DeFi or Decentralized Finance is an innovative technology based financial system. Through DeFi, financial products are made available to public in a blockchain network in a decentralized manner. The system is decentralized because there is no intermediary such as banks or brokerage houses. All transactions here are technology based and software driven.
The present global financial ecosystem is interdependent. There are hubs of key economic activities such as New York and London. These hubs impact smaller economic centers such as Mumbai or Milan. The ecosystem is subject to varied laws and regulations across the globe. The flaws in the existing system got exposed by events such as financial crisis and recession. This is what DeFi disrupts.
DeFi Lending
DeFi offers lending platforms in which users can enlist their cryptocurrencies using a smart contract . The platform is also called as P2P lending. Borrowers having access to the platform and can get the loan. There are lending protocols that allow lenders to earn money. The entire process is paperless and without intermediaries.
DeFi lending is a very useful proposition for users. The value of cryptocurrency is always fluctuating. Cryptocurrency lying idle in the wallet will not give any benefit to the user. Through DeFi lending user can get attractive return on cryptocurrencies held by him.
DeFi Lending Vs Traditional Lending
In traditional lending the creditor does analysis of the borrower’s credit history. The KYC or Know Your Customer requirement is must. The interest rate charged is based on the credit and collateral provided. The approval of the loan is decided by the creditor and he may factor in many other issues.
In DeFi lending creditor approval and KYC requirements are not there. The borrower has to provide collateral in the form of digital asset. Depending on the Loan-to-Value or LTV ratio the borrower will get his loan.
In DeFi lending both the creditor and the lender have advantages. The platform provides access to both centralized and decentralized exchanges. Users can borrow fiat currency at lower rates and lend through decentralized exchanges at higher rates.
Benefits of DeFi Lending
1. Speed
The process speed of DeFi lending is much faster than conventional lending process. It uses technologies such as machine learning, cloud based services and artificial intelligence to evaluate the application. E -contracts are generated immediately after approval of the loan.
2. Consistent lending decisions
Lending decisions are as per policy and automated and established to be consistent.
3. Permissionless
The decentralized nature of the platform makes it democratic. The blockchain technology enables anyone with crypto wallet to access the platform irrespective of geographical location and financial standing.
4. Transparency
A blockchain network shares all its activities with public. A data is recorded in blockchain only after authenticity is verified. All users have free access to blockchain data making it fully transparent.
5. Immutability
Blockchain technology ensures immutability. Data stored in blockchain can’t be manipulated by anybody.
6. Interoperability
Various DeFi protocols and applications can be integrated and they complement each other.
7. Self Custody
There are features in DeFi system that enable users to keep custody of their assets and data.
DeFi Lending Platforms
There are many DeFi lending platforms and some of them are listed below.
1. Aave
Lenders and borrowers can participate on this platform. It was launched in 2017 in London with the original name ETHLend. It has over 5 billion USD locked up in its smart contracts.
2. Maker
This lending platform permits borrowing in DAI tokens. Maker is also known as Multi-Collateral Dai or MCD system. Dai is stable coin which is pegged to the USD.
3. Compound
It was launched in 2018. It has over 6 billion USD locked up in liquidity pool.
4. Uniswap
It was founded by Hayden Adams in 2018. It has over 4 billion USD Ethereum tokens locked up in its liquidity pool.
DeFi Lending Contribution to Financial Services Sector
Multiple peer to peer lending and borrowing platforms are operating in the global financial services sector. These platforms also assist people manage their savings through innovative ways.
There are popular savings apps including Argent, Dharma and PoolTogether. Interest bearing accounts offered by them help users earn more income than conventional savings accounts.
DeFi lending protocols have the potential of decentralizing the traditional financial ecosystem.
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