DeFi Lending and borrowing platform are
crucial elements of today’s finance, and it is effectively
taken care of by loans. In the decentralized realm, lending and
borrowing can be taken care of by smart contracts. DeFi lending and
borrowing happens completely on a peer-to-peer basis, without
involving any intermediaries.
To lend, it is only natural that one must have a receptacle of
the asset that needs to be lent. In this case, the
“asset” it’s declared as a liquidity pool. A
liquidity pool is a repository of multiple tokens shielded securely
by a smart contract. People can deposit the crypto-cash that they
do not use through a smart contract into this liquidity pool.
Another user who expects to borrow some money can borrow from this
pool. In nature, the liquidity pool functions as a bank.
If a bank can earn over the interest levied on the loan amount,
people who deposit their money in the liquidity pool are also
eligible to earn within the interest. This process of earning money
from decentralized lending platforms is called yield farming. It is
one of the most profitable ways to make money in the DeFi
range.
Some DeFi platforms even go ahead and attract users to
participate in their platform by giving away free tokens. With the
first token serving as the attraction, liquidity endures developing
in the platform. This method it’s called liquidity mining.
And it is considered to be one of the many techniques of yield
farming.
Most DeFi applications are open source. This would mean that it
is publicly available, and these apps can be used as the foundation
for building new apps with the same code. This property is known as
composability. If we extrapolate this trait, the entire blockchain
can be filled with decentralized applications designed to execute
various DeFi operations.