to create an open, trustless, and permissionless financial market. Significant development and investment have been placed into the advancement of DeFi, and as a financial advisor, it is important to understand this space. Much of the technology in the DeFi space builds on and improves on the TradFi system, which can deliver better results for the users—you and your customers. As the space continues to grow and consolidate, it is paramount to be knowledgeable about decentralized finance and ready to interact with and rely on these applications.

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