DeFi Lending and Borrowing
DeFi or decentralized finance is quite a buzzword in the world of cryptocurrencies. This tool has revolutionized the field of borrowing and lending. If you have an internet connection, you can borrow or lend as long as you play by the rules.
This simplicity and affordability have allowed DeFi to overcome the obstacles created by traditional financial institutions in the form of third-party involvement and ongoing audits. DeFi is a term that implies borrowing or lending through the crypto network.
How lending and borrowing works in DeFi?
Technically, this lending space is similar to a traditional institution offering financial loans to individuals and businesses. The only difference is that DeFi does it without an intermediary. As a blockchain user, you can transfer your coins to a specific lending platform, which can be transferred to another user at interest. DeFi lending is governed by smart contracts.
Most crypto platforms allow you to add funds via bank transfer, Apple Pay, or card. Alternatively, you can send Bitcoin or Ethereal directly from your wallet. Then you need to conclude an agreement through a smart contract and complete the processing of the loan. At the end of the repayment period, the principal amount and interest are returned, only then the collateral can be returned. It’s pretty simple. The most popular decentralized finance protocol, Compound, allows borrowers and lenders to interact directly and receive a floating interest rate. So, to use the new tool, you need to open an account, buy some coins and sign a smart contract to provide a loan or loan.
Protocols and platforms in lending and borrowing crypto assets offer various use cases for their users. At the same time, the attractiveness of decentralized applications is that private keys do not need to be trusted by a central authority; their owner holds them.
Usually, when you lend or borrow funds, you sign a contract with the other party, which includes all the details, such as the repayment period, interest rate, etc. Compared to traditional lending, DeFi offers distinct advantages. The most important of them are transparency and simplicity of the process due to the absence of a third party. It is enough to have an account on one of the DeFi platforms and a crypto wallet, then the smart contract is verified within a few minutes. When a borrower takes out a loan, the network will ask him to deposit a currency equal to or greater than the loan amount. This is the so-called collateral, and it can be provided in different currencies.
Asset holders can earn passive income from interest charges on borrowers. Apps and protocols in the DeFi ecosystem allow anyone to access financial instruments not available in the traditional financial market. Users can receive interest on their assets by issuing loans, and borrowers can get a loan at lower interest rates.
In general, decentralized lending platforms rely on excess collateral from borrowers to initiate a loan, as well as rules for deciding whether to close loans.