DeFi Borrowing & DeFi Lending Platforms - An Overview

Most of us are quite familiar with the terms borrow and lend. Frequently we went through these in the form of loans or mortgages, etc. However, the concepts are now revolutionizing the financial system. Increased digitization in the global economy is modernizing borrowing and lending especially when it comes to the crypto market. Traditionally lenders provide some funds to the borrowers that they are expected to return with an additional interest rate.

Lending & Borrowing in Cryptocurrency

In crypto terms, lending and borrowing refer to the crypto finance that one party provides to the other in the form of monetary assets whether it be fiat or digital currencies. Another important thing to note is that in cryptocurrency, the lending and borrowing processes take place via a centralized financial institution or a decentralized finance protocol.

CeFi Platforms

The role of CeFi platforms is almost the same as banks in the traditional financial system, whereby the individual’s assets custody is taken that eventually loans them to the intermediaries such as hedge funds or market makers. This process might appear interesting but there are potential issues associated with it that correspond to cyberattacks such as payment fraud, identity theft, and hacks.

DeFi Protocols

DeFi protocols enable decentralized finance development and allow users to lend and borrow assets in a decentralized ecosystem which means that participants have complete control over their funds. In this, smart contrast plays a vital role in automating the processes on open blockchain such as Ethereum. When compared to CeFi platforms, DeFi can be used by anyone anytime anywhere without allowing intermediaries to take control of their funds.

Lending & Borrowing on DeFi Platforms

The sender makes use of smart contracts in the DeFi platform and sends the tokens to the money market that they want to lend. The tokens are then issued in the platform with a certain interest value in the native token. DeFi platforms make use of protocols such as Maker and Aave and the lenders provide some tokens to the money market that they want to lend to borrowers. In the whole process, smart contracts are involved when one person sends assets to the smart contract that ultimately acts as a digital intermediary to process those assets.

Interest Value

Moreover, smart contracts are irresponsible to issue interest value to the tokens that are provided by the lender. The process automatically redeems the interest in a later stage on the underlying assets of the lender. The m minted tokens are minted to their platforms. For instance, in the Maker, those tokens are called Dai whereas in Aave they are aTokens.

Over-Collateralization

The concept of over-collateralization in DeFi platforms states that the loans that are issued using native tokens need to have a guarantee by borrowers. This assurance is given in the form of crypto that is worth more than the actual loan taken. It might not make sense but this is the reason why DeFi borrowing works.

First, the user needs some money to mitigate unforeseen expenses with the intent of not selling their holdings as those assets might give more value in the future. At the same time, when borrowing takes place via DeFi protocols, people can delay or avoid paying the gains on their digital assets. Last, people can also make use of the borrowed tokens to take advantage of getting a certain trading position.

Benefits of using DeFi Lending

DeFi lending offers the following benefits to its users.

Accountability - It offers on-demand records of all transactions when the loan is granted

Analytics - Users get a clear overview of all the processes and activities happening in the DeFi platform through advanced analytics that ultimately help in effective decision making

Speed - Borrowing and lending are quick processes in DeFi. They are processed faster as compared to traditional lending processes.

Immutability & Transparency - DeFi offers enhanced transparency and immutability to the users that ultimately reduces the risk of fraud and makes data accessible to everyone

Interoperability - DeFi lending protocols can easily be integrated with each other allowing smart contracts to function better and enabling the DeFi development of various financial instruments

To conclude, the popularity of DeFi platforms is increasing with each passing day, financial institutions are employing innovative means to digitize their systems while obtaining efficiency and security. So if you are also looking for DeFi Protocols Development services, look for the top DeFi development companies that offer end-to-end development services.

Author Bio

Ryan Jason is a technical writer At InvoBlox - Blockchain Development Services with 7+ years of experience in writing for state-of-the-art technologies such as Blockchain, Artificial Intelligence, and Cloud Computing. He works closely with B2B and B2C businesses to help market their vision to the target audience. Ryan is always passionate to educate complex topics and emerging trends to the people.