This entire process can happen instantaneously in a single transaction without the need for a lengthy application/appraisal process, and the only cost is the associated gas fee to execute the transaction. The user can refinance the loan at the lower rate by taking the following steps:ġ) User takes out a flash loan using the Aave protocol, 2) pays the original debt on the Compound protocol, 3) borrows from the 7% debt offer, and finally 4) pays back the flash loan on the Aave protocol. Let’s say a user opens a DAI loan from Compound at a 9.5% interest rate and there is another protocol that offers debt at 7% interest. This concept can be used to refinance a loan, if the user wants to take advantage of the best interest rate offered in the DeFi market. Popularized by Aave, a flash loan is a DeFi primitive in which a user can borrow and repay a loan in a single transaction, which is built into the smart contract logic. This has led to the development of novel DeFi primitives such as flash loans, automated market makers, algorithmic stablecoins, synthetic assets, liquidity mining, decentralized price oracles, and more. DEXs and other DeFi platforms also allow for greater composability and interoperability between the different DeFi “money legos”, unlocking entirely new use cases.ĭEXs enable rapid product iteration and experimentation. Register for the Free Forbes Webinar “Crypto Assets & Taxes: What You Need To Know” being held on March 30ĭEXs excel in providing access to the long tail of DeFi products and crypto assets that may have too little liquidity or too much regulatory uncertainty for centralized exchanges to consider adding them. This was a systemic issue caused by the inefficiencies of the encumbered and capital-intensive T+2 settlement system inherent to traditional finance, inefficiencies foreign to the near-instant settlement of public blockchains and the crypto market structure. The Robinhood and GameStop GME fiasco injected rocket fuel as investors experienced firsthand the pain of punitive trading restrictions exercised by Robinhood’s unilateral control as the exchange faced a potential liquidity crisis. Although the combined volume of centralized exchanges in January was considerably higher at $906 billion, DEX volume is catching up with a current volume ratio of 7%, up from 4.6% in July of last year. Six months prior in July 2020, the combined DEX monthly volume was just $4.9 billion, an astounding increase of over 1,100%. DEXs such as Uniswap, Sushiswap, 0x, Curve, Serum, Balancer, and others combined monthly volume surpassed $61 billion in January of this year.
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