Blockchain Fintech Tutorial: Lending and Borrowing With Python

Prerequisites

This tutorial is designed for individuals with basic Python familiarity and minimal Solidity/smart contract experience.

Introduction

Decentralized finance (DeFi) provides developers with powerful tools for algorithmic trading and financial modeling, mirroring traditional fintech capabilities while offering enhanced transparency and flexibility. Key advantages of DeFi lending/borrowing protocols include:

• Non-custodial short selling
• Liquidity access without position liquidation
• Yield generation on collateral deposits
• Innovative instruments like flash loans

Python remains the language of choice for quantitative finance due to its developer-friendly ecosystem. With smart contracts, you can leverage familiar Python tools without Solidity expertise—though learning Solidity will amplify your DeFi capabilities.

In this tutorial, you'll learn to:

1. Deposit collateral into Aave's lending pool
2. Calculate asset conversion rates
3. Borrow against collateral
4. Repay loans

Tools Overview: Web3.py vs. Brownie

Web3.py

The granular interface for direct blockchain interaction. Example repository: aave_web3_py

Brownie

A framework abstracting blockchain complexities, built atop web3.py. Offers:

• Simplified transaction management
• Integrated testing environments
• Contract compilation automation

👉 Explore Brownie documentation

Setup Guide

1. Clone Repository

   git clone https://github.com/PatrickAlphaC/aave_brownie_py
   cd aave_brownie_py

2. Install Requirements

   pip install -r requirements.txt

   Verify installation with:

   brownie --version

3. Configure Environment
   Create .env with:

   export WEB3_INFURA_PROJECT_ID=your_infura_id
   export PRIVATE_KEY=your_wallet_key

   Never commit sensitive keys to version control

4. Acquire Testnet ETH

   • Use Kovan faucet
   • Alternative faucets: Chainlink docs

5. Convert ETH to WETH

   brownie run scripts/get_weth.py --network kovan

   WETH address for MetaMask: 0xd0a1e359811322d97991e03f863a0c30c2cf029c

Core Workflow

1. Deposit Collateral

def approve_erc20(amount, spender, erc20_address, account):
    erc20 = interface.IERC20(erc20_address)
    tx = erc20.approve(spender, amount, {"from": account})
    tx.wait(1)
    return tx

Key steps:

• ERC20 approval for lending pool
• Deposit execution via lending_pool.deposit()
• Receipt of aTokens (interest-bearing tokens)

👉 Aave deposit documentation

2. Borrow Assets

def borrow_erc20(lending_pool, amount, account):
    tx = lending_pool.borrow(
        DAI_ADDRESS,
        Web3.toWei(amount, "ether"),
        1,  # Stable interest rate
        0,  # No referral
        account.address,
        {"from": account}
    )
    tx.wait(1)

Critical parameters:

• Health factor >1 to avoid liquidation
• Loan-to-value ratios per asset
• Chainlink price feeds for conversions

3. Repay Loans

def repay_all(amount, lending_pool, account):
    approve_erc20(amount, lending_pool, DAI_ADDRESS, account)
    tx = lending_pool.repay(
        DAI_ADDRESS,
        Web3.toWei(amount, "ether"),
        1,
        account.address,
        {"from": account}
    )
    tx.wait(1)

Advanced Concepts

aTokens Mechanics

• Minted upon deposit, burned when withdrawn
• Value appreciates continuously via protocol fees
• Track balances via Etherscan

Liquidation Risks

Calculated by:

Health Factor = (Collateral × Liquidation Threshold) / Total Borrow

Maintain HF >1 to prevent liquidation discounts.

FAQ Section

Why use WETH instead of ETH?

WETH (Wrapped ETH) standardizes ETH as an ERC20 token, enabling seamless integration with DeFi protocols expecting token interfaces.

How do flash loans work?

Flash loans allow uncollateralized borrowing provided the loan is repaid within one transaction block. Aave flash loan docs

What are gas optimization tips?

• Batch transactions where possible
• Use gas estimation tools
• Consider Layer 2 solutions for scaling

Next Steps

1. Explore Synthetix for synthetic assets
2. Experiment with Bancor for automated market making
3. Participate in Aave governance

Deepen your knowledge with Chainlink documentation for oracle integrations and advanced DeFi strategies.

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- Comprehensive FAQ section