As firms began exploring Blockchain’s possibilities, the financial industry demanded decentralized digital ledger-based fintech solutions. In addition to online transactions, Blockchain will soon be used for crypto exchanges and storing. Blockchain has become even more dominant with Defi (Decentralized Finance).
Defi has continued to grow and has drawn a large amount of funding since 2020. According to Defi-Pulse, the overall value secured in Defi systems has increased to $20 billion, rising from lower than $1 billion a year earlier. The fact that Defi has risen twenty times in a year shows the extent of its appeal.
Defi financing has settled. Tokens may be lent and borrowed from the authorities (Maker, Compound, and Aave). Maker, Aave, and Compound are Defi’s three largest creditors.
What is Decentralized Finance (DeFi)?
Essentially, decentralized finance is a system of financial applications based on Blockchain Architecture that operates without a third person or a centralized body in its simplest form. Using a peer-to-peer network creates decentralized programs that anybody may access and manage regardless of their location. It aims to establish a permissionless, open, and open monetary services environment.
Because smart contracts are self-executing and do not need third-party monitoring, they are the fundamental element for decentralized finance. Since Ethereum launched the Defi idea, the Ethereum Blockchain has been used to build most Defi apps.
DeFi Lending
Defi financing systems attempt to provide crypto debts without intermediaries, allowing users to post their cryptocurrencies on the network for borrowing reasons. P2P lending is a decentralized network that will enable borrowers to take out loans directly. Furthermore, the lending protocol allows a creditor to profit from interest payments. DeFi has the fastest lending growth rate of all the DApps and is the most common sponsor for securing digital currencies.
DeFi loans are based on distributed ledger technology, which is remarkable in surpassing traditional loans. Defi finance gives complete disclosure and ownership of investments for all payment processing activities without needing a third-party service provider.
The borrower merely has to enroll on the Defi platform, have a virtual wallet, and conduct smart contracts to borrow money from the service. Censorship-free Defi implies that no one is given preferential treatment while preserving the integrity of the system.
Both creditors and debtors gain from deferred financing. It lets long-term investors lease resources and earn more excellent interest rates by offering margin trading choices. It will also allow users to borrow loans in fiat money at cheaper rates than decentralized markets. Users may also sell it for a cryptocurrency on a centralized market and lend it to decentralized exchanges.
Cryptocurrencies may fluctuate in value, but they do not earn interest while resting in wallets. It is not enough to own a cryptocurrency to make a profit. Defi mortgages come into play in this case. Loaning cryptocurrency to someone and earning interest is possible with Defi loans. Banks have long used this service, but now anyone may become a lender in the Defi universe. A lender may lend their assets and earn interest. To achieve this, conventional banks may use loan pools or loan centers.
Smart contracts allow users to combine their assets and lend them to borrowers. Given the variety of interest distribution methods, it is prudent to investigate your interest distribution method. The same is true for borrowers since each pool will have its strategy.
You can’t borrow money from a bank if you don’t have anything to back it up with. A vehicle, for example, serves as collateral for a car loan. The banker will confiscate the car if the client defaults on the loan. The decentralized system is similar; the main difference is anonymity and does not need any tangible securities.
To obtain credit, the debtor must provide something of greater value than the loan balance. Intelligent agreements are employed to deposit this quantity of cash at minimum equivalent worth to the loan balance. Collaterals come in various shapes and sizes, and any crypto token may be used to repay a loan. For instance, if a person wants to borrow one BTC, he must first transfer one BTC price to DAI.
However, Bitcoin values continue to fluctuate significantly. When the value of the security falls below the value of the mortgage, a lawsuit may emerge. Now comes the issue of how to handle this circumstance.
It could be easier to explain with an example. Assume a user requests a loan of 100 DAI. Borrowers must put up a minimum of 150 percent of the loan amount as security with MakerDAO. This immediately implies that the debtor must put up $150 in ETH as security for the loan. When the security’s value falls below $150 Ethereum, it is subject to a liquidation penalty.
Benefits of DeFi borrowings
While this system is entirely new to us, there are a lot of benefits that this system can give us. DeFi loans processing speeds are exponentially faster and personal than traditional loaning services. There is greater consistency regarding issuing loans as rules are already well defined. Records are well secured and cannot be changed by a third party.
This can ensure greater security and also help law agencies to secure a loan. Almost anyone can access the DeFi system by having a crypto wallet and borrowing a loan. Public Blockchain broadcasts every payment process, and every user on the network verifies these processes. Public Blockchain allows more outstanding data analysis and provides verified users to access this data anytime.
