The financial sector has been impacted by the rapid progress of blockchain technology and its rapid penetration into many conventional sectors of human activity. Many new actors have entered the financial sector with more loyal, accessible, and flexible financing options for the populace, from multiple Neobank debuts to the creation of DeFi products.
With these numbers in mind, it’s easy to see how the financial sector’s blockchain transformation is speeding fast, promising a slew of new disruptive projects that will transform the financial landscape and redefine how people store, exchange, and borrow money.
The DeFi borrowing and lending platform, for example, is a type of blockchain resource that provides access to money to people who are otherwise unbanked or underbanked.
DeFi, like traditional finance, provides consumers with a variety of loan and borrowing options. One party can lend crypto assets to another party at an interest rate stated in the smart contract if they have some crypto assets in the form of coins or tokens as an investment and do not require them for regular use right now. Users of the DeFi system can currently use one of two ways to obtain a loan:
How Does DeFi lending Work?
Despite the fact that the term “DeFi” implies a completely decentralized character of financial operations, experts warn against lumping all blockchain-based financial products into one category. It’s worth noting the distinction between CeFi and DeFi in the traditional sense:
CeFi is a blockchain-based financial platform that allows users to lend and borrow money, with the platform’s owner taking care of operations and asset security. Users are often required to fill out KYC forms on CeFi systems in order to protect their funds and reduce risk.
DeFi is built on blockchain technology as well, but it uses a peer-to-peer lending and borrowing strategy that is totally decentralized. Users in this approach have complete control over their funds and keep their crypto assets in their wallets. DeFi resources provide users with increased privacy and confidentiality without requiring KYC compliance, and they ensure that users meet their responsibilities solely through smart contracts.
What Is the Difference Between DeFi Lending and Traditional Finance? Defined-Finance Loans are a type of loan that allows you to borrow money
In classical terminology, borrowing and lending take place through fractional banking, which means that people with extra money deposit it with banks, while people who need money for specified purposes borrow it at a fixed interest rate. As a result, the bank acts as a guarantee that the lender will receive their money plus a predetermined interest rate within the agreed-upon term, while borrowers will return the funds plus a percentage for using other people’s money.
DeFi Lending vs. Staking
Staking and lending are both founded on the notion of entrusting one’s assets to the trade network in exchange for the possibility of profit or interest. Even yet, there are some differences between these two methods for generating passive income from your crypto assets.
Staking is the process of putting a network’s native assets into it to assure liquidity and maintain its operation. As a result, your investment is protected by the network’s immaculate operation, but it may diminish if the network has issues.
In terms of the value attributed to your assets, lending is far more secure. You can contribute a variety of tokens to the borrowing and lending platform.
DeFi Lending and Borrowing Platforms and Financial Innovation
The financial sector’s working principles, including how monies are lent and borrowed, have been revolutionized by DeFi platforms. DeFi resources are a substantial source of financial innovation for users, as well as increased coverage of unbanked people who would otherwise be unable to obtain loans.
Speed and efficiency
Unlike traditional banking institutions, DeFi platforms enable borrowers to get funds quickly and efficiently. You won’t have to wait days or weeks for a decision from the institution; everything happens very instantaneously.
Different lending decision principles
Many people can’t receive loans because of the traditional balanced scorecard method of decision-making used by traditional banks. They don’t have a credit history yet. Everything is different with DeFi, where more people may get loans thanks to transparent and fair credit policies.
Transparency of operations
All operations related to the asset ownership transfer are logged in the ledger due to the blockchain principles and characteristics. As a result, all participants are aware of the status of their funds, can follow transactions, and see who has access to their assets.
Flexibility of use
DeFi is exceptionally easy to use, with users being able to access their wallets and execute transactions with crypto assets from anywhere on the planet.
Impressive cross-platform functionality
The majority of DeFi blockchain systems are interoperable, meaning that users can access funds on one platform and trade or swap them on another. The DeFi cosmos turns into a global interconnected network with smooth operation and countless user benefits as a result of such interoperability.
Some Popular DeFi Lending Platforms
MakerDAO — The platform supports the DAI stable coin and employs its own Maker currency. Users of this resource can easily convert ETH to DAI and benefit from low price fluctuation.
Aave — The network runs on Ethereum and uses the smart contract protocol to provide users with peer-to-peer lending and borrowing.
UniSwap — Since 2018, an Ethereum-based network has been working on the principles of a completely decentralized exchange (DEX).
Compound — Users can additionally lock their assets and tokenize them in the platform’s own currencies, tokens. After the assets have been locked, tokens can be used to buy other assets and calculate the interest rate based on the lent assets. The increase in the value of the token benefits users as well.
We’ve already mentioned that in order to develop a blockchain-based DeFi lending platform development, all of the platform’s logic must be written in smart contracts. Smart contracts are self-executing contracts that are triggered automatically after all of their requirements are met. Once you’ve determined the project’s requirements, such as the system for calculating interest rates, the sort of credit pool, the process for investing rewards, and so on, all of these aspects must be coded.