Thread by @eli5_defi

#GM!
1/ #Lending and #Borrowing (LB) are the most primitive financial services. We will discuss how #DeFi LB solves and enables financial inclusivity with transparency but still maintain #privacy.

#Crypto #Cryptocurrency #Bitcoin #Ethereum #ETH #BTC #AVAX #BNB #SOL #visualguide

2/ In traditional #finance, the intermediaries are appointed banks or financial institutions that act as the bridge between the lender and borrower. All of these services are strictly regulated and monitored by the central #banks.

3/ Despite already existing for a long time, LB in traditional #finance has a long-standing problem: non-inclusive, stringent procedures, arduous verification process, low rate and approvals, and non-transparency.

4/ #DeFi LB is open, permissionless, and transparent. The participants can access the service without the need for intermediaries. Compliance with the terms of loans by both parties is ensured through smart contracts employed in the #blockchain instead of conventional methods.

5/ Over-collateralization means that the collateral value will exceed the #loan value. As most #DeFi platforms don't require conventional background checks, borrowers must provide overcollateralized loans to hold them accountable and mitigate the risks of bad debt.

6/ #flashloans are a subset of smart contracts that enable uncollateralized loans, as long as the liquidity is returned to the protocol within one block transaction. This is due to the nature of programmable smart contracts that enable all instances to happen at the same time.

7/ #flashloans are mostly used to do arbitrage that requires instant execution and also #collateral swaps for the LB platform.

8/ As #flashloans are still a nascent product in #DeFi that enables someone to borrow with almost zero initial capital, this potential makes it the subject of several attacks.

9/ Even with its advantages, #DeFi LB also has its own drawback. Minimal user protection, prone to #hacking/ #exploit, and not particularly user-friendly/ intuitive have become obstacles to mass adoptions.

10/ #Centralized LB/ #CeFi work pretty much the same way as traditional banks as they're regulated and under supervision from a central #institution. They take custody of deposited #assets and loan them to third parties while providing returns to the depositor.

11/ With insolvency cases of @CelsiusNetwork, following #default from @investvoyager and maybe more in the upcoming months, #CeFi has proven not as safe as it promoted.

12/ #DeFi LB innovation is still nascent, there is a lot of potential and improvements to be made, especially in terms of security and user experience. However, DeFi LB solves limitations and accessibility in #TradFi LB.

13/ Platform that offers LB services:
@MakerDAO
@compoundfinance
@AaveAave
@eulerfinance
@LiquityProtocol
@MIM_Spell
@QiDaoProtocol
@InverseFinance

Complete List from @DefiLlama
defillama.com/protocols/Lend…
defillama.com/protocols/CDP

14/ As usual, shout-out to the account below for high-quality content:
@thedefiedge
@SalomonCrypto
@PastryEth
@CroissantEth
@blocmatesdotcom
@alpha_pls
@shivsakhuja
@knowerofmarkets
@theFiVerse
@BowTiedNightOwl
@rektdiomedes
@The_ReadingApe
@phtevenstrong
@VirtualKenji