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What is DeFi?

What Is Decentralized Finance?

Decentralized finance, or “DeFi,” is a term used to describe a wide range of decentralized financial services made possible by blockchain technology.
Trustless
Accessible
Transparent
Convenient

What Is a Decentralized Exchange?

Traditionally, centralized exchanges are needed to facilitate the trading of financial assets between two parties. A decentralized exchange (DEX) is a decentralized marketplace where financial assets can be traded in a permissionless and trustless manner. DEXs are accessible by anyone with an internet connection and a crypto wallet, with no sign up or KYC needed. Decentralized exchanges allow users to maintain full control over their assets, unlike centralized exchanges which take custody over all assets deposited. Since there is no intermediary needed, trading fees are often significantly cheaper on a decentralized exchange than a centralized exchange.
Funding a Wallet
User Guides
Learn how to use a DEX to purchase UMEE tokens here.

Lending & Borrowing in DeFi

In finance, loans are issued in two ways: credit or over-collateralization. Most of the time a DeFi lending and borrowing protocol such as Umee issues loans based on over-collateralization. DeFi users typically have to post one crypto asset as collateral in order to borrow another. This means that no credit check, trust, or personal information is needed for a loan to be issued.
While borrowers have a certain amount of crypto assets posted as collateral, the lending platform simultaneously uses the asset to lend to other borrowers so that the assets are being utilized to generate lending interest, thus increasing overall capital efficiency. Lending platforms usually set up their own risk framework to keep a healthy loan to value ratio and liquidation threshold based on each crypto asset’s property to withhold market volatility.
Lending
Borrowing
LTV Ratio
Repayment
Liquidations

Lending

In DeFi, lenders can choose to deposit any amount they wish to the lending protocol at any time. In Umee, there are no fees depositors need to pay apart from the transaction fees to post their transactions on chain, similar to any DeFi protocol. After depositing, lenders can enjoy a passive lending yield.
Supplying & Withdrawing
User Guides
Learn how to lend assets on Umee here.

Borrowing

In order to borrow in DeFi, borrowers must first deposit assets as collateral. After the collateral has been deposited, borrowers can select any asset to borrow. The amount a borrower can borrow is determined by the amount of collateral the borrower posts and the loan to value ratio of the specific asset.
Borrowing interest rates usually float based on the total amounts borrowed and available to be borrowed from the pool in real time. Borrowers must pay off their loan plus interest in the form of the asset borrowed in order to withdraw all of their collateral.
Borrowing & Repaying
User Guides
Learn how to borrow assets on Umee here.

Loan to Value Ratio

The loan to value ratio is commonly used by a lending platform to monitor the health of each collateralized loan position.
The loan to value ratio represents the value of the asset borrowed against the health of each collateralized loan position.

Repayment

When it comes to paying off DeFi loans, borrowers don’t have a deadline to make payments. As long as borrowers’ loan to value ratios remain in check they can choose when to pay off their loan at whatever pace they desire.

Liquidations

Since DeFi borrowers need to over-collateralize their loans, it’s important that they maintain a healthy over-collateralized position or they risk being liquidated.
Liquidations occur when a borrower’s loan to value ratio increases above a required threshold before an under-collateralized loan position occurs. The liquidation mechanism makes sure that the loans can always be repaid in full to protect the safety of the lenders’ assets.
Borrowers can take steps to decrease their chances of being liquidated by doing things like:
  • Borrowing smaller amounts relative to collateral provided;
  • Depositing more collateral as the loan to value ratio becomes less healthy;
  • Making payments on the loan as the loan to value ratio becomes less healthy.