All you need to know about DeFi Lending & Borrowing
DeFi has always been one of the controversial subjects in the growth of blockchain. But do you truly understand what DeFi is? Have you ever wondered how people borrow and lend in the DeFi world? What are the benefits of borrowing/lending in DeFi? Here at Rikkei Finance, we’ll provide you with a valuable package of knowledge about DeFi lending and borrowing!
What is DeFi lending & borrowing?
DeFi protocols allow users to become lenders and borrowers in a totally decentralized and seamless way, while enjoying full custody over their funds. In DeFi lending, a person has complete control over their assets all the time. This is made via the leverage of smart contracts operating on open blockchain solutions. In general, DeFi lending is defined as the situation when a user deposits their funds into a protocol, resembling a traditional cash deposit or investment that accrues interest over time.
In traditional finance, borrowing often requires legal contracts and posting collateral. If you get a small loan just on the promise that you will pay back later, plus interest, you must post some amount of collateral in case you cannot pay this loan back. In DeFi, collaterals and liquidations also exist, usually specified in the smart contract code. There are methods for borrowing that require a range of amounts and types of collateral, from BTC and ETH to altcoins and stablecoins.
Earning interest on deposited funds in a bank is usually not enough to make up for the inflation of the dollar over time. Traditional savings accounts cannot compete with the APY of DeFi protocols that offer 6% or more in compounding interest yearly. Many lending platforms offer incentives to lenders so that they can continue to provide a place for people to borrow against their crypto assets.
Working mechanism of DeFi lending
Users who want to be lenders can have their digital crypto deposited into DeFi protocol-based smart contracts. In return, they will receive minted native tokens to the protocol such as aTokens for Aave, cTokens for Compound, RIFI for Rikkei Finance, etc. These tokens represent principal and interest in token form that can be redeemed at any time. The rate of exchange between native tokens and tokens deposited enroots inside the annual percentage yield (APY). In other words, an interest rate is determined by the ratio existing between the supplied and borrowed tokens in a specific market.
Users who want to be borrowers can choose to borrow from one of those protocols and put down collateral. Note that these types of loans are over-collateralized, meaning that borrowers deposit collaterals an amount in crypto more than they borrow.
Benefits of borrowing & lending in Defi
Analytics for process improvement and portfolio profitability
Analytics can help lenders and borrowers get the most out of the digital lending process. Monitoring loan applications over a particular duration (a week, month or year) can help lenders anticipate and allocate proper resources to accommodate seasonal demands. Analytics also provides insights into demographics, loan sources, credit tiers, etc. The portfolio can be improved by determining how borrower characteristics and credit policies affect loan performance.
Transparency
The public Blockchain broadcasts every transaction on the network and is verified by every user on the network. This transparency level around transactions allows for rich data analysis and ensures verified access to every user on the network.
Improved loan origination speed
Defi lending platforms are backed by cloud-based services, analytics for fraud identification and detection and machine learning calculations for optimum loan terms and risk factors. All these technologies eventually help to speed up the process. As soon as the loan is approved, lenders send offers via e-contracts.
Permissionless Access
Defi lending allows open, permissionless access, meaning anyone with a crypto wallet can access Defi applications built on Blockchain, regardless of their geographical location and without any minimum amount of funds required.
To sum up
From the information provided above, we can clearly see that DeFi attempts to decentralize the core traditional finance services such as payments, trading, investments, lending and borrowing. DeFi lending being involved with the captivating technology has vast benefits and opportunities to revolutionize the global financial landscape.
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Disclaimer: The information herein is for educational purposes only and should not be considered financial, investment, or trading advice. Please conduct your own research and due diligence before making investment decisions. You understand that you are using the Information provided at your own risk.
