In the space of decentralized finance (DeFi), one of the most eagerly sought-after development protocols is lending/borrowing. This is because of its unique approach in the field of the banking industry that gets rid of all the existing shortcomings. The profit reaped in DeFi lending (or) borrowing protocols is also huge.
"For the foreseeable future, I'm all about building blockchain-based decentralized services," said Fred Ehrsam, the co-founder of world-famous crypto exchange Coinbase.
With so many affirming statements about DeFi's success and it's potential future, let's quickly witness it for ourselves by exploring the mechanism employed in DeFi protocols and its business prospects.
Consider you wish to borrow a sum of amount from a nearby bank. Can you imagine the complications involved in the process?
From manual filling out of forms to credit score check, the time it consumes, and the difficulties faced are massive. In some cases, certain banks even misconduct with their customers with a discriminational approach.
The alternate option to banking organizations is private lending and borrowing. Since that cannot be regulated and the parties are mostly untrustable, loanees often encounter conflicts.
Lending and borrowing practices are essential to either maximize our income or meet our urgent demands instantly. But since the existing system is rigged with flaws, is there a way out to borrow and lend funds fast with proper security?
Well, we've got a way out. And that's decentralized finance (DeFi).
DeFi's immediate success is credited to its architecture and system of work. The decentralized nature of DeFi protocols offers transparency in every process involved and helps us gain ownership over our funds. In simple words, unlike the banking sector, there's no third-party involved.
DeFi plays a phenomenal role in lending and borrowing protocols. Here's how it works for lenders and borrowers.
Users can lend their crypto-assets to any borrower irrespective of their race, nationality, or status. Based on the amount lent, lenders earn respective interest from the borrower. Also, in some lending/borrowing protocols, they also earn additional DeFi tokens for lending the same.
Borrowers who wish to borrow digital funds are required to deposit their crypto-assets as collateral. This collateral is usually higher than the sum borrowed due to the volatile nature of the crypto market. However, this is solved by stable coins that are pegged to a constant value. Thus borrowers can borrow crypto funds. Their collateral is subjected to liquidation if they fail to repay the borrow the amount.
If the system is decentralized, without any middle-men, how exactly are these activities executed?
Yes, smart contracts are pre-coded conditions that execute functions based on the conditions. They collect, deposit, transact and liquidate funds based on the pre-set criteria. Smart contracts cannot be altered once set. Thus, the entire system is automated and made secure.
The compound is a decentralized protocol that helps users earn interest by lending their Ethereum digital assets for acquiring real-world assets like real estate and other commodities.
Aave is another decentralized protocol where the interest rates in pools are algorithmically adjusted. Users can lend/borrow cryptocurrencies on both stable and variable interest rates.
In flash loans, users can avail of loans, earn a profit using the loaned amount, and repay the borrowed amount in less than 15 seconds. If the user is found in a situation where he can’t repay the full amount, the entire process is blocked from happening. So, the lender gets to retain his amount.
Evidently, the figures are scaling exponentially. It confirms DeFi’s growth is set to be massive in the upcoming years.
Osiz Technologies, a leading DeFi Development Company, has 10+ years of experience in blockchain technology. Our pool of blockchain architects and DeFi developers are guaranteed to deliver quality DeFi development services to launch your DeFi lending/borrowing platform.