The rise of DeFi has strengthened the prospects of blockchain implementation in the development of financial apps. DeFi or decentralized finance, has recently gained prominent attention as it has garnered massive amounts of capital for various businesses.
You will be surprised to know that almost $20.46 billion is locked in DeFi protocols, proving that the popularity of the DeFi applications has escalated to a considerable margin. This has influenced the growth of DeFi lending. DeFi lendings are one of the upsurging parts of the cryptocurrency ecosystem. These types of loans are now allowing crypto holders to lend their assets and earn lucrative interests.
In simple words, DeFi lending is all about offering crypto loans on a decentralized platform. Among all the decentralized applications (Dapps), DeFi has the highest lending growth rate globally. It is one of the prominent contributors utilized for locking crypto assets.
How does DeFi Lending Work?
By now, you know that DeFi lending aims to offer a transparent, permissionless, and open-source financial service environment.
Now let’s move on to discuss the commonly asked question, “how does DeFi lending work”.
DeFi lending, or decentralized finance lending, is quite similar to the traditional lending service offered by the banks, except that it is offered by the P2P decentralized applications (DApps). The DeFi lending platforms help people borrow and lend funds which allow the crypto holders to earn a substantial income.
The DeFi lending process is simple. It focuses on offering crypto loans with a trustless approach. This means that the users can easily lock their crypto assets on the DeFi lending platform without worrying about intermediaries. The borrowers can directly opt for loans from the decentralized platform with the help of blockchain development company.
In addition to it, the DeFi lending protocol helps lenders to earn interest on crypto assets. As compared to the conventional loan processing system of the banks, DeFi lending enables individuals to become a lender just like a bank. An individual can easily lend their assets to others and accrue interest on that loan. Just like the loan offices in traditional banks, DeFi lending mainly relies on the lending pools where the users can add their assets to the lending pool and ensure quick distribution among borrowers through smart contracts.
With various mechanisms for the allocation of interest to investors, it is crucial for lenders to identify the type of interest. Borrowers also need to do their part of research on the lending pools as each pool has a different borrowing approach.
How is DeFi Lending Different from Traditional Lending?
The traditional financial system provides borrowing, lending, margin trading, and spot trading. The DeFi ecosystem, however, has adapted and can offer similar financial services.
One of the crucial differences between DeFi and traditional lending is that conventional banking involves a time-consuming process along with continuous checks on a customer’s status. DeFi, on the other hand, grants loans quicker as long as the individual meets all the collateral requirements.
The smart contracts take care of the entire reviewing process, making it easier for the borrower and the lender. DeFi lending typically offers better returns when compared to the traditional lending markets.
What Kind of Benefits does DeFi Lending Provide to its Users?
DeFi lending mainly works by engaging the participants to contribute funds by depositing them at interest. These interest rates are more lucrative than the rates offered by traditional banks. Other than that, there are multiple benefits of DeFi lending as compared to the traditional lending system. These include:
Accountability
Accountability is one of the top benefits of DeFi lending. Blockchain is a public ledger that can offer on-demand records of all the DeFi loans along with the policies and rules that granted that loan. The public distributed ledger mainly serves as proof of all the financial transactions when a particular DeFi loan gets granted.
Lending Analytics
Having a complete digital process for lending mainly helps in the assessment and monitoring of the borrowing and lending market. Lending analytics is another major benefit of the DeFi lending process. The lending analytics can be utilized for optimizing funds. It also allows various DeFi lending platforms to gain insights on loan sources that can help them improve the performance of the loan.
Speed
DeFi loans are processed quickly, and the lent amount is available instantly once the loan is approved. DeFi loans are processed faster because the DeFi lending platforms are powered by cloud services that help identify any fraud and other DeFi lending risks.
Immutability and Transparency
Blockchain can be easily verified by any user present in the network. DeFi lending ensures transparency as the decentralized nature of the blockchain mainly ensures that all the transactions are genuine.
Permissionless
Decentralized lending offers permissionless and open access to anyone with a DeFi crypto loan wallet. One can easily access the DeFi applications built on blockchain networks regardless of the presence of their fund or geographical location.
Interoperability and Programmability
By utilizing the interconnected software stack, one can ensure that the DeFi lending protocols complement and integrate with each other. Also, smart contracts are highly programmable and enable the development of financial instruments and digital assets.
Asset Management
Crypto wallets and DeFi lending protocols like Metamask, Gnosis Safe, and Argent enable the users to be the sole custodians of their crypto assets. It also allows the users to interact with the decentralized applications securely and avail the services of selling, buying, earning interest on investments, and transferring crypto.
Savings
DeFi lending platform has now come up with innovative ways of savings management. By plugging into different lending platforms, users can maximize their earnings and avail the services of interest-bearing accounts.
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