To explain DeFi simply, imagine that you had 5,000 euros in all and all in your bank account, but that you owned, in parallel, an ether wallet (ETH) with the equivalent of 100,000 euros (in constant evolution, of course, the altcoin - or alternative coin - ether being volatile just like the bitcoin), your salary and your professional situation do not allow you to borrow by a bank, unless you decide to resell all your bitcoins ( always without guarantee of success), pay the tax related to this resale, and bring this sum in contribution of the loan, for example.
The DeFi solution is available to you, with its protocols, you could block your bitcoins as collateral (while retaining exclusive ownership) in what is called a "smart contract" on a blockchain (smart contract, computer program self-executing, auditable and enforcing "code is law"), which would allow you, in return, to receive a percentage of this value placed in escrow, in the form of stablecoins (i.e. a cryptocurrency backed by a fiat currency, for example Tether (USDT) -> 1 USDT = 1 USD, stable price).
The smart contract is autonomous and programmed to guarantee to the lender who wishes to respond favorably to your request, that if the price of ether were to drop, your collateral will automatically be switched to stablecoin to ensure the lender the recovery of its funds. Of course, such a conversion will only be done if you have not returned funds to the smart contact to respect the collateral / loan ratio requested by the protocol used, moreover, in parallel, you will send in real time the reimbursement of the loan + the interest to the lender, not once a month, but at all times pro rata and automatically, and once again, decentralized ...
Concrete example, I want to borrow 50,000 euros via the DeFi Aave protocol, I block 75,000 euros in ether in a smart contract of the DeFi protocol of my choice, I receive in exchange 50,000 stablecoin euros or dollars that I can convert as I wish in fiat or use in crypto directly, without needing to resell my bitcoins.
As long as the collateral / loan ratio is respected (example, my collateral must be 120% higher than the loan taken at all times, a condition specific to each protocol), I only have to pay the interest (automatically) + the repayment portion of the loan.
Note that depending on the DeFi protocol used, sometimes an intermediate token specific to the protocol comes into play in the process. On the other hand, if the price of ether goes up, I could if I wish to borrow more, for example, because the value of my collateral will increase, on the other hand, if the price of ether goes down, I should add collateral or repay part of the loan in a larger and earlier manner, always with the aim of maintaining this famous collateral / loan ratio.
Obviously, you can also be the lender, and lend directly to a borrower or deposit your funds in a liquidity pool made available to borrowers and therefore generate interest at all times.
I will not go into all the technical details of DeFi, but overall, you will not have to make this loan, any administrative file or any signature to make, just to send your ether (or other cryptocurrency) in the smart contract of the DeFi protocol chosen… In return, obviously, the interests are more important than in traditional finance (hence the interest for lenders), but you can repay the loan when you wish, choose the DeFi protocol in all transparency with its interest rate, etc.
You are certainly thinking to yourself that this is great, but that you do not own any cryptocurrency, so please be aware that the borrower's first collateral-free loan has taken place, so we look forward to further developments of these protocols.
Moreover, know for information, that there are also so-called CeFi protocols, understand Centralized Finance, I am not talking about banks, but about companies which centralize interactions between borrower and lenders on their protocol, therefore, “secure DeFi”. ”By an intermediary entity, this will interest you if you do not have full confidence in decentralized protocols, for example (unaudited smart contracts, etc.). The borrowing rates are different there and there is also no guarantee that you are not dealing with a scam, that said, serious CeFi projects do exist such as Celsius, for example.
To conclude, we are in the infancy of DeFi, but the development and incredible enthusiasm for this new use case of Blockchain make it a major area of ??development with exceptional potential for the years to come. Will the banking system lose the monopoly on loans? To be continued ...
