DeFi Lending Protocol Development - Create DeFi Lending Protocol Like AAVE!
While people talk about the potential of blockchain tech, business people are busy to revamping their business with immutable blockchain. Over the past couple of years, we’ve supported a rising wave of earnest projects that have combined forces to fight the centralized financial system and revamp the traditional banking system. The core of these projects is now officially called DeFi.
So in this article, we will start to discuss about the most trending and popular, DeFi Protocol, Aave. We will discuss how one can borrow in Aave, its benefits over other protocols, how to create DeFi protocol like Aave and more
Before we entering into the topic just get some knowledge about DeFi & its use cases!
Simple Explanation of DeFi
DeFi, short for decentralized finance, can be explained as a base of blockchain-powered decentralized tools such as Synthetic Crypto Assets, Protocols, Payments, Lending, Borrowing, Staking and dApps that mainly run on the Ethereum & Tron network. Most of the DeFi protocols are open source and aim to provide the best solutions for the adaptable management of digital funds.
Explore here more - What is DeFi? A Complete Guide!
Why Do We Demand Decentralized Finance?
The local fiat currency system is far from optimal – cash payments are difficult, so we all adopt to use our credit and debit cards. The problem with cards or other instant payment systems is that there is a complete third party systems, whether it’s a bank or the government which takes control over your fund. Apart from that they are charging numerous commission fees, banks may hold your accounts for various reasons, not to notice financial crises, inflation, human factors, and privacy issues.
Also, there is a huge number of people enduring in developing countries who still remain unbanked and have no access to credits, loans, and other benefits.
Our traditional financial system is also far from being fair and transparent and it’s clear that the world requires an alternative solution. That being said, decentralized finance (DeFi) might be the best answer.
With cryptocurrencies entering into the market and play a major role, the situation with our financial system has potentially enriched, but it has not transformed completely. Although we’ve got a way to buy, sell, and deposit money to one another on our wish, the only perfect way to get access to cryptocurrency is via centralized exchanges but one of the major issues is these types of centralized exchanges also non-transparent and they depended on another third party companies.
But DeFi is working on a breakthrough that transforming the entire traditional methods.
How DeFi Projects are Dealing Your Financial Ecosystems?
There are a lot of hurdles that have to be faced in the upcoming years, from adoption to development, but open finance like DeFi projects have been focused on their efforts regularly to create a consolidated ecosystem where all elements can simply interact with each other. As a result, we’ll be able to link various applications together and make use of customized solutions.
Now, let’s take a peek at the key players of the current DeFi ecosystems.
Stablecoins in DeFi
Unlike other cryptocurrencies that have a volatile value, stablecoins are blockchain-based tokens built to hold on to a specific real-world asset value. A stable coin can be pegged to fiat money like USD, or to exchange-traded commodities (like precious metals or industrial metals), cryptocurrencies.
Stablecoins can be primarily categorized into 3 types:
Exchanges and Open Marketplaces in DeFi
DeFi exchanges are very different from centralized exchanges like Coinbase. They involve p2p transactions of digital assets between two parties on the blockchain with no third-parties actions. The advantage of this way is that there are no sign-ups, no identity verification, or any withdrawal fees.
IDEX is the most popular Decentralized Exchange – a dapp on built top of the Ethereum blockchain platform. Other Decentralized exchanges include Binance DEX, EtherDelta & Radar Relay.
Most of the open marketplaces focus on non-fungible tokens (NFTs) exchange. These types of tokens are specified to as crypto-collectibles. There are also some marketplaces available such as District0X that allows for the development of marketplaces to vote on governance procedures.
Open Lending Protocols in DeFi
This refers to s a crypto lending platform built on top of the blockchain platforms like Ethereum, Tron, etc. It's similar to a bank, users can deposit their money and earn interest if other else borrows their digital assets. Yet, smart contracts are used instead of third-parties to rule the loan terms. These smart contracts are also important for connecting lenders and borrowers, and distributing the interest.
So here we have got some idea about DeFi and their use cases so let's come to the topic. There is n Number of DeFi based Lending and Borrowing platforms have arrived but Aave (LEND) is the best DeFi protocol which beats Maker & Compound to become #1 in DeFi rankings!
What is Aave?
Aave is a decentralized money market protocol that enables users to lend and borrow cryptos of their own wise in an honest way while providing stable and various interest rates. In other words, Aavi is an open-source, decentralized protocol that enables users to earn interest on deposits & borrow assets.
Aave is a market leader in the lending and borrowing sector of DeFi space.
Aave is one of the top lending & borrowing platform in DeFi ecosystems. Unlike other DeFi protocols, this network accepts liquidity from depositors and allows borrowers to get loans using undercollateralized or overcollateralized methods.
When compared to other DeFi protocols, there is no lengthy registrations process to contend with, and not any KYC (Know Your Customer) or AML (Anti Money Laundering) documents required. Aave sets users free from all this.
How To Lend & Borrow Crypto Using Aave?
