Understanding De-Fi : A Quick Look at Compound Finance

[otto11]

BANKS :

Are one of the main players of the financial industry and had been present for over 2000 years , from the times of trading by barter to the times of giving grain loans to farmers and traders.

Then in the 14th century it really started to grow from ancient China , India , Greece and Assyria.

The industry started to really grow in Italy and spread into other parts of Europe then into the rest of the world.

It will be safe to say since other forms of banking had already been in place since B.C the system has been able to absorb and adapt to other forms of banking this in a way would mean that the banking system is fluid and flexible.

Banks are a major part of the financial industry and since banking has or is viewed as flexible and fluid which has enabled an almost effortless providence of value transfer services (deposits , withdrawal , transfers and even loans)

They have always been managed by policies that are prone to mistakes and corruption an example of this would be the event if 20th of February , when the stock markets crashed due to the outbreak of the Coronavirus .

Point :

It is no longer news that financial institutions have been using the funds of civilians to trade in stock markets without the owners knowing about it.

There have also been events where financial institutions like this simply disappear without a trace of where the costumer assets are .

The outbreak caused a major recession in fact it caused a "deep recession" that has caused a major slow down to emerging economies.

Reconfirming the dreaded thought that even though such an institution promises safety of one's assets , though traditional and ever adapting in their methods they are not perfect and when they make such mistakes other institution in neighboring countries in fact are affected as they are all centralized

But there's a solution called De-Fi (Decntralized finance).

So ,

What is DE-FI ? :

De-Fi stands for “decentralized finance” and can be defined as the use of decentralized networks and open source software to create multiple types of financial services and products.

• De-Fi aims to build a better financial landscape with internet and blockchqin technology and with major focus on

a). Accessibility.

b). Payment Clearance systems.

c). Centralization and Transparency.

Now see , before i start going on and using lines like "awesome , super , wonderful" and etcetera lets start by picking an example and doing my best to break it into components in the remainder of this piece.

So , where were we ?

Oh yeah !!! De-Fi!!

Since we've already touched on the definition lets go a wee - deeper by firstly listing a few examples of De-Fi projects.

Examples of De-Fi projects are :

• Compound.
• MakerDAO.
• Uniswap.
• Kava.

To put it more accurately think of De-Fi as a Tesla though there have been cars before it that use electricity and gas but not in the same as the Tesla has been able to use its own.

Comprende? No? - okay but i tried , huh? Lol!!
So for a better understanding lets take look at one of the De-Fi projects earlier mentioned (lets pickcompound).

COMPOUND :-

What is Compound Finance ? :-

Its an interest rate protocol that's capable of governing it's own affairs for the purpose of open financial applications.
De-Fi projects are mostly on the Ethereum blockchain as it is Compound is a protocol on the Ether blockchain that establishes money markets.

How? :

This is based on supply and demand for asset where suppliers interact directly with the protocol , earning interests rates without having to negotiate terms such as maturity , interests rate or collateral with peer or counter party.

Judging by the key categories that De-Fi projects go by ( that's like the building plan of De-Fi ) namely :

• Stablecoins.

• Lending and Borrowing.

• Derivatives.

• Fund Management.

• Lottery.

• Payments.

• Insurance.

Compound to have checked all requirements with the recent surge in the value of it's governance token called COMP.

Okay , so enough droolling time to get back to what we came here for.

Also Compound also currently uses : ETHER (ETH) , USD Coin (USDC) , Dai (DAI) , WRAPPED BITCOIN (WBTC) , OX (ZRX) , AUGUR (REP) , and BASIC ATTENTION Token (BAT).

The annual percentage yeild (APY) of each asset differs.

How much is received if I want a loan or need to pay? :-

To begin with, it'll very important to know that assets are set algorithmically based in the supply and demand of the assets

This means a high demand will naturally cause a high interest rate.
And as it isnt needed to register for an account 'cos lets face it if you do then whats the point of Decentralization huh?

Alright , so without more to take away or add here's ...

A Step-by-step guide on how De-Fi works.

I'll be picking Compound (pfft...obviously!!!) for this so ,

How investing works on Compound Finance :-

Step 1 : - Visit : compound's page here .

• Connect your wallet and follow its instructions.

• Deposit cryptocurrency into the liquidity pool.

Step 2: - Receive eTokens

• After you would have supplied your assets you get cTokens which will represent the type and amount of assets you have deposited.

• The cTokens act as a claim of deposit and records the interests you earn. It'll also be used to redeem or withdraw your assets.

Step 3: - Earn interest.

• You will start earning immediately after deposits are done which also means the same as holding the cTokens.

Step 4: - Redeem cTokens

• Over time the interests accumulates and each cTokens is convertible into a greater value of underlying assets.
  They can be redeem at anytime into your Crypto wallet.

How borrowing funds works on Compound Finance :-

Note :- in other to be able to borrow funds from the pool there are requirements that needs to be met , they are ...

(a). You are required to supply a valuable worth of assets into the Compound as collateral.

(b). Each token has its own collateral factor , by that it means the total amount of the value you supplied is worth.

(c). You can't supply and borrow the same token at the same time.

Step 1: - visit Compound's landing page using this link .

• Chose which token you wish to borrow e.g USDC.

Step 2: - A pop-up on USDC will appear first timers would need to enable it (browser through options)

• Each token has to be enabled individually.

Step 3: - Chose the amount of how much you would like to borrow.

• Confirm the transaction with your wallet.

Step 4: - You will see how much you supply and how much you've borrowed on the main page .

• Congrats , You are finished.

As we slowly near the conclusion of this piece , here are my Final thoughts and the part where are start using lines like... :

• One of the "awesome" advantages of De-Fi is autonomy , that is your assets in a De-Fi ecosystem are yours alone

• Another wonderful thing about De-Fi I'd that there aren't any intermediaries , meaning you interact directly with the ecosystem.

• The super part of De-Fi systems are the extra costs (hold on! don't get a heart attack yet, let me finish) and the charges that it doesn't need to operate.
  Unlike other forms of institutions like banks.

• Also please it is strongly advised that you DYOR as the illustrations above a from personal researched and views.

@Otto11 here and have a good one .

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