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Bitcoin has brought us the concept of a digital asset stored in a decentralized database called Blockchain.
Blockchain, however, can store much more than just value (i.e. the amount of coins we own). A blockchain can also store computer programs. These are called “smart contracts” (smart contracts), but this can be a somewhat confusing term since it is not a real contract. It is merely a computer program (code).
How are smart contracts different from regular computer programs?
Once a Smart Contract is uploaded to the Blockchain, it can never be deleted or changed (just like no one can delete the amount of Bitcoin someone owns). Once something is stored in the blockchain, it stays there forever.
You can’t store code in the Bitcoin blockchain, but you can store it in the Ethereum blockchain (that’s why they say Ethereum is a “smart contracts blockchain”).
This way, programmers can create decentralized programs (smart contracts / smart contracts) that allow lending / borrowing between many people, as well as buying / selling tokens (no central exchange needed anymore) and much more. This is what we call DeFi.,
What does DeFi mean?
DeFi is short for Decentralized Finance or Decentralized Financial System.
This means that any financial service (such as lending, borrowing, trading, etc.) that we know from traditional finance can be performed in a decentralized and freely accessible manner in DeFi.
How does this affect me? Why should I care that something is decentralized and freely accessible?
Decentralization means that you have complete control over your own funds. There is no middleman in the middle who can freeze your finances.
Of course, such circumstances are very rare in the Western world, but someone living in a non-democratic country can face such consequences (if he/she speaks against the government, for example).
Open access means that one can use a service regardless of where one lives, gender, nationality, or race. Smart contracts do not discriminate.
Europeans often face such issues when trying to use web services from U.S. technology companies. This is not necessarily related to discrimination, but because the country is not supported. Blockchain applications (smart contracts) don’t care which country you are from, anyone can use them.
What are popular examples of DeFi apps?
Probably the most popular and widely used DeFi service is Venice Swap. With Venice Swap, you can buy or sell all tokens that are issued on the Ethereum network.
But what if a borrower doesn’t return the loan?
In order to receive the loan in the first place, the borrower must include collateral in the Aave Smart contract. Collateral can be any token supported by Aave.
For example, if a borrower wants to borrow 1000 USDC (a USD stablecoin), she must put up collateral in the form of an ETH. If she doesn’t repay the loan, Aave will automatically sell the locked ETH and repay the loan.
Why not just sell the ETH then?
If one believes that the value of ETH will increase, one would rather not sell the ETH, but instead take out a loan that can be repaid gradually.
In the meantime (if one is right) the ETH price will rise and when one repays the loan and gets back the ETH collateral, one will get out with a profit in the end.
Where do you learn more about DeFi and how blockchain works?
There are many resources – from YouTube videos to books. Like everything these days, there are endless resources and sources to teach yourself the knowledge. In our Cryptocurrencies & DeFi course, you’ll learn how the technology behind cryptocurrencies works (cryptography, mining, blockchain, etc.) and what other useful DeFi products and services are available besides Venice Swap and Aave.