The main purpose that blockchain and the crypto space is catering toward is reducing the third-party involvement in any transaction that takes place. Providing financial freedom is what the blockchain protocols have been collectively working towards, popularly known as DeFi or Decentralized Finance.
Decentralized finance (DeFi) is a movement that is used to leverage the decentralized networks such that the old financial products are transformed into transparent and trustless protocols that can run without any middlemen. It is also the umbrella term for various projects and applications in the blockchain space that possesses the potential to disrupt the financial world. DeFi consists of peer-to-peer protocols that are developed on this decentralized network for easy trading, borrowing, and lending of financial tools. According to market data, the current big lenders in the market are Maker and AAVE.
Also Read: What is Crypto Lending?
DeFi Lending is usually platform based where investors can get access to loans without any intermediaries. Not only do they have a process set for loans without any third-party involvement, but also has an option to enlist their crypto tokens for lending purposes! Using the P2P method of lending, a borrower can directly take a loan from the decentralized platform. Amongst the various decentralized applications, often called DApps, available; DeFi has the most steady growth rate in lending.
Also Read: HOW IS DEFI BETTER THAN TRADITIONAL FINANCE?
If we seek a deeper understanding of why DeFi ending has seen steady growth in recent times, the first and the most important point would be the underlying technology of DeFi; i.e., blockchain. The usage of blockchain in DeFi lending not only negates the involvement of any third party but also makes sure that the transactions take place almost without any obstacle. The process of borrowing and lending in DeFi is also pretty straightforward. The participant had to follow only the following three steps:
While the participant if following the step, DeFi makes sure that it provides an equal opportunity to every user, all while ensuring immutability. Both Lenders and Borrowers get to benefit from this method. They get access to margin trading options, and long-term investors can lend their assets and stand a chance to earn higher interest rates. This also enables users to access their fiat currency credit to borrow loans at lower rates than decentralized exchanges.
Crypto assets in your wallet do not generate any interest if not put to use. Though the underlying value of the assets may increase or decrease, just holding particular crypto will not lead to any earnings. This is where DeFi loans come into play. DeFi loan is a method that enables users to lend their crypto as a loan while earning interest on the loan. Unlike in traditional finance, anyone in the DeFi realm can become a lender. All you need is a certain amount of any crypto token and a borrower looking to take out a loan! The easiest way to do this is via lending pools.
Though DeFi lending is based on blockchain technology, it also has certain advantages that help smoothen the loaning process, and certain disadvantages that require thorough research from the participants before diving in.
The DeFi Lending platform helps the Financial Service sector in the following ways:
The DeFi Lending marketplaces have seen steady growth in the crypto ecosystem with a rise in many new innovative platforms. With our discussion of what DeFi Lending is and How DeFi Loan works, it is also important that we take a look into some of the most well-known DeFo Lending platforms today.
The deep dive in to DeFi loans and DeFi lending has clearly stated the potential this sector has in reshaping the financial system. The decentralized nature of the function makes DeFi Loans that much more appealing and its handshake with the blockchain technology makes it an attractive option for individuals to explore. Being deeply involved with crypto, DeFi Loans also require a thorough understanding and research before they are explored.
Disclaimer: Crypto products and NFTs are unregulated and can be highly risky. There may be no regulatory recourse for any loss from such transactions. In case you have any queries, write to [email protected].
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