Chapter 7
Decentralized Lending and Borrowing
IN THIS CHAPTER
Explaining collateralized lending protocols
Introducing flash loans
Much like how technology has facilitated liquid exchanges of assets, it has also greatly facilitated borrowing and lending activity. After all, matching borrowers to lenders is just another type of marketplace.
There are many similarities between DeFi loans and CeFi loans. The key difference is that DeFi loans are implemented through a nexus of smart contracts that are settled and executed in a decentralized manner rather than by trusting a central bookkeeper to maintain a proper account of who owes what. This chapter explains how decentralized lending protocols are designed to make longer-term collateralized loans as well as extremely short-term uncollateralized loans.
For simplicity’s sake, in this chapter I focus on decentralized borrowing and lending protocols built on the Ethereum blockchain, which remains the predominant smart-contract platform for DeFi activity. Keep in mind, though, that these concepts apply to decentralized lending protocols built on other blockchains.
Making a Collateralized Loan
Suppose you decide to lend money to someone ...
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