DeFi Lending: Understanding the ins and outs of decentralized lending

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TL;DR Breakdown

  • Defi lending allows the lender to earn interest from the loans.
  • Decentralized finance is advantageous in different ways. Most especially reduced fees.
  • Different liquidity pools have different borrowing approaches, so an investor needs to research the pools. 

What is DeFi Lending?

Decentralized finance is a blockchain technology that eliminates the use of intermediaries like brokers and decentralized ledgers. This type of finance offers anybody willing to earn interest and profits through trade using digital assets. Most assets used for trading in decentralized finance are a result of a cryptocurrency platform called Ethereum. It is also responsible for most decentralized finance applications.

Instead of intermediaries like banks in traditional finance, Defi is enabled by smart contracts and protocols directed by AI and computer algorithms. While some think it cannot go mainstream since some traders do not accept crypto coins and tokens due to the fear of volatility, statistics do not support the same. According to Defi Pulse, there is 83.05 Billion USD locked in DeFi today. DeFi has also brought about a significant improvement to the blockchain.

How DeFi Lending works

DeFi lending provides a chance for trade between two parties and can only involve a trusted third party if the APIs allow. With the use of this criterion of finance and smart contracts, P2P ending is possible. A crypto investor can enlist his crypto coins for lending on the crypto platform and lend out to another investor by use of protocols. This type of lending is becoming a trend because of how trustless and transparent it is.

A borrower is supposed to create an account on the cryptocurrency platform then ensure that he has an active wallet. He is then supposed to open smart contracts that are supposed to guide how the lending is expected to happen. 

Defi lending allows the lender to earn interest from the loans. One can borrow money at a specific interest rate. It is also helpful as it serves financial services while giving back to the cryptocurrency community. It is beneficial to both lenders and borrowers because borrowers can access crypto loans quickly, and the lender earns a yield from investments instead of watching wealth sit in one’s wallet.  Lenders are like investors who deposit their money in lending pools like banks in centralized finance.

Various ways can be used for an investor to access their interest and from borrowers. Moreover, different liquidity pools have different borrowing approaches, so an investor needs to research the pools. 

Borrowers are expected to offer something of equal or more value compared to the loan amount provided. This is used as collateral during loan payments. Depending on the borrower, a wide variety of crypto tokens can be offered as collateral for the loan.

Benefits of DeFi lending

Decentralized finance is advantageous in different ways. These are;

  • Unlike traditional banks, the processing speed of crypto coins is fast
  • Decentralized finance complies with the law of the land
  • There is an availability of helpful analytics that a borrower can use to tell the best lender and vice versa
  • DeFi is permissionless
  • There is transparency in their services

As DeFi targets to go mainstream, it is advisable to try its services like lending to compare it with the usual way of things; it might just be your niche! 

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Beatrice Mastropietro

Beatrice is an experienced freelance Crypto and Financial market writer with several years of experience writing for a variety of businesses, platforms, and media sources. She specializes in developing original content to fit her clients' needs with a dedication to quality and integrity.

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