Perpetual Protocol

Money markets are the third largest sub-sector of DeFi by total value locked after decentralized exchanges and liquid staking, with over <a href="https://defillama.com/protocols/Lending" rel="noopener noreferrer nofollow">$14.2 billion locked</a> in these protocols. DeFi money markets allow anyone to borrow or lend crypto-assets without requiring a credit check, the submission of personal information or involvement of any intermediaries.In what follows, we’ll describe a simple outline of how money markets in DeFi work. Lenders supply their crypto-assets to a pool and earn interest income from borrowers. In return for their deposits into lending pools, lenders receive a token that represents a claim on the asset supplied, which is then burned when a lender wants to reclaim their funds.Tokens supplied to the lending pool can be utilized by borrowers and to incentivize them to repay the loan, they must deposit some crypto-assets as collateral. Once the loan is repaid, the borrower can then reclaim their collateral.However, if a borrower fails to repay their loan and the value of their collateral decreases, they may face liquidation. Usually, another user can liquidate part of the loan to earn a discounted amount of tokens. As a result, borrowers need to ensure over-collateralization of their borrow positions to avoid being liquidated.<h2 id="header-0">Benefits and Risks of DeFi Money Markets</h2>Money markets in DeFi offer many benefits over traditional finance. First, there’s no need to hand over any sensitive personal information. To take part, all you need is:Secondly, DeFi money markets are also more inclusive and permissionless. In the world of traditional finance, entrepreneurs often have difficulty obtaining funding and individuals with no credit scores are denied access to capital. But this is not the case for on-chain lending protocols, since anyone can borrow from these money markets given they have the three things listed above.Some other benefits of money market protocols in DeFi are:<ul><li>On-chain smart contracts determine the parameters of a loan, so there’s no scope for discrimination against borrowers.</li><li>Lenders receive granular interest payments denominated in crypto-assets based on supply and demand. In traditional financial markets, interest rate changes are often not passed on to their customers. For instance, if the supply of loanable funds increases, this should translate into a low rate of interest for borrowers. However, lending firms may not facilitate lower borrowing rates to maximize their profits.</li><li>The ability to use crypto-assets as collateral and retain exposure to their price while also borrowing funds (e.g., for an unexpected emergency).</li><li>Because of the composability of DeFi money markets, other interesting applications can be built on top of lending protocols. For example, <a href="https://pooltogether.com/" rel="noopener noreferrer nofollow">PoolTogether</a> uses Aave’s lending protocol as a building block to offer a no-loss lottery. The yield generated by supplying funds to Aave’s USDC lending pool is used to award PoolTogether users USDC prizes every day.</li></ul>While DeFi money markets offer many advantages over traditional finance, there are also some risks to be aware of:<ul><li>Lending in DeFi is over-collateralized, which means you can only borrow a fraction of the collateral amount. As a result, there’s a risk you could lose the deposited assets if the value of your collateral drops sharply in relation to the value of your loan. For example, when depositing ETH as collateral and borrowing DAI, a large drop in the price of ETH exposes your position to liquidation. Each protocol has their own parameters for the maximum permitted loan-to-value ratio (LTV) and if you exceed this maximum, then you can potentially lose the assets deposited.</li><li>As with any DeFi protocol, there are smart contract risks. Always DYOR! Closely examine a money market’s audit reports, stick with the projects that have an established community and a long track record.</li><li>Lending pools can become over- or under-utilized, depending on the balance between the demand for and the supply of loanable funds. If a lending pool is over-utilized, that means borrowers have exhausted almost all the funds deposited into the pool by lenders, meaning new users cannot borrow or redeem. On the flip side, under-utilized lending pools result in reduced yield for lenders, as there are funds in the pool but there’s very little borrowing demand.</li></ul>To learn more about the best money markets in DeFi, check out the full post on Mirror here: <a href="https://perpprotocol.mirror.xyz/O5fRlugD5s_tY864wzyJ96dJh3k7JzmeDKFXq9Q_Aps" rel="noopener noreferrer nofollow">https://perpprotocol.mirror.xyz/O5fRlugD5s_tY864wzyJ96dJh3k7JzmeDKFXq9Q_Aps</a>

What are DeFi Money Markets?

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Perpetual Protocol

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What are DeFi Money Markets?

Table of Contents

Perpetual Protocol

Other articles published on Jun 6, 2023

SEC Strikes Back: Popular Tokens SOL, ADA, MATIC Among Alleged Unregistered Securities

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Get in the Game: The YUSE Zealy Contest Awaits Your Participation!

Join our free newsletter for daily crypto updates!

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