Above I said, Aave is an open-source and noncustodial decentralized finance protocol which allows users to participate as depositors or borrowers
As lenders, they have to deposit their funds into liquidity pools and earn interest. The interests are not fixed because they depend on prevailing market conditions. Interest paid to lenders is based on the borrowing rate and the utilization rate.
As a borrower, they can borrow from such liquidity pools. As well as the protocol allows depositors to earn a passive income, while borrowers can borrow the selected amount in an overcollateralized or undercollateralized manner.
Each pool sets crypto assets aside as manage to safeguard against volatility. Such reserves assure that lenders can withdraw their funds whenever they want to exit the protocol.
Aave is entirely open-source, audited, and secured, which means lenders and borrowers can interact or else with the user interface client, API, or directly with the smart contracts on the Ethereum network. It supports around 20+ cryptocurrencies; Yet, all cryptos cannot be used as collaterals.
For a borrower to borrow, one must handle and hold collateral, which should be greater than the amount borrowed, and while using Aave protocol, it is compulsory for borrowers to handle the collateralization ratio. If in case, they don’t maintain this ratio, any other user can liquidate them.
Impartial of whether the user deposited collateral for either of the purpose (lending or borrowing), they get interest-bearing tokens(known as tokens) in return.
Aave also has liquidity pools set up on other DeFi platforms like Balancer and Uniswap to deal with liquidity issues, if any, so that users can withdraw their funds when ready.
The Progress of liquidation in Aave
Liquidation happens when the borrower’s collateral value significantly drops and does not completely cover the loan or the actual part of their credit. Two processes can ignite this. The value of the collateral can fall, or the value of the borrowed debt rises, leaving part of it exposed.
The Aave protocol has various liquidation penalties depending on the collateral type. Liquidations can be avoided by offering more collateral or repaying sections of a loan. Note that liquidators get a liquidation bonus.
Aave flash loans
Flash loans are loans taken by Aave developers without collateral to build smart contracts. Yet, the contracts have to be adapted towards loans. On getting the contract ready, proceeds from the product are utilized to repay the loan with interest. End-users can approach flash loans utilizing applications such as defisaver and collateralswap.
How Aave Handles Governance?
DeFi lending protocol Aave has launched its new governance token on the Ethereum mainnet which supports staking. A people who can stake the token or delegate to what Aave calls ‘Protocol Politicians.’ Delegated tokens can be withdrawn at any time.
The politicians show their people, those who have delegated the coins to them, on governance matters. The Aave network allows governance-related reports to be signed from the cold storage to cut down the need to transfer tokens from cold wallets to hot wallets.
Aave (LEND) Token
Now, Aave’s DeFi platform uses LEND as its native token but its old name is called as a ETHLend, but these are now set to be swapped for the upcoming governance token, AAVE. These governance tokens will probably introduce a financial services ecosystem that is pegged on a future proof framework and distributed governance to enlarge safety and viability.
LEND is built using Ethereum’s ERC-20 standards. Aave’s native coin is used to obtains discounts on transaction fees. Also, LEND investors get a share of the platform’s transaction fees for securing the platform.
As with native token’s on other DeFi platforms, LEND affords voting rights on governance issues originated via Aave improvement proposals (AIPs). Voters can use their tokens even if they are utilized as collateral.
The LEND token supply, which is actually 1.3 billion, will be decreased to a bare 16 million AAVE tokens once the Aavenomics proposal is fully integrated. 13 million of LEND tokens will be recovered by token holders, while the remaining 3 million will be allotted to Aave Ecosystem reserve. With this stats, Aave fixed the conversion rate for LEND against the new governance token at 100:1 to achieve the target numbers.
To initiate the swap, a governance vote will be handled via the existing LEND token holders. Once approved, the underlying smart contracts will facilitate the swap in a move that will see Aave attain more decentralization in its governance.
Benefits of DeFi lending/borrowing platforms like Aave:
DeFi lending and borrowing platforms offer N number of benefits over the traditional lending/borrowing platforms like:
- Integration with crypto-asset lending or borrowing.
- Collateralization of crypto assets in case of defaulting on the loan.
- Instant settlement of transactions and new secured lending plans.
- Similarity and interoperability which can also reduce costs with automation.
- No credit checks which means broader access to people that cannot tap into traditional services.
Currently, the DeFi market is so hot as well as getting so popular. Over the last year, DeFi based solutions like tokens, smart contracts, lending & borrowing, staking, and, of course, DeFi have totally changed the traditional finance way to get more transparency with it.
So if you are thinking about creating your DeFi lending protocol like Aave, you won't have a more apt moment than now: the demand is very high. We will guide you and help to launch your DeFi lending & borrowing protocol with cutting-edge technologies!
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Our team connects cutting-edge technologies and architecture with the unique logic of the DeFi solutions. We offers a complete range of Decentralized Finance development services, including DeFi token development, DeFi smart contract development, DeFi staking platform development DeFi exchange development, DeFi Synthetic asset development, as well as decentralized application development.
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