DeFi, an innovative realm within digital finance, taking us away from traditional finance by
removing intermediaries, enabling direct participation in lending, borrowing, trading, and
other activities. Despite its technical complexity, DeFi has achieved multi-billion-dollar valuations within a decade of its emergence.
What is Defi?:
DeFi is a cryptocurrency-based financial spectrum that works on the ideology of
decentralization. It is permissionless, transparent, and open for all, regardless of any
physical location. The foundation of DeFi is based on cryptocurrencies and blockchain technology. It includes a variety of financial applications such as staking, lending, borrowing, trading and more.
What is DeFi Lending?
DeFi lending is the practice of peer-to-peer crypto asset loans, which works in a
trustless and automated manner. It allows a user to borrow and access funds by
putting other assets as collateral. Users can utilize the borrowed funds however they
want.
Lending in DeFi varies based on factors such as collateral type, asset usability, and market
dynamics. Certain protocols enable under-collateralized loans, surpassing collateral
valuation, while others offer over-collateralized loans to ensure security.
Borrowers are also subject to predefined interest rates, typically measured in APY and
APR.
Notably, DeFi’s accessibility transcends geographical boundaries, allowing global participation in lending and borrowing without reliance on banks or fiat currencies, forming
a decentralized money market.
Theoretically, DeFi lending functions on the principles of trustless, peer-to-peer, and
an open network where transactions are executed without any intermediaries.
Elements of DeFi Lending:
All the below-noted elements together form an ecosystem that facilitates lending and
borrowing in decentralized finance.
.Liquidity: Liquidity is the most significant element in decentralized
finance. It refers to the current availability of assets that can be used instantly.
In the DeFi space, liquidity plays a vital role by enabling a variety of
applications to be built and run.
.Smart Contracts: Blockchain-based smart contracts are the digital
strategies to functionalize liquidity in the DeFi ecosystem. These contracts
have different sets of methods and instructions that allow them to lend, borrow,
or utilize crypto assets.
.Lending Pools: DeFi lending pools are essentially smart contracts where
users provide liquidity. Users can borrow funds from these pools while paying
fixed or dynamic fees associated with them. These fees may vary depending
on the popularity of the asset.
How DeFi Lending Differs From Traditional
Lending:
In contrast to traditional finance, where borrowers often endure cumbersome paperwork
and sometimes even need to visit physical branches of lenders, DeFi streamlines the
borrowing process. Without the burden of regulatory compliance, borrowers in DeFi are
spared the need to submit extensive income proofs and privacy-preserving documents to
access loans.
We were able to put together a Simple guide on How you can easily participate in Defi Lending:
DeFi lending, on the other hand, is completely hassle-free and does not require any kind of information from borrowers. The inherited characteristics of blockchain, such as transparency, immutability, and high-end security, make DeFi lending far more secure
than traditional lending. DeFi Loans DeFi Lending and borrowing are functionalized using crypto loans that different lending
platforms offer.
Following are the types of loans in DeFi;
.1. Over-collateralized Loans:
In DeFi lending, over-collateralized loans enable users to borrow up to 80% of their
deposited assets. For instance, depositing $1,000 worth of ETH allows borrowing up to
$800. These loans leverage efficient collateral as security, empowering lending protocols
to liquidate positions in case of default.
.2. Under-collateralized Loans:
Conversely, under-collateralized loans in DeFi offer users the opportunity to borrow larger
amounts, often based on the borrower’s credibility within the crypto space. These loans are
typically provided by lending platforms with confidence in the borrower’s ability to repay.
.3Flash Loans:
Flash loans, a unique feature of some DeFi lending platforms, are collateral-free crypto
loans processed and repaid within a single blockchain transaction. The lending protocol
executes loans only if repayment with interest occurs in the same transaction, making it a
groundbreaking financial tool in the DeFi landscape.
.Advantages of DeFi Lending:
DeFi lending revolutionizes decentralized finance, offering a range of innovative benefits to
participants. These include:
.Permissionless Accessibility: In DeFi lending, there are no barriers to entry; borrowers
and lenders can engage without any permission, fostering universal access without
geographic constraints.
.Foolproof Execution: DeFi lending operates on smart contracts ensuring flawless
execution of transactions and precise numerical outcomes. Any deviation, even by a
decimal, halts the transaction or yields an unintended result.
.Programmability Flexibility: Users can experiment with DeFi lending through smart
contract functionality, enabling complex conditions and transactions within a single
contract.
.Peer-to-Peer Dynamics: DeFi lending eliminates the need for intermediaries, facilitating
direct peer-to-peer transactions. Borrowers can access funds from DeFi lending pools
without any external interference.
.Abundant Liquidity: Decentralized finance offers extensive liquidity, often underutilized.
With the DeFi lending industry valued in billions, liquidity needs are adequately addressed.
Users can borrow substantial sums, provided collateral requirements are met.
Popular DeFi Lending Platforms
DeFi lending platforms or protocols are the places where decentralized lending and
borrowing are accessible. These platforms are deployed on blockchain networks as a
set of smart contracts.
Below are some popular DeFi lending platforms;
.Aave: As the pioneer of DeFi, Aave is one of the earliest decentralized
lending and borrowing protocols. It was previously known as ETHLand when it
launched in 2017. Aave is currently the most popular DeFi lending protocol with
a TVL of over $10 billion, and it is deployed on 8 different blockchain networks,
including Ethereum, Polygon, and others.
.Compound: Compound is also a leading DeFi protocol that enables
borrowing and lending for a variety of crypto assets. It primarily operates on
Ethereum, and it has a TVL of nearly $2.4 billion.
.MakerDAO: While Aave and Compound, focus on different crypto assets,
MakerDAO functions to lend the native stablecoin DAI against other assets
such as ETH. The value of DAI is pegged to the US dollar and used as a hedge
against volatility in the crypto market. Borrowers can secure over-collateralized
DAI loans from the MakerDAO against their collateral.
.Venus Protocol: Venus is the most popular DeFi lending protocol built on
BNBChain. It enables lending and borrowing of assets such as BUSD, BNB,
USDT, and BTCB on BNBchain, which was launched by the team behind the
Binance crypto exchange.
Conclusion:
Decentralized finance, or DeFi, is growing fast and could soon reach hundreds of billions in
Total Value Locked (TVL) as cryptocurrencies gain more value.
DeFi lending and borrowing are the most exciting parts of this new finance world.
Even though DeFi lending is still new, it’s growing quickly and has lots of room to grow
more. It could change finance completely, creating a financial system that’s safe, strong and doesn’t rely on trust.