Lending And Borrowing In Defi
Lending and borrowing have been around as prominent concepts for several financial ages. Even the globally popular setup of 'fractional banking' works on the simple lending and borrowing concept. For instance, a lender gives an amount of money to the borrower and gets a regular rate of interest on it. Conventionally, these deals take place under an institution like a bank or in independent person-to-person lending. However, when cryptocurrency is involved in this context, there are two basic routes. One of these routes is lending through a centralized institution like BlockFi and the other one is decentralized protocols like Aave. Let’s move ahead and get familiar with the concept of lending and borrowing in Defi.
The DeFi protocols
Unlike the CeFi platforms, the DeFi protocols enable the users to be the lenders as well as borrowers in a completely decentralized way. This means that an individual gets total control over his or her funds all the time. It has been possible through the usage of smart contracts operating on an open blockchain solution like Ethereum. As compared to CeFi platforms the DeFi platforms are easier to access, which means they can be used anywhere by anyone. Along with that, while using DeFi platforms you are not required to submit your personal data to any central authority.
Lending and borrowing on DeFi platforms, how does it work?
While using the defi protocols like maker and aave, users who wish to become lenders are required to supply the tokens in the money market. This process is done by a person who sends his or her assets to a smart contract that serves as an automatic digital intermediary through which the concerned person's coins become available for other users to borrow. In a simpler way, a person sends the desired number of tokens for lending into the money market with the help of smart contracts. These smart contracts issue the interest on the lending amount in the native token of the concerned platform.
Advantages offered by DeFi lending to its users
When the whole process of lending and borrowing is executed digitally, things do not get delayed. Thus, the speed of loan origination is improved. From fraud identification analysis to e-contracts everything is highly updated but that’s not it, there are several other benefits as well, have a look-
- Lending decisions come with consistency- the rules that describe policies of credit guarantee consistency in decisions of lending. The variations while evaluation of applicant’s attributes as well as deals structured via underwriters do not exist.
- Local, state, and federal regulations- the record of decision rules make sure that lending individual complies with local, state as well as federal regulations.
- Portfolio profitability and process improvement analysis- lenders, as well as borrowers, get the maximum out of the complete process with the help of analytics. When you have an insight into loan sources, demographics, credit tiers, and other stuff, you can improve your portfolio.
- Transparency and no permission- Each and every transaction that takes place on the network is broadcasted by a public blockchain. Along with that users verify these transactions as well, this provides transparency. On the other hand, you don't need any special permission except a crypto wallet to access the DeFi applications.
- Immutability- the decentralized architecture of blockchain makes sure that the auditability and security are increased along with that it also provides data coordination that is tamper proof.
Now when you are fully aware of the advantages that are offered by the DeFi lending and borrowing process you may like to consider it as an option.
Maker and Aave are the two most popular platforms or protocols for DeFi lending. However, there is also an autonomous platform named compound. You can take the help of these platforms for carrying out the DeFi borrowing and lending process. Cryptocurrency has created a huge impact on the conventional financial systems that used to run at a Global level and loans are not an exception to this.
To sum up, the platforms mentioned above make it easier to carry out the financial processes of DeFi lending. With the involvement of intriguing technology DeFi has the potential to bring a revolution at the global level